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Exploiting ‘margins of safety’

Two investment companies, housebuilder and gas exploration company are priced below the intrinsic value of their assets, thus offering re-rating potential as investors reappraise prospects.
Exploiting ‘margins of safety’

In chapter seven of The Intelligent Investor, the seminal 1949 work of Benjamin Graham, a US investor and writer, the father of value investing explains: "If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamorous for some other reason, it is logical to expect that it will undervalue – relatively, at least – companies that are out of favour because of unsatisfactory developments of a temporary nature. This may be set down as a fundamental law of the stock market, and it suggests an investment approach that should be both conservative and promising."

Mr Graham's approach was to focus on companies with strong balance sheets, so can trade through any short-term difficulties. He called it his "margin for safety". In a nut shell, that’s what’s on offer at investment companies CIP Merchant Capital (CIP) and San Leon Energy (SLE), the former fell out of favour after a period of investment underperformance and the latter was shunned due to its exposure to the oil sector. Both companies are now performing well, making their share price discounts to the underlying value of their assets buying opportunities.

 

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