Seeking safe value

Thursday, Nov 22 2012 by

I have been playing around with Stockopedia's excellent filtering to try to find some safe value shares. I am more a growth/momentum investor and am not hugely comfortable in the value arena. Why? Because growth opportunities and momentum plays are easier to spot [for me] and value can be rather subjective.

Anyway, I set about thinking how about I might find value.

I started with Piotroski's idea of scoring stocks according to a set of accounting values and then picking those with low price to book value and a high score. Stockopedia has a screen for this and it currently has 17 shares on it. That's about 12 too many for me.

What next? Well, Altman came up with a checklist that attempts to filter out the chances of bankruptcy. I added Z score of greater than 1.8, his cut-off for financial distress.

I then decided to look for companies that have a low p/e, pay a dividend, have 2x both interest cover and dividend cover. Just to make sure the dividend part of the screen doesn't deceive, I look for a dividend growth streak of at least 1. Interest cover is a passing attempt to make sure any debt payments are covered. I don't screen for debt because it's difficult to screen good debt vs bad debt. Good debt is used to move the company forward; bad debt to save its skin!

A Market Cap £25m cut-off gets rid of likely illiquid stocks with wide spreads.

I still had too many stocks.

I added Beneish M score of less than -1.75. The idea is to filter out stocks that might be subject to a bit of creative accounting.

Lastly, I look for someone else to agree with the filter's analysis. I'm not a great believer in broker forecasts but that's what's on offer. So I look for at least one broker forecast, at least one outperform and the current price trading at least 5% below the broker price target.

Right now the filter throws up:

Cohort (LON:CHRT) (I hold) is a buy on the chart, Fenner (LON:FENR) is just off the bottom of a channel and could be good to the 400-420 area and Rank (LON:RNK) looks like a buy signal may just be around the corner.

The warning is that in an econonic downturn what is cheap can get cheaper but with sensible trading plan there might be worse stocks to trade/hold.


Please keep in mind that all comments made by Susan Marmor are for educational purposes only and should not be construed as investment advice regarding the purchase or sale of securities, options, futures or any other financial instrument of any kind. Consult with your investment advisor before making an investment decision regarding any securities mentioned herein. Susan Marmor assumes no responsibility for your trading and investment results. Susan Marmor does not warrant completeness or accuracy for any observations made herein, or warrant any results from the use of the information. Susan Marmor may have a position in the securities and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. There is a very high degree of risk involved in any type of trading. Past results are not indicative of future returns. Securities, options, futures and any other financial instruments can go down as well as plunge.

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Cohort plc is a holding company. The Company's segments include MASS, MCL, SCS and SEA. Its subsidiaries include Systems Consultants Services Limited (SCS) and SEA (Group) Ltd. (SEA). Its sub-subsidiaries include MASS Consultants Limited (MASS) and Marlborough Communications Limited (MCL). SCS is a defense consultancy. SEA is an electronic systems and software company operating in the defense, transport and offshore energy markets. MASS is a specialist defense and technology business, focused on electronic warfare, information systems and cyber security. MCL is engaged in sourcing, design, integration and support of communications and surveillance technology for the defense and security markets. It provides a range of services and products for the United Kingdom, Portugal and international customers in defense and related markets. The Company operates in the United Kingdom, other European Community (EC) countries, Asia Pacific, and North and South America. more »

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Fenner PLC is a United Kingdom-based provider of engineered solutions for performance-critical applications. The Company's business segments include Engineered Conveyor Solutions and Advanced Engineered Products. The Engineered Conveyor Solutions is engaged in the manufacture of rubber ply belting, solid woven and steel cord conveyor belting for mining, power generation and industrial applications with complementary service operations, which design, install, monitor, maintain and operate conveyor systems for mining and industrial customers. The Advanced Engineered Products is engaged in manufacture of precision polymer products, including precision drives; power transmission and motion transfer components; silicone and complex hoses; lay-flat hoses; seals and sealing solutions; technical textiles; rollers, and fluoropolymer components. It offers its products to range of markets, including medical, energy, transportation, general industrial, construction equipment and agriculture. more »

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The Rank Group Plc operates gaming services in Great Britain (including the Channel Islands), Spain and Belgium. The Company's segments include Grosvenor Casinos, Mecca and Enracha. The Company's Grosvenor Casinos is a multi-channel casino operator in the United Kingdom. Grosvenor Casinos offers a range of casino table games, including roulette, blackjack, baccarat and poker, as well as electric casino and slot machine games. The Company's Mecca is a multi-channel community-based gaming brand for the British market. Mecca's digital channel offers a selection of games from bingo to a range of slots games. The Company's Enracha is a community-based gaming business for the Spanish market. Enracha offers a range of community games, such as bingo, as well as electronic roulette and slot machine games, sports betting and food, drink and live entertainment. The Company has a portfolio of over 150 venues. more »

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  Is Cohort fundamentally strong or weak? Find out More »

9 Posts on this Thread show/hide all

Edward Croft 22nd Nov '12 1 of 9

This looks an excellent set of criteria - I can't question any of the criteria. It would be great if you could post a link to the screen page - as other subscribers will be able to watch the list over time. By the way we are considering adding the ability to 'publish' screens and track their performance over time in the same way we do for our premium models. Let me know if you'd appreciate that feature. We'll also be adding the ability to 'watch' different screens more formally so that investors can be notified of new qualifying stocks more promptly.

The fascinating thing about screening for value stocks is that sometimes its the most unusual stocks in a basket that do the best - it's often the oversold stocks that nobody wants to look at that actually bring the lions share of the reward. Joel Greenblatt found that investors who picked stocks from his lists of 30 magic formula stocks underperformed because they picked the wrong ones - the safe ones ! Of course if you have a highly concentrated portfolio, you can't find safety in numbers, you need to have high conviction that each stock won't disappoint - in that scenario it's definitely vital to weed out the danger stocks.

I'm going to take a closer look at these companies - I noticed that Fenner is also qualifying for our Naked Trader screen - which I believe is a strategy you have followed too?

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smarm 23rd Nov '12 2 of 9

Hi Ed,

Happy to post a link, although I thought the screens were private and beyond prying eyes.

The biggest problem with filters is the lack of backtesting. What would be really useful is the ability to run the filter on a specific dataset e.g. Finals December 2005. All that is required is the set of stocks a filter might have produced for the dataset, together with a price on the final day of the month. The user could then manually work out what to do with all the changes in ownership and get an idea of performance. I accept that running on specific dataset limits the shares that would be thrown out but I can't think of an 'easy' way to do it. What do you think?

I like the idea of forward testing but would prefer to keep my filters and their performance 'close' until they are proven to work. I guess that means a 2/3 year lag from when you make the facility available but it would surely be worth it in the end.

Cherry-picking a system or filter will almost always lead to disappointment so I aim to reduce any filter to a few picks and then buy when the chart tells me the time is right.

Sorry I missed you at Olympia show....


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Murakami 23rd Nov '12 4 of 9

Hi, we're definitely agreed re: the need for back-testing. This is something we're working on. What I would say is that it's easy to do badly, in which case the results are worse than useless, i.e. misleading because of issues like look-ahead bias and survivorship bias. It can give the impression that a strategy is wonderful, but in practice, it will never reflect the back-tested results. That's why we only use live performance tracking for the screens:

Doing backtesting properly is extremely hard, not least because database schemae change over time, and the only applications I'd trust are all institutional sources at present. We do want to make it more widely available but only once all of those kinds of issues are properly scrubbed.

In general, if you'd like to see something added to PRO, the best thing is to suggest it here (or via the Green Button), as that's the list we're monitoring - I've now added that suggestion (although it's already high on our internal dev list):

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smarm 28th Nov '12 5 of 9

In reply to Murakami, post #4

That's great, thanks.

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smarm 28th Nov '12 6 of 9

Euromoney Institutional Investor (LON:ERM) has popped up on the filter. Hmmmmm. The recent results were encouraging and that has seen the price bounce a little but the chart is saying NO WAY. I guess it goes on the watchlist for a good chart entry....

We wait.


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Susan Marmor 3rd Dec '12 7 of 9

Euromoney Institutional Investor (LON:ERM) has dropped out of the filter becasue the P/E is no longer less than median. So what the filter is telling me is that ERM is no longer 'cheap' according to my metrics. The price is up since last I score that a win for the filter.

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Susan Marmor 13th Dec '12 8 of 9

CHRT Statement today seems solid enough. So far FENR and CHRT have moved nicely and RNK remains a sell on the chart and one to watch. The filter remains a work in progress; I will continue to update.

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jdo 21st Mar '13 9 of 9

Nice screen idea. I see CHRT has been slipping back recently. Now qualifies for 7 screens including NT screen. I'm a bit surprised Robbie hasn't flagged this one up, seems like the kind of stock he would like.
Looks good to me.

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