Wednesday, April 6, 2011

Director buys - March 2011

In his book "The Little Book of Value Investing", Christopher Browne says: "Stocks bought by insiders outperform the market by at least two-one". With this fact in mind, I have been keeping tallies of director buys during last month, and trying to find the most promising candidate. I look through Director buys daily, and keep a note of interesting buys. It is a first stage screen, in which most companies are rejected. Once a shortlist is compiled, I then pair off companies, selecting what I think is the most promising buy. Companies making it through that round are then paired off again, and the process repeated until a winner emerges.

The candidates
The companies that passed the selection stage are: £AQP, £BARC, £CEY, £CNA, £CPP, £CW., £DPLM, £FCAM, £HWDN, £ICP, £III, £JPR, £LGO, £LLOY, £NXT, £POL, £PSN, £RRS, £RTN, £SPO, £VTC. They do not necessarily represent strong ideas; merely ones that, at first glance, have some kind of merit.

Of these companies, £DPLM, £HWDN and £NXT crop up on my "Magic Formula" screen, so readers may want to pay these companies another look.

Financials are a prominent sector on director buys this month. Based on historic PBV, £BARC and £LLOY look particularly cheap, with the possibility of doubling (and quite possibly even more) if business returns to usual levels. £BARC, for example, is trading at a PBV of 0.69, whilst its median over the last decade was about 1.74. It is also trading at a ROE of 9%, when the median was 19%. If you believe that the current clouds hanging over it will lift, and returns will revert to their historic values, then the banks look cheap.

The winner - ICP.L
My top pick for March 2011 is £ICP, 331p/£1.3bn. It is on a yield of 5.1%, and a rolling PER of 10.6. Low double-digit growth is expected in 2012. £ICP is engaged in the provision of mezzanine and equity finance to companies throughout Europe, Asia Pacific and North America, and the management of third-party funds in mezzanine, debt, high yield bonds and related assets. Director T. Attwood bought nearly £1m of shares last month. Other directors also bought shares in September and December 2010. The company's latest interim management statement in late January was upbeat:
Overall we are pleased with the performance over the last three months.  Our investment portfolio continues to perform well and we have made progress in growing our fund management business.
 Historically, ICP.L traded at a PBV of 1.86. It currently trades at a PBV of 1.1.

The runner-up - NXT.L
Second place goes to Next (forgive the pun), the apparel retailers, at 2030p/£3.6bn. It is on a yield of 3.9%, and a rolling PER of 9.6. It has a z-score of 5.9 and a net debt of £530m compared to a net profit for the latest financial year of £401m. Those debt figures look good until you see that its gearing is 228%. Estimated growth for the next two years is in the low single-digits, although those estimates may be too optimistic in light of the recent statement in the latest year-end results:
Looking ahead we are facing a tough trading environment.  Increases in VAT, cotton prices and labour rates in many of the countries in which we source means the price of our products are rising at a time when our customers are experiencing increased demands on their income.  However, we believe NEXT can continue to thrive by keeping to our strategy of investing in the Brand, improving the products, and developing new avenues of growth. 
As noted previously, Next is a "Magic Formula" company, but people will have to decide for themselves whether a PER of 9.6 represents an attractive valuation or a cyclical trap. The company has engaged in  strong buy-back activity lately, and four directors have bought shares at the end of March to the tune of £918k, combined. Next has won praise in this article on Stockopedia by QFinance for its honest, no-nonsense approach to communicating with shareholders.


Yorkiem said...

Hi Mark

Interesting article. I've always looked for director "involvement" and am looking to move that higher up my list of requirements. If it's good enough for them with inside knowledge, then that's a strong signal.

One thing with the Magic Formula, doesn't Greenblatt exclude financial stocks and banks? I can't recall the exact reasons why, but from my experience banks' balance sheets are complex and seem to be a myriad of smoke and mirrors, and therefore a routine analysis is of reduced value and the NAV may even more subjective than it might otherwise be for a trading company.

Mark Carter said...

@Yorkiem Good point, I had forgotten about Greenblatt excluding financials.

My main focus on the article was director buys, and what looked good, rather than magic stocks per se. The banks, particularly BARC, are "cheap and bad" rather than "cheap and good". That doesn't put me off if I think they can restore profitability.