In my last article, I introduced another classic value metric: Price-to-Tangible-Book, and explained why buying stocks at a discount to this may indicate undervaluation. As usual, I used the Stockopedia screening facility to search for potentially undervalued UK stocks. As many value investors do, I demanded a margin of safety by looking for PTBV < 0.7, with a check on balance sheet strength and also excluded some difficult to analyse sectors, such as banks. I kept similar market cap constraints to the 52-week lows screen. However, in this case, the £600m upper limit is mostly academic; large companies rarely trade at a discount to Tangible Book Value outside of the banking sector.
The resulting stock screen generated 38 results, which is too many to analyse in any detail at this stage. My aim in this article is to narrow down the field to the best 10-20 stocks for further analysis as quickly as possible. One of the keys to using stock screens to generate ideas is being able to rapidly home in on the most promising opportunities.
This endeavour is helped by the fact that this is the second Screening for Value stock screen. The results from this screen contain nine companies that appeared on the 52-week lows screen, and I won’t look at these again. It isn’t unusual to find this duplication since cheap companies are often cheap on a number of metrics.
With the 52-week low screen, we looked for excessive debt, pension deficit or evidence of earnings manipulation as reasons for initial exclusion. These will be less relevant to this screen since these companies may have no earnings, and any debt will be included in the net asset figure. This means that asset quality and cash burn are usually more important aspects to consider for discount to Tangible-Book-Value stocks. These are particularly relevant for the resource stocks that appear on this screen. The tangible assets here are often the net present value of commodity reserves and production or pre-production machinery in challenging locations. These assets are very difficult to value. My general rule is only to consider these stocks further if they are cash flow positive.
Pension deficits can also still be an issue here since the Triennial valuation, which the Pension Trustees use to agree on recovery payments, can be much larger than the accounting figures used to calculate the book value. Accounting…
