There are good reasons why this strategy works more often than not. Technical selling by index-tracking fund managers, who have no choice but to dump their holdings in the laggards, and short-selling by traders riding the downward momentum, have the effect of driving shares of these companies below fair valu, making them heavily oversold. In turn this offers nimble investors the opportunity to buy in just as the selling pressure starts to abate when they exit the index.
There is only one change to the blue-chip index this month, with Tate & Lyle making a comeback and tour operator TUI Travel heading for the trapdoor following a 13.5 per cent slide in its share price since since mid-May. TUI's shares are now close to a major support level of 215p and they may indeed bounce shortly, especially as the 14-day relative strength index (RSI) is back to levels at which previous rallies have started.
However, the problem I have is that we rate the shares an outright sell, having advised readers to check out at 243p in mid-February. Moreover, if the 215p support fails to hold, then they could drop fairly rapidly to the next support at 200p. In my opinion, the risk-reward ratio does not favour buying TUI Travel's shares, so I am going to pass this one over.
Value in small caps
Instead, I have been drilling down into the FTSE Small Cap index, where there are no fewer than 21 changes to the constituents this month, and have noted a very interesting new entry, Henry Boot. The Sheffield based construction and property firm - in which the Boot family retains a significant holding - celebrates its 125th anniversary this year and it could be one to savour as I believe the rerating of the shares, which can only be helped by small-cap fund managers buying in, has some way to run.
Unlike the majority of operators in the sector, Henry Boot (TIDM: BHY) has managed something that few others can match - the company has raised its net asset value above pre-recession levels which means that NAV has doubled since 2002, and is up an eye-catching 300 per cent since 1994.
Henry Boot's impressive financial performance: 1994 to 2010
| Year to 31 Dec | Pre-tax profit (£m) | Dividend per share (p) | Net asset value per share (p) |
|---|---|---|---|
| 1994 | 8.2 | 1.42 | 36.8 |
| 1995 | 8.7 | 1.50 | 39.6 |
| 1996 | 9.4 | 1.60 | 42.8 |
| 1997 | 10.1 | 1.70 | 44.4 |
| 1998 | 10.6 | 1.82 | 46.6 |
| 1999 | 11.2 | 2.00 | 51.2 |
| 2000 | 12.2 | 2.20 | 58.0 |
| 2001 | 13.4 | 2.42 | 63.2 |
| 2002 | 17.1 | 2.68 | 72.2 |
| 2003 | 30.0 | 2.96 | 89.0 |
| 2004 | 23.2 | 3.28 | 83.8 |
| 2005 | 30.2 | 3.80 | 93.8 |
| 2006 | 40.8 | 4.40 | 116 |
| 2007 | 46.5 | 5.00 | 139 |
| 2008 | 19.3 | 5.00 | 146 |
| 2009 | -11.9 | 2.50 | 135 |
| 2010 | 18.9 | 3.50 | 145 |
The business is also in the enviable position of having a debt-free balance sheet after from some astute property and land bank sales over the past 18 months. By the end of May, the company, which has a market value of £180m, was sitting on £16.5m of net cash, having had net borrowings of £32.1m at the end of 2009. This puts the business in a strong position to take advantage of investment opportunities especially as it also has an untapped £50m credit facility.
Moreover, the company is very profitable, having turned in pre-tax profits of £18.9m in 2010. Prospects look well underpinned, too. Henry Boot's construction business reported operating profits of £9.2m on £84.8m of revenues in 2010 - above budgeted margins - and holds a decent forward order book from a mix of public sector funded construction projects as well as private sector work in the hotel, leisure, industrial and retail sectors. The business has contracts with a number of county councils for school extensions and modernisation projects, has been expanding into the health sector and last year won six contracts for upgrades and security improvements at six prisons in the north of England.
On the property development side, which produced trading profits of £10.5m in 2010, current schemes nearing completion include a supermarket in Warminster, pre-let to Waitrose, and a Tesco Express food store in Bradford. Larger projects include a mixed-use scheme for the former County Court building on Deansgate in Manchester city centre. With the support of English Heritage, planning approval on the scheme is expected shortly. Henry Boot will also be submitting planning applications soon for a 100,000 sq ft town centre redevelopment in Daventry and a 140,000 sq ft retail park on the edge of the town.
Hidden value
But the main reason I think the shares can be significantly rerated is Henry Boot's hidden jewel: the land development business, Hallam Land. This operation turned in profits of only £0.6m last year which reflects the subdued housing market. However, the recent sale of 700 residential units to Barratt Developments and Bovis Homes in Buckingham shows that there are still deals to be done. At the end of 2010, Hallam held interest in over 8,000 acres of land of which it owned 1,409 acres, held around 4,076 under option and a further 2,567 under planned promotion agreements.
These land holdings are in the books at just £55m, because optioned land is on the balance sheet at its agricultural value of around £2,000 per acre. Development land is worth substantially more; analyst Kate Moy at Arbuthnot Securities believes the Buckingham sale, made under a planning promotion agreement, could have achieved a price of around £50,000 per plot. Moreover, there is a geographical bias towards the more prosperous regions of the south and west of England and Scotland. In fact, Arbuthnot estimates that Hallam Land could add 40p a share to Henry Boot's reported net asset value of 145p a share, giving a sum-of-the-parts valuation of 210p a share, slightly above the 200p valuation derived by Philip Sparks at Evolution Securities.
Trading a third below these sum-of-the-parts valuations, yielding 2.5 per cent and with small-cap index-tracking funds now buying, I rate the asset-backed shares a value buy at 140p and have a six-month target price of 170p.
Trading update: A glistening investment
My trade to buy gold a couple of months ago has worked out well. To recap, I suggested buying the commodity around $1,440 an ounce, using RBS Gold Bullion Sterling tracker, RB81. The price pulled back to $1,445/oz on the day the article was published (Bailouts and fiat currencies, 12 April 2011) and subsequently rallied to $1,570/oz by early May. I had advised a target price of $1,550/oz, a level which the price hit once again last week. RB81 has returned 5.69 per cent against a 5.96 per cent rise in the gold price, so it has proved a decent way of tracking the underlying price. The tracker has actually outperformed the gold price over the past year, highlighting the benefits of the currency hedging of the product.
