2 June 2024
Long-time readers know that in searching for investment opportunities, I look for some combination of business quality and valuation. More specifically, I pay attention to five key criteria, such as
1. Business
2. Financial performance
3. Management and insider ownership
4. Low Leverage
5. Attractive valuation
Sometimes, a company is just ridiculously cheap. For example, it is trading at negative EV (cash is higher than the market cap), buying back 20% of its shares (annually), announcing a special dividend offering over 30% yield , or trading at 3x P/E (on trough earnings) and so on.
If that is the case, then the first four criteria require only a quick check. I usually focus on the negative search. For example, looking at the first parameter (Quality of the Business), I want to make sure the company is not a scam and is providing a real service to its customers. I am no longer interested in its competitive position, ‘moat’, industry dynamic, long-term outlook etc.
As for Financials, I want to avoid companies with huge chronic losses or those that constantly raise new capital.
Looking at Management, I eliminate companies run by shady individuals with chequered reputations.
I also ensure that there is no unbearable leverage or hidden liability (e.g., litigation, fines) that the company cannot easily cover from its operating cash flows.
Such opportunities are rare, and to maximise your chances, I think it pays off to look in less competitive places (somewhere far from US large-caps - the most liquid and most widely followed).
In most cases, your alpha comes from deep research (analytical edge), industry insights (information edge) or behavioural (not selling at a time of maximum pessimism and not buying blindly during euphoria).
However, in the case of deep value and special situations, the edge comes from knowing where to look for such opportunities, being small and having the discipline to act systematically. The analytical part covers the basics, such as getting the share count right or using the latest net cash positon, for example. This is possible because, in overlooked markets, even the basic facts about the company can often provide an edge.
Below is the preliminary list of deep-value opportunities in the UK market. It is a work in progress. I have run several screens and monitored the company’s announcements as well as select UK-focused media and blogs. The result is a list of about 20 companies that trade at exceptionally attractive levels. They also passed the minimum levels for the first four criteria. The list is not complete with more names to be added over time.
1. Business
2. Financial performance
3. Management and insider ownership
4. Low Leverage
5. Attractive valuation
Sometimes, a company is just ridiculously cheap. For example, it is trading at negative EV (cash is higher than the market cap), buying back 20% of its shares (annually), announcing a special dividend offering over 30% yield , or trading at 3x P/E (on trough earnings) and so on.
If that is the case, then the first four criteria require only a quick check. I usually focus on the negative search. For example, looking at the first parameter (Quality of the Business), I want to make sure the company is not a scam and is providing a real service to its customers. I am no longer interested in its competitive position, ‘moat’, industry dynamic, long-term outlook etc.
As for Financials, I want to avoid companies with huge chronic losses or those that constantly raise new capital.
Looking at Management, I eliminate companies run by shady individuals with chequered reputations.
I also ensure that there is no unbearable leverage or hidden liability (e.g., litigation, fines) that the company cannot easily cover from its operating cash flows.
Such opportunities are rare, and to maximise your chances, I think it pays off to look in less competitive places (somewhere far from US large-caps - the most liquid and most widely followed).
In most cases, your alpha comes from deep research (analytical edge), industry insights (information edge) or behavioural (not selling at a time of maximum pessimism and not buying blindly during euphoria).
However, in the case of deep value and special situations, the edge comes from knowing where to look for such opportunities, being small and having the discipline to act systematically. The analytical part covers the basics, such as getting the share count right or using the latest net cash positon, for example. This is possible because, in overlooked markets, even the basic facts about the company can often provide an edge.
Below is the preliminary list of deep-value opportunities in the UK market. It is a work in progress. I have run several screens and monitored the company’s announcements as well as select UK-focused media and blogs. The result is a list of about 20 companies that trade at exceptionally attractive levels. They also passed the minimum levels for the first four criteria. The list is not complete with more names to be added over time.
UK Deep value and special situations
Source: Company data, LSE, Koyfin, Hidden Value Gems
Notes
This is a summary table. Premium members can access the full spreadsheet on Google Drive with additional details (historical financials and business description for each company).
P/E multiples are not adjusted for cash. Certain companies hold a net cash position. If the market cap were reduced by the net cash position, the adjusted P/E multiples would be considerably lower. Some companies operate in more cyclical industries. I used the forward-looking earnings estimates based on a combination of recent performance and current trends, management guidance and consensus estimates.
Net cash is based on the latest company announcements and does not include lease liabilities.
P/E multiples are not adjusted for cash. Certain companies hold a net cash position. If the market cap were reduced by the net cash position, the adjusted P/E multiples would be considerably lower. Some companies operate in more cyclical industries. I used the forward-looking earnings estimates based on a combination of recent performance and current trends, management guidance and consensus estimates.
Net cash is based on the latest company announcements and does not include lease liabilities.
Webinar on Deep value and Special situations/Monthly Stock Idea Lab
A presentation on UK Deep Value opportunities will be held as a live webinar followed by a Q&A session.
All Premium Members have been sent dial-in details by email. If you have not received them, please get in touch.