Is the FTSE 250 expensive today?

Unlike the FTSE 100, the FTSE 250 has put in a pretty decent performance over the last couple of decades.

Since it peaked in 2007 (at the end of the early 2000s credit bubble), the FTSE 250 has just about doubled and since its peak in 2000 (at the end of the dot-com bubble) the FTSE 250 has more than tripled.

Given that the FTSE 100 has produced zero capital gains since 1999, a 200+% price increase for the FTSE 250 isn’t too bad at all.

And if you take your starting point as the 2003 low which followed the dot-com bust, the FTSE 250 is up more than 500%.

But have these healthy gains come at the expense of sane valuations? In other words, is the FTSE 250 dangerously expensive?

You can find out what I think on my new website,

Is there a bubble in dividend growth shares?

The ongoing problems in the UK and global economies have driven many investors into the arms of safe, defensive companies that can generate consistent dividend growth.  It’s easy to see why this might be an attractive strategy, given the high levels of uncertainty and volatility in the stock market today.

However, the popularity of safe dividend growth shares has caused some people to ask whether this is the next bubble.

At first glance, it seems that there is.  Adam Parker of Morgan Stanley is quoted by Merryn Somerset Webb in MoneyWeek as saying “Defensive stocks are trading near a decade-high relative to their more economically sensitive peers”.

Continue reading “Is there a bubble in dividend growth shares?”

New worksheets (with checklists), spreadsheets and investment guides

I’ve added some new free resources for investors who are serious about making the most of their money.  These include a new investment analysis worksheet, an updated guide to value investing and the latest articles and research by email.

The guide is now more practical than before, walking you through the process of value investing at the same time as going through some of the underlying ideas.

Find out more about these free resources >>

Luminar Annual Results

I bought Luminar back in early 2010 as a turn-around play on the assumption that if (IF) it survived then it might return to average earnings at an average PE, which might be something like 40p and 7 respectively, giving a potential share price of 280p.  Currently they’re around 9p and I bought at an average of 34p.  Yes, obviously that makes me look pretty stupid and with hindsight I’d agree.

For those who don’t know, Luminar is the UK’s leading nightclub operator and has debts of £90M, which isn’t huge but it is if you keep losing money as the yoof of today are either unemployed or up to their eyes in student debts or both and have little desire for a big night out.  When they do it involves a six pack of something cheap from Tesco.  The company is responding by getting the ‘experience’ right for their market, selling off loss making units and opening up the clubs (for comedy clubs and other such things) at times when they would normally be closed.

With the latest annual report I can’t even attempt a sensible share price projection since the company as it stands now a) might not even exist a year from now and b) is constantly shrinking so comparisons with the past are hard to say the least.

However, the banks are being nice for now so I will assume, perhaps foolishly, that they are still a going concern and therefore I won’t sell out just yet.  That still leaves the problem of working out a target price, although ‘work out’ should probably be replaced with ‘make up’.

The earnings per share over the last decade have averaged around 40p.  The company as it stands now has 77 clubs compared to 296 in 2002.  In 2002 the company earned 61p per share, which is 0.2p per club.  With 77 clubs that’s about 16p.  At a PE of 7 this gives a share price of about 111p as a ball park guess of what Luminar might trade for, IF they survive and IF they maintain something like 77 clubs and IF the clubs are broadly as profitable as in 2002 (in nominal rather than real terms).

With a ‘rational’ (?!?) share price of 111p expected at some point in the next 5 or so years, I want a minimum 50% upside, i.e. if the shares get within 50% of the expected price then I’ll sell since I want more bang for my buck than that.  This means the target price would be 74p which is the price I will sell at (until the next annual report turns up and I revalue the company).

As of now I expect to be an ex-Luminar holder when either the company goes bust or when the shares reach 74p, one of which looks more likely than the other.  I’ll leave it to you to work out which.

Billington Holdings – One last tangible asset play

“Billington Holdings Plc is a UK based group of companies providing structural steel and safety solution services to the UK market.  Structural Steel comprises Billington Structures, the award-winning and nationally recognised steelwork contractor.  Easi-Edge is a leading provider of Safety Solutions to the construction industry.”
I bought Billington back in November at 85 pence but haven’t got round to analysing in writing yet, so I thought I’d nail this one before moving on to my recent turnaround purchases. 

I liked this company because of its strong balance sheet, low price to book and price to earnings ratios, but in this review I’ll look at it from a defensive Ben Graham view, with some Buffett-like projections thrown in.
Starting with the company as at now:
  1. Is the company of substantial size?
Large companies can be more consistent in their results and more robust in the face of hardship, but not always.  Billington is an AIM listed micro-cap (~£12M), so it is not large in any sense.
  1. Do they have low levels of debt?
Yes, they have net cash.
  1. Are they currently generating a profit, free cash and a dividend?
Profit, free cash and dividends are all good signs of a healthy company.  For Billington the answer is yes, no and no.  Free cash does seem to be a slight problem with Billington, with three in eleven years having no free cash and in fact negative cash flows in total.  This may be a consequence of heavy capital expenditure requirements.
Looking back into the company’s past:
  1. Have earnings per share, turnover, book value and the dividend all increased in the last decade?
Increasing earnings, at least in line with inflation over the long term, is a minimum requirement for a Ben Graham defensive company.  For Billington it seems that the answer is sadly no.  EPS has been quite volatile with positive and negative results, but no clear upward trend.  Turnover is down by about 50%, book value per share is slightly lower and dividends have only been paid in seven of eleven years with the most recent one cut drastically.
  1. Have profits, dividends and free cash been positive for at least nine of the last ten years?
Again no; dividends, free cash and earnings have all been negative in multiple years.
  1. Is the return on equity consistently in double digits?
It is usually in double digits in the 20-40% range, but it has been negative and in single digits in a few years.
  1. Is return on capital consistently high?
Again it’s quite lumpy.  The good times were 2004-2008, which is what you’d expect for a company in the building business.
  1. Has the company produced a good return on reinvested earnings?
Since 1999 Billington has retained 64.35p per share of its basic earnings.  In that time there has been no clear increase in EPS or in the book value of the company, so it could be argued that no real return has been produced from those retained earnings, which is not brilliant.
  1. What is the total expected return over five and ten years if the shares traded at their historic average PE?
Billington isn’t really suitable to long term projections as its earnings are so variable.  However, the average earnings per share over the last decade are 19 pence and at the average price earnings ratio of 6.1 that gives a price of 116 pence, which isn’t far above where we are now. 
Taking it a step further, if I say next year their earnings normalise from the current 8p back to 19p (which isn’t hard to believe since the 2009 earnings were 33p) and then grow at the historic average of 6% (although that 6% isn’t smooth by any means as the earnings jump all over the place), then the earnings might be 25p in five years, giving a share price of 155p, which plus dividends paid out at the historic average cover of 3.2 gives a total return of 124%.  Do the same math over 10 years and you get 240%.  A 100% return in 5 years is about 15% annualised which is right on target.
  1. How likely is it that the earnings projections are in the right ballpark?  Or, does the company have a durable competitive advantage?
Billington does not have a durable competitive advantage so the projections are no more than a guess that at some point in the next few years the earnings will be about average as will the price to earnings ratio.
This company scores pretty badly on this kind of analysis, which is fair enough given that I bought it under different criteria; but I’m getting interested in this kind of work, of looking for good companies rather than just cheap ones, so I need the practice.  In fact I really need the practice when you see some of the other things I’ve bought lately.
For Billington my conclusion is that it’s a hold, since I think it’s a fair bet that the return on an 85p purchase price could be over 100% within 5 years.  Now the trick is to be patient enough to hold it for that long.

Portfolio review – January 2011

At the end of January my fund was down over 1% taking the rolling one year figure to 13%, slightly lagging the FTSE 100. 13% is down a long way in relation to the December one year figure (22%) but that’s due to what happened last January rather than in this one (last year’s was much better). 

The goal as ever is to out-perform the FTSE 100 by an annualised 5% in any rolling 5 year period, but it’s more of a hope than a goal. Having a returns goal in stock market investing is a bit like having the goal of it being sunny tomorrow.

The current effort to increase the number of holdings to twenty stumbled slightly as two companies were sold and two were bought, as detailed below.

Sold – AGA
Somewhat surprisingly, AGA turned out to be the ‘least undervalued’ company on a quantitative basis and its sale returned 22% in only three months.

I bought AGA using version 0.1 of my evolving scoring system, which is a quantitative model to sort and screen stocks for further analysis. I’d say about 80% of any buy decision is based on this score with the remaining 20% going to soft qualitative research. The model looks for equity selling cheaply relative to its historic earnings and AGA certainly fitted that description.

My quantitative research is quite limited and if you like that sort of thing you will find many better exponents of it listed on the web site. When doing this soft research I typically ask just four things:

First, is the company that I’m buying now substantially the same company that produced the historic earnings? It can often be the case that valuable assets are sold off during restructuring and a special dividend pays out the proceeds to shareholders. In that case the company is not the company that earned the historic returns and so the numbers are misleading. As far as I could see the AGA I bought was more or less the AGA of the last 10 years, minus their foodservice company which they sold in 2007.

Second, why are the shares so cheap? For AGA the drop in share price started in late 2007 and seemed to be directly tied to the recession rather than anything specific to the company.

Third, is this fixable? Personally I couldn’t see any reason why after the recession AGA wouldn’t return to more or less the position it was in before, when the shares were in the 300-400p range rather than around 100p. Various commentators were worried about the pension fund, but this was outside my circle of competence, so I ignored it.

Finally, how are they fixing it? According to Frederick M. Zimmerman’s book The Turnaround Experience, successful turnarounds typically focus on core operational issues and incremental improvements rather than launching into new markets, products or businesses. In AGA’s case they seemed to be dropping non-core businesses even before the recession in order to focus on their consumer operations. Savings are being re-invested to improve and organically grow that core business.

In a nutshell that’s why I bought AGA. It scored well through a fundamental screen and ranking system and ticked each of my simple qualitative boxes.

AGA was sold because after only three months as the rise in share price made it the lowest scoring holding since the higher the price goes the less ‘value’ is left in the shares. In part this change from scoring high to scoring relatively low was due to a minor change in the scoring system. Hopefully such changes will become limited in time. It was also a sell target as it took up over 10% of the portfolio and I’m in the process of reducing the size of each holding to increase diversification.

Sold – Airea
Another leaver this month was Airea, the design led specialist flooring company. Airea was a victim of the move from version 0.1 to 0.2 of my quantitative model mentioned above. Version 0.2 places more emphasis on recent earnings compared to earnings over five years ago and in that respect Airea had done badly. This meant that the future outlook for the company appeared weaker than I first thought and according to version 0.2 it was already fairly priced which is an automatic sell signal.

The sale resulted in a loss of about 13% in a holding that was about 1% of the fund.

Bought – Enterprise Inns
Enterprise Inns owns a large collection of pubs (almost 7,000) which it leases out to landlords and provides them with additional support in return for various monetary returns. Going by historic earnings the current price is very cheap, debt is high but not high enough to stop the company coming near the top of my screen. The four qualitative questions give these answers:

Has the company changed dramatically in the last year or three? Not that I can see.

Why is it cheap? The recession is the obvious and rational reason. People are squeezed and don’t have the money to spend on quite so much booze. The company also has a lot of debt which seems to scare some investors, but that is already factored into my quantitative model and the potential rewards outweigh this risk. A detailed analysis of the debt is not my area of expertise.

Is it fixable? I don’t think that pubs are going the way of Blockbuster, so this looks like a cyclical downturn rather than a terminal decline to me.

What are they doing to fix it? They seem to have two main strategies. One is to sell non-core pubs and the other is a sale and leaseback scheme which sold 71 pubs in 2010 and it’s expected to be around the same figure next year. Both of these are focused on the core business rather than trying some new fangled idea.

On that basis around 4% of the fund went into Enterprise Inns with a current target price of 330p which I don’t think it will get anywhere near within the next year.

Bought – Hampson Industries
Hampson Industries is an international group serving the global aerospace industry. According to the web site, “Hampson is now the world’s largest supplier of highly engineered, close tolerance tooling systems for the fabrication and assembly of both metal and composite structures for commercial and military aircraft and space applications”. My model suggests a possible share price increase of around 150-200%, which of course is up to Mr Market and not me, unfortunately. And so to my four questions:

Is it still the same company? Yes, more or less. They have been buying companies over the last few years and selling some, but overall the basics of the business appear to be the same as they have been for the past few years.

Why so cheap? The recession is once again the answer; although in this case the global recession rather than the UK one.

Is it fixable? As with Enterprise Inns, this isn’t a problem with the company as such, it’s just a knock on effect of the global downturn.

How are they fixing it? The response seems to be operational improvements and major restructuring where required, which is what I like to see rather than a radical shakeup of the business.

Again about 4% of the total fund went into Hampson as I’m aiming for around 20 holdings.

New Stockopedia fund
Since there is a good chance that I am making up these results I have started a mirror fund on the Stockopedia web site. They are entirely independent of me and so I cannot fix the results (of course if my results are rubbish they are unlikely to be fixed). The trades will be the same as for my personal account, just a day or so later. Don’t be too critical of its performance though as the fund only began a few weeks ago; please give it a year or three before passing judgement. 

Unfortunately their ‘fantasy fund’ system seems to be down as I write this so I’ll add a link to my static pages once it’s up and running again.

Adding Armour to the value portfolio

On January 6th I put 4% of the UKVI ‘aggressive’ fund into Armour Group at 7.46 pence.  The 4% came from existing cash from the sale of Victoria.  At the time Armour came top of the UKVI valuation table, with a ‘returns yield’ of about 40% and according to their web site “Armour Group is the UK’s leading consumer electronics group within the home and in-car communication and entertainment markets”.

The company trades on the AIM index, which I’m not so keen on as they have live outside of the tax haven of an ISA wrapper, so it’s not for those investors who only have money in an ISA, but I have a little bit outside the wrapper so that’s okay.

The key data are as follows:

ROE10 = 9.2%, ROE5 = 7.5%, ROE3 = 5%, P/B = 0.18, market cap = 5.3M

As is typical of many value investments, the trend in earnings is downward, but that’s fine as earnings mean reversion is one of the main causes of share mispricing.  Typically companies rebound faster and better than expected.

This leaves my cash position at about 14% which is spot on the current cash target.  The cash target for the ‘aggressive’ portfolio being half that used in the ‘defensive’ portfolio described in detail here.

Pre-Christmas sale, everything must go…

As has become clear, my portfolio has undergone a major change from a collection of low price/tangible book, low earning companies to a growing collection of low price/book companies with far better earnings histories.

Using my new approach to valuation (which as ever is mostly stolen from the giants whose shoulders I am trying to stand upon), I found that most of what I owned was already ‘overvalued’.

The list of the departed and their annual gains is as follows, some of which I’ve mentioned before:

Company              profit/loss    Holding days
J Smart Contractors  5.2%           403
M J Gleeson          34.2%          541
French Connection    15.7%          639
600 Group            4.2%           682
Northamber           31.2%          757
Mallett              -8.9%          785
Titon                47.7%          812
Averages             18.5%          660

Even though I’ve ended up selling these companies outside of my original system (which was to sell when the price/book ratio reached one, or after five years) I am happy, or perhaps lucky, with the average returns.

Currently my valuation method is in a bit of a flux, and there may be some movement beyond what I mentioned before.  The basics remain the use of historic ROE and price/book, but the ROE factor it is likely to be some combination of ROE10, 5, 3 and 1, all handily provided by sharelockholmes.

The companies above were re-valued either with ROE10 alone or the averages of the above averages (making averages of averages seems to be a compulsion of mine).  Taking the average of the averages gives around a 40% weighting to the current ROE, with gradually less for the prior years.  It makes some sense to me and in combination with less strict price/book entry criteria (I will now buy companies above book value and with negative tangible book values (!)) it certainly throws up a different sort of company to those I’ve held before.  I’ll nail down the exact approach in the coming weeks or months.

I realise this move (from buying assets on the cheap with little or no thought for anything else, to paying much more attention to the earning power of the assets) represents a sizeable amount of style creep, which can be a very bad thing; but as long as you’re creeping in the right direction I think it’s justifiable.  I can only point my finger in Buffett’s direction and say that if he did it, so can I.

French Connection saves the day

The UKVI fund was down 6.48% this month compared to our iShares FTSE 100 benchmark. This was due to a large 7.04% gain in the benchmark which completely trounced my holdings over this short period.  What upside we had was mostly thanks to French Connection and their sale of Nicole Farhi, which prompted a raft of activity from institutional owners perhaps helping the share to its 23% gain from last month. On the downside, Luminar continued to slide another 16% but now it is such a small part of the fund that any further losses will be barely noticeable overall.

The six monthly figures are not much better (down 3.4% relative to benchmark), but six months is too short a time to make any meaningful judgments on performance. The goal for the fund is to outperform the benchmark in any given five year period so I am not sweating the small stuff just yet.

Other events of note

M J Gleeson sold off their property maintenance and emergency respose unit, Powerminster. I have no idea how this sale to Morgan Sindall for £6.6M cash will affect things other than to give Gleeson a boost to their already huge £20M cash balance.

In addition to French Connection’s share price increase, the fund received its first FCUK dividend which puts their total realised returns at 1.1% which is 0.8% annualised. Not exactly Earth shattering but at least it is a start.

Victoria’s latest interim management statement said of their three geographic regions that Australia was good, the UK was bad and Ireland was ugly. In summary they said that;

Overall, the trading environment will continue to be challenging. However, the Group remains confident that it has a financially strong position, a solid and geographically diverse business model which is well positioned to support future growth when the markets in which it operates start to strengthen.

Notice the all important word, “when”. The “when” may be sooner than with some other holdings as Victoria has a lot of exposure to Australia which may well return to boom long before the UK can even dream of such things.

Titon Holdings also produced an interim management statement but a much happier one than Victoria’s with revenues are up by 19%.  However, uncertainty and caution continue to loom large on the horizon and so the champagne remains on ice.

600 Group have just released their preliminary results for the year but I’ll leave any comment on that for next month, except to say that they are still making a loss overall, book value is down slightly but they at least made an operating profit in the second half.

How goes it for the market?

Currently the FTSE 100 has a real PE10 of about 12.7 which is slightly below my long term average estimate of 13.8. This is pretty close to a sensible value and if I were rebalancing an index tracker account between stocks and bonds today I’d put 72% into stocks.

And housing?

Some signs of weakness have started to appear, but as ever with the market that acts like a super tanker it may take a long time to find out which direction we’re headed. Currently the PE is still about 5.5 according to Nationwide, which is over 30% above my estimated sensible ceiling of 4.

April Update – Victoria gets a boost

Back to normal this month, with next to nothing going on other than volcanoes and general elections campaigns.  If you’re interested, please check out the Current Holdings, Trade History and Benchmark pages for the most recent updates.

Current Holdings

Electronic Data Processing made me happy by paying out a small dividend after I’d sold them, bringing the annualised returns for that company to 20% during my brief period of ownership.

The cash that I had left at the end of March went into Victoria, an existing holding.  I increased this holding because I didn’t really want to add another new holding – I like to hold around 10 companies – and it was the cheapest by price to book of those companies where I didn’t already have more than 10% of the portfolio invested.  On the downside I don’t really rate Victoria’s chances of being a big gainer as it hasn’t traded much above its current price in the past – i.e. there is technical resistance – and it hasn’t traded at book value for years and years, which doesn’t bode well for my mean reversion theory.  However, who am I to say what the future holds?  Given that I think most analysts are as good at seeing the future as house bricks I ignored my own fears and upped the holding.


The benchmark figures this month are less ego boosting than last month, but at least they are not depressing.  Once I get some 6 month and 1 year figures I think I’ll drop the 1 and 3 month comparisons from the table as I think 1 and 3 month benchmarking is for the short term traders.  Eventually I’ll probably just do 1, 3 and 5 year comparisons to the FTSE 100, with 5 years being the important one.

FTSE 100 : 3.7% over my newly adjusted Fair Value

After my attempts to assign a ‘fair value’ to the FTSE 100 last month, the blogger over at Retirement Investing Today pointed out that my assumption that the long run average CAPE is 16.4 (taken straight from Shiller’s S&P data) is a bit too simplistic.  It is a fact that the UK markets typically have a lower PE than the US.  Since I have earnings data going back to 1993 I can only produce CAPE going back to 2002, which is only 8 years and a bit crummy.  By looking at how far the S&P’s CAPE was over the long term average during the 1993 to 2010 period and extrapolating that onto the FTSE 100, gives an expected long therm average FTSE 100 CAPE of 11.2.  Once again the decimal point is probably going a bit too far.

In my opinion this is too low as I think the US markets were more over valued in the dot com bubble than in the UK, but of course that’s my opinion and probably has no basis in fact.  However, I think it’s not unreasonable to move my expected average FTSE 100 CAPE to 13.8, the midpoint of those two values.  On that basis I think the current fair value (i.e. the value that will give a future risk/return profile similar to the long term historic one) is 5,645. Given that it’s 5,445 right now then I’d say it’s only 3.7% overvalued, which in the big scheme of things is virtually nothing.

House Prices : Still a crazy 37% over fair value

Jeremy Grantham thinks the UK housing market is one of only two financial bubbles yet to pop.  Well, I think it popped two years ago, but the government has done an amazing job of patching up the hole.  That doesn’t change the fact that the air supply is fading and the rubbing is wearing thin.  High oil prices may yet prove to be the needle once again.

Dividends by the bucket load

March has been the busiest month at the UK Value Investor head office (spare bedroom) for a long time. I’ve had reports from Mallett and J Smart, a report and strategic review from French Connection (I love their new website) and dividends from Waterman, Gleeson, Northamber and Titon. Then there’s the somewhat infamous purchase of Luminar, a company so scary it seems that almost no one will touch it.

Continue reading “Dividends by the bucket load”

Luminar, bond allocation and checklists

With the impending dividend payout from MJ Gleeson, I’ve been thinking about what to do with it. I mentioned at some point in the past that I wanted to hold more cash and bonds, using the CAPE10 based function I’ve posted about before. That function calculates my cash or bond holdings using the value of the FTSE 100 and is therefore suitable for portfolios where the stock holding is an index tracker following the FTSE 100. In fact that’s exactly what I’ve used it for so far when annually re-balancing my wife’s pension and currently the bond allocation is about 30%.

However, the value investing portfolio which is the focus of this blog is most definitely not a FTSE 100 tracker. The shares in my portfolio live in a dark little corner of the size and value grid where academia says out-performance is most easily had. On that basis I don’t think I should hold cash or bonds based on the value of the FTSE 100. What I’ve decided to do instead is to be as fully invested as is sensible (i.e. if I have £100 cash there’s no point investing it since the trade commission will be about £10).

Once I get my hands on the MJ Gleeson dividend and sell my bond holdings I’ll have about £3,000 cash to invest; and Luminar is looking like a high risk high reward place to put it. This big nightclub operator is very cheap, both tangibly and intangibly. It doesn’t have quite the low debt levels I typically like, but it doesn’t seem to be drowning in debt. On the downside, they’ve just lost the founder and chief executive; and one of their major investments has just gone into administration probably wiping its ~£17 million value from the balance sheet. Further to the downside the company has lost over 50% of its tangible assets over the last 5 years which, although bad, pales next to the 90+% paper losses of shareholders.

This is as good an example of why value investors are a rare breed as you are likely to find. Only the maddest or hardiest of souls would give money to a company with such a poor record. Will I become one of them?

For those of you who are interested in this sort of thing, I’ve added a Checklist page to list the (semi) mechanical steps I take when investing. The whole area of checklists and why we need them is very interesting in itself and I’d recommend both The Checklist Manifesto and Work the System as an introduction.

French Connection’s strategic review

With a report titled “Restructuring to return French Connection to Profitability”, the team at French Connection have start the real work of turning their fortunes around.  I’m not really a details sort of person, so the main points are that they are selling the Nicole Farhi brand and loss making stores internationally.  I hate to speculate about the future, but generally I’d say this is a good thing and the markets seem to agree as it’s been up by over 10% today.

More importantly for me, the report comes attached to the preliminary results for the year ended 31 Jan 2010.  The sole point of interest here is that the book value of the company has changed from £83.2 million at the interim report to £72.3 million now.  The market cap is currently £43 million so it’s still cheap by my simple metrics.  All in all I’ve lost a little book value but gained some market value, neither of which should make me jump for joy nor cry into my tea.  I wonder if they’ll give me a discount on a new shirt?

February Update

This month the market value of my holdings increased by over £2,000 while the book value changed hardly at all.  You can see the current holdings on the new current holdings page.  This will be updated each month so you can see how things have changed over time.  There was another dividend from trusty Titon which now makes three dividends since I’ve owned a slice of this little business.  This dividend totalled £178.83 and is currently sitting in my cash balance.  You can see the realised returns from Titon and my other holdings in the new trade history page.

I’ve also added a benchmarking page so that you can quickly see the comparison between the returns of a traditional value portfolio against a FTSE 100 ETF.  This month I outperformed the ETF by 3.39%.  Although it’s nice to have a positive month it’s not really very important.  What is important is the multi-year returns since stock investing is for the long run.

One of my holdings, M J Gleeson, announced a 15p special dividend.  Since I hold over 6000 shares that’s over £1,000.  Unsuprisingly the share price has jumped up, although it will probably jump back down again after the ex dividend date.  How this affects my ownership of M J Gleeson depends on how high the price spikes.

Finally, both Richard Beddard and Monevator have mentioned this blog recently, so I tip my hat in their general direction.  Thanks chaps and good luck.

Benchmark Comparison – Version 1

I’ve chosen the iShares FTSE 100 as my benchmark as it’s about as near as you’re going to get to holding the FTSE 100 directly.  It’s also easy to calculate total returns (returns assuming dividends are reinvested automatically) as they have a nice table of 1, 3 and 6 month returns, and 1, 3 and 5 year returns.

I don’t like the idea of setting target returns since I cannot control those returns.  I only like to target things I can actually have an influence on, like winning races at a kart track, or swimming 20 lengths of a pool. 

However, given that I am investing my money through stock picking I must think I can outperform (on a risk adjusted basis) the FTSE 100, otherwise I’d just hold that iShares ETF.  So, on that basis I am forced to have some kind of goal, which I have subtly outlined below:

My investing goal is to beat the iShares FTSE 100’s total return over any given 5 year period

I’ll post a table, updated monthly, comparing my 1, 3 and 6 month and 1, 3 and 5 year returns against my benchmark.  May the best theory win.

Purchased – Waterman Group

I first bought Waterman on October 22nd 2009.  I had recently sold Harvard International for a profit of £4,102.82 and needed somewhere to put the proceeds and some additional cash.  Waterman marked a slight change in my rules.  Whereas before I would only invest when a company was trading below 2/3 of tangible book, I decided to allow intangibles into my valuations.

The idea is that on average intangible assets do produce economic benifits (i.e. earnings) to justify themselves.  I have no evidence to support this other than that the majority of companies I have looked at have traded above book value, including intangibles, at some point in the last five years.  Allowing intangibles into my valuations also expands on the sorts of companies I can invest in, such as Waterman.  Waterman an engineering and environmental consultancy group where goodwill has been paid for mergers or aquisitions in the past.

A much more extensive and interesting report on Waterman has been recently written up by Richard Beddard whose Thrifty 30 is broadly similar to what I’m trying to do, but is very different in that it’s earnings rather than asset driven.

This purchase has already been updated onto my Trade History.

Share buybacks and placements

Electronic Data Processing is a company I bought recently. I’ve since found out that they bought back half the shares for 6 million pounds just after the most recent financial report. The web sites that I use to filter stocks have the new number of shares (12.5 million, down from about 25 million) but have the cash balance as at the last statement, £8 million, rather than the actual amount post-buyback of around £2 million. So the NTAV isn’t 13.5 million, it’s 7.5 million, so the market cap of 5.8 million isn’t below half NTAV, it’s about 80%… there’s a lesson in there. READ the last few reports rather than just the latest one!

The same kind of thing happened recently with Abbeycrest, where they issued 40 million shares at 5p each for £2 million. But the shares have a market price of 9.5p so that blows the price to tangible book ratio up to over 1 since 40 million shares are now priced at twice the equity they raised! I’m not sure what to do about this. My theory is that I’d sell since I can get more selling the shares than I could by selling the company assets. But I might wait until the next financial report to see how this all shakes out. I may do something similar with EDP mentioned above.