Finding companies that match this strict criteria has become more and more difficult over the years as the link between market capitalisation and asset value has become more tenuous. For example, information technology companies will rarely match the criteria and biotechs generally only appear when their share price is depressed and the cash pile on the balance sheet - intended for future research and development - significantly boosts net current assets.
Housebuilders inevitably have bargain ratios above one simply because accounting policy is to include land banks as current rather than fixed assets. This does not mean to say we ignore them - we have successfully prospered in the past eight years with the likes of Bryant, Alfred McAlpine, Bellway and Bovis - however, this should be taken into consideration.
When we ran the programme over 2,800 listed shares, as expected only a handful turned up with a bargain ratio of 1.0 or above. So to widen the net, and as in previous years, the cut-off point has been lowered to 0.5. Some companies may drop into bargain territory because of short-term difficulties, but it is the resolute nature of the balance sheet that will see them through. Hence our balance sheet based approach.
The overall record of Investors Chronicle Bargain Portfolios has been very good over the years, but it's worth remembering that you may end up being in for the long haul - namely two to three years - so don't expect instant profits. It is also important to buy a decent number of our recommendations to diversify risk. Finally, with small-cap companies, market makers could easily raise the price they are quoting by 10 to 15 per cent on publication day so our advice is to hold off for a few weeks, until the shares fall back.
