Why Marston's could be a high-yielding, cheap stock for your ISA

Mid-cap Restaurants & Bars operator Marston's (LON:MARS) operates over 1,600 pubs and its five breweries produce well-known brands of beer and ale such as Hobgoblin, Pedigree, Wainwright, Banks's, Ringwood, Jennings and Brakspear.

At c100p, Marston's shares are valued at just seven times forecast earnings - but does this spell an opportunity for potential shareholders?

Cheap shares are often cheap for a reason. That said, numerous studies show that maintaining a value strategy through boom and bust will be rewarded (although sticking with it can be very hard).

One of the masters of value (and factor) investing is Jim O'Shaughnessy, the founder of O’Shaughnessy Asset Management (OSAM). In the 4th edition of his groundbreaking investment research tome What Works on Wall St, O’Shaughnessy showed that composite value factors based on a mix of metrics dramatically beat the market over a multi-decade period.

It was from this robust insight that Stockopedia’s Value Rank was born, its synergy coming from the following simple valuation ratios:

• Price to Book Value
• Price to Earnings
• Price to Free Cash Flow
• Dividend Yield %
• Price to Sales
• Earnings Yield %

How does Marston's stack up?

Is Marston's cheap?

We can see by using Marston's’s StockReport that the group has a:

• Rolling price to book value of 0.67,
• Rolling price to earnings ratio of 6.89
• Trailing twelve-month price to free cash flow of 32.4
• Rolling dividend yield of 7.48%
• Trailing twelve-month price to sales ratio of 0.56

When we add all of these together, we find that Marston's has a Value Rank of 84. Investing in high-value stocks requires finesse and a sturdy constitution but, when cheap stocks come good, the payoff can be large and sudden. Marston's’s Value Rank of 84 puts it in the cheapest quartile of the stock market. That is certainly a promising jumping off point for our analysis but it is not the whole story.

One area that this checklist flags up is that the group looks expensive on a free cash flow basis. Pubs can be extremely capital-intensive, and sometimes millions of pounds have to be invested into sites just to maintain performance. When you couple this capital intensity with Marston's c£1.4bn debt load, liquidity might be an area of concern.

A smarter way to invest in value stocks is to find the best quality value stocks or value stocks whose share prices are turning around - history shows that you can do much better than a passive investor by combining factors, so it makes sense to consider Marston's’s Value Rank alongside its Momentum and Quality Ranks. You can find these on Marston's StockReport.

What does this mean for potential investors?

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But there are no guarantees and it's important to do your own research. Indeed, we've identified some areas of concern with Marston's that you can find out about here.