A filter

Here's a filter I saw on the MFI Yahoo group:

Try Jamie Gritton's backtester

http://www.backtest.org/

Under "Screen Builder" enter the following inputs:

Market cap > $50 million (mcp > 50)
PE bottom 25% of companies (cpe bottom 25%)
ROA top 25% of companies (nin/tas top 25%)
Starting month = January
Holding period = 12 months
Timeliness = 1-5

The average annual returns for the period 1989 through 2009 are:

S&P 500, 10.8%
Little Book Table 6.1 plus updates from website, 21.7%
Gritton screen above, 19.0%

See if you can add/modify the screening criteria to achieve a higher return. 

A few of suggestions for better perspective: 

1.  In order to get apples-to-apples comparisons try to get about the same number of companies passing the screens.  In general, you don't want to compare screens that pass 5 companies with screens that pass 50 companies.

2.  Run 12 month screens starting in January, April, July and October and average the results.

3.  Run the opposite conditions to see the change from the top tier to the bottom tier.  For example,
cpe bottom 25% and nin/tas top 25%--> CAGR = 15
cpe top 25% and nin/tas bottom 25%---> CAGR = 9
 
I hope this is helpful.

Inverurie retailers

I paid a visit to Inverurie today, Sunday, at 10.30am, to see how the retilaers were doing. My main port of call was Inverurie Business Park, which had the retailers Acorn, Argos, Currys, Halfords, Homebase, Lidl . there were a couple of vacant retail units. I was particularly interested in Halfords from an investment viewpoint.

I noticed two things about all the units: they were clean, but fairly empty; Currys particularly so.


Acorn Pet Centres is a pet food retail chain. It also sells pet toys. It doesn't sell pets; except for fish and rats. It is a privately owned company.

Argos is owned by Home Retail Group.

Currys is owned by DSG International. I noted that an LG 32" 1080p LCD TV cost £349. A Samsung 46" 1080p LED back lit TV sold for £1199.

Homebase is owned by Home Retail Group. I noted that a smooth buff paving slab 400x400mm cost £2.99 each.

Lidl is German company.

I walked around the rest of Inverurie, and made the following notes.

Poundland is a British based variety chain. It is owned by an American company. It was quite busy.

Superdrug was closed.

Marks & Spencers mainly sold food, and it was not that busy.

Tescos was doing reasonable business, though, and seemed the most successful business out of all that I visited. It even sold windscreen wiper blades.

BATS - ROE

I thought it would be interesting to break down the last 10 years of BATS (British American Tobacco). Presented below is a list of years, together with the median ROE of its last 3 years:

YEAR    ROE%
2003    29.2
2004    32.2
2005    32.2
2006    31.3
2007    31.3
2008    31.3
2009    32.2
2010    37.2

As you can see, BATS has enjoyed high returns on equity, which seem to be getting even better. As you might expect, its share price has done rather well over the period. Over 10 years to 1 Aug 2010, the Footsie returned -17% (dividends excluded), whilst the share price over the same period rose 448% (dividends also excluded). The PER started out at 9, and has since risen to 13. So some of the increase is due to the PER re-rating. Nevertheless, the share price has done well on account of the rising earnings of the company, assisted by the high ROE.

How To Invest Like Warren Buffett And Peter Lynch

Here's an interesting YouTube vid "How To Invest Like Warren Buffett And Peter Lynch":
http://www.youtube.com/watch?v=a-q17Ag0Ojc

Warren Buffetts general strategy is supposedly outlined in it. Here's what Buffett looks for, allegedly, according to the vid:
- consistent earnings pattern over 10 years - look for earnings predictability for the future - which should be steadily increasing earnings
- high ROE over 10 years
- debt which can be repaid within 2-5 years out of the earnings of the company, which is an interesting take on financial leverage

Unfortunately, he doesn't mention what PE ratio is acceptable. I suspect that it's higher than the usual "bargain bucket" prices that value investors are interested.

Despite the vid title, Lynch isn't really mentioned.

Investment Newsletters and Stock Advice - Cabot Heritage Corporation

Investment Newsletters and Stock Advice - Cabot Heritage Corporation

Small companies look relatively cheap

I decided to have a look to see how the price of small companies compared to large companies. I obtained the median PE of companies whose market cap was in the range £100-200m, and compared them with the median PE of companies in the Footsie. Here's what I discovered ...

There are 130 companies in the £100-200m market cap range. The median PE is 9.
My database returned 98 companies in the Footsie (maybe a slight anomoly because there should, of course, be 100 of them), and I obtained a median PE of 13.

So large caps are 44% (=13/9) "more expensive" than small caps. Interesting, no?

Crystal Amber Fund - Home

Crystal Amber Fund - Home

Welcome to Crystal Amber Fund
An activist fund taking stakes in undervalued companies and taking action to enhance value.

How to invest like Peter Lynch - MSN Money

How to invest like Peter Lynch - MSN Money

Correlation of ROEs from year to year

In "The Little Book That Beats The Market", Greenblatt assumes that a good ROCE one year implies a good ROCE next year. To test this hypothesis, I took 30 companies from the Footsie (the first 30 alphabetically), and recorded their EPIC code, ROE1 (ROE for the latest year) and ROE0 (ROE for the year before that). I then plotted ROE0 against ROE1. Here's the graph:

As you can see, there's a lot of correlation. So companies doing well continue to do well, and companies doing badly continue to do badly. Here's the raw data:

EPIC    ROE0    ROE1
AAL    25    9
ABF    9    9
ADM    52    52
AGK    26    28
ARM    9    9
AU.    13    14
AZN    46    29
BA.    18    30
BARC    4    5
BATS    37    40
BAY    -18    -16
BG.    24    15
BLND    8    5
BNZL    27    26
BP.    28    13
BRBY    24    26
CCL    12    8
CNA    20    26
COB    14    22
CPG    18    21
CPT    51    51
CSCG    5    3
DGE    43    51
EMG    24    11
ENRC    32    13
EXPN    35    29
GFS    15    29
GSK    73    61

Understanding Insurance companies

General Insurers (aka Nonlife insurance) - e.g. RSA - defensive stocks that generally do well in a recession. Tend not to invest in equities.

Life Assurers -e.g. Aviva - tend to follow the stock market more closely and invest in a lot in equities. The issue policies that pay out a lump sum in the event of someone's death.

Returns On Equity

I zoomed through my Sharelock Holems account, looking for returns on equity. Here's the quartile results:

Q1: 20%
Q2: 11%
Q3:  3%
So what it's saying is that the median ROE is 11%. The top quartile earned more than 20%, and the bottom quartile earned less than 3%. Some of them will, of course, be negative, as they made losses.

There were 556 companies in the sample. You have to be very careful about interpreting the result, as some of the top companies had ROEs in excess of 100%, and two of them in excess of 1000%. These figures are, course, not credible. If only!

To see what the top ROEs were, I compiled the following table:
ROE %ile   
25% 18%
30% 13%
40% 6%
50% 5%

So, what the table is telling you is that 18% of the companies has ROEs of at least 25%. 13% of the companies had ROEs in excess of 30%, and so on. I think that one should be very careful of these ROEs, though, as they are likely the result of statistical anomolies or accounting manipulation or skewing. It seems that companies are unlikely to maintain such high ROEs, even if true.

HMV

I see that HMV was up 8% yesterday. HMV has been a real dog, down from 110p a year ago to 62p now (after the rise yesterday). HMV is, as everyone knows, a retailer of records, books, and suchlike. Oh HMV, how could it have gone so wrong? Could we be buying into a sucker's rally, or is there still value to the shares? Below, I argue that the price of the shares is too cheap.

Here's some numbers:
Mkt cap: £262m
SP: 62p
Yld: 11%
Div cover: 1.7
Int cover: 9.6

Various stats

Now   Avg
Turnover  1956 1824
Op Profit   70  100
EV/Sales  0.18 0.40
PE         5.0 11.0
EPS         11 10.8

So, on the basis of EV/Sales, we could expect a doubling of the company share price. On the basis of PE ratios, the fair value would be 118p (=11.0 x 10.8), which, again, is about double. Brokers estimate rising forecasts (13% growth next year, 6% thereafter).

The yield looks very good, and hopefully safe, especially in light of forecasted profit increases. Even if they were to halve the dividend, that would still be very good. I don't see why they would need to suspend the dividend, certainly not at this point in time, anyway.

Now, OK, there's a fair bit not to like about HMV. The particular worry is that it's a niche retailer where the internet is threatening to obsolete its business. So, I wouldn't necessarily hold out for the shares to double, because I think it's likely that the nature of business has changed; but there would be quite a lot of margin for error if one decided to sell out at a 50% gain from here (assuming that such a thing happens, of course).

Footise is at 5240.

BWY - Bellway - House builder

I expect house builders are not at the top of everyone's mind, so I thought it might be interesting to dig out a nice little builder for you.

BWY (Bellway) is the 4th largest house builder in UK. I'm taking a broad brush approach here in my analysis of its fair value.

Current share price: 639p
Mkt cap: £772m
yield: 1.5% OK, small yield, but it does get better.
Interest cover 2.88 Adequate, especially given the depressed earnings of the company


BOOK VALUE
It has a PTB of 0.76. I've looked through the historic averages for PTB, and it's 1.2. So, if you were to value the shares on a PTB basis, that would suggest at least a 50% increase in the share price is possible.

EARNINGS
Current PE is 26. That looks a lot, but earnings are depressed. So we have to come up with an alternative way of measuring PE. Looking back at the historic figures, I find that the average PE for the company is 11, and it's average adjusted EPS is 95. Multiply the two, and you get a share price of £10. So again, this suggests at least a 50% increase is possible.

Analyst earnings forecast are expected to increase robustly in next 2 years.


TURNOVER
Trying to value the company in terms of turnover, the turnover for the year was £683m. The average turnover for tha last 10 years was £975m. So again, this suggests about a 40% increase in share price is possible.

TRADING STATEMENT
In a management statement on 15 June, covering the period 1 feb 2010 to 15 jun 2010, we get such snippets as: "slight reduction in both site visitor levels and weekly sales rates. ... the original annual sales target of achieving last year's volume is secure ... Operating margins on current reservations have improved ... Bellway remains well positioned to continue to deliver earnings growth."

So, sounds pretty good to me.

MISCELLANEOUS
One negative thing I found was looking at their website (it's actually quite simple and effective). They advertise a try before you buy up to 12 months rent free. I'm not sure that I like it that they have to give stuff away.

I notice that the discussion board hasn't been posted to since 2008. I'll take that to be a good sign.

SUMMARY
The company looks cheap on fundamentals, and the share price needs to increase by 50% to attain fair value. Exactly when that will happen, or if economic conditions deteriorate, I couldn't say. Footsie currently stands at 5250.84

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