As I said in the last post, the fact that earnings can impact company valuations has finally entered my brain and caused a cascade of activity in my once quite and peaceful fund. The turmoil began with the 600 Group. I first bought 600 Group back in December 2008 when it was trading at a sizeable discount to tangible assets. Gearing was low and liquidity was good and that was enough for me.
However, things move on and now I look at returns on equity as well as book value, gearing, liquidity, etc. Over the longer term the ROE for this company are frankly appalling and the economic value of the company's assets is much less than their book value. For example, ROE10 is -0.5%, ROE5 is -2.4% and the current ROE is -14.5%, none of which screams of success.
I realise of course that this is massively oversimplifying things, but unless you have a brain the size of a planet then pretty much any analysis you do is a massive simplification of reality.
So 600 Group (LON:SIXH) departed with a total gain of 4.2% in almost 2 years, to be replaced with Barratt Developments.
Barratt Developments Plc (LON:BDEV) is a very different company to what I've invested in before. Yes it is trading below book and tangible book, it has reasonable debt and liquidity, but what makes it different is its size. The market cap is £723 million and the net asset value is over £2 billion. That puts it well outside of my usual small cap zone. But in terms of what I'm buying I am much happier. Price to book and tangible book are lower than with 600, but also ROE10 and ROE5 are better at 14.3% and 7.3% respectively, including the negative values of the last two years.
It is cheap for various reasons: the housing market, the economy, the recent rights issue, the level of debt they took on at the peak of the market, etc etc. But as of now I think it has a good chance of outperforming over the next year or three.
And because everybody else seems to, I'm going to include a target price. As of now my target price…
Just come across this... I have a question : I'm familiar with book value and getting familiar with ROE. I'm not so clear on gearing yet, and not sure what you mean by liquidity. Could you please explain? Just briefly, for a novice. I understand net cash/debt but am guessing you mean something else. Also, what other measures do you look at, or which are your higher and lower priority measures?
Thanks... I'm learning to become a good stock-picker one step at a time :)
