Recruitment company HVN (Harvey Nash) leaves the portfolio by rotation, and more importantly, because it received a takeover offer last month. That caused the shares to shoot up to near the takeover price. There’s unlikely to be any upside from here, so it’s it’s just for the arbiters to play with. It has to be removed, whether I like it or not.
HVN has been in the portfolio for about two years, and has risen 98% since purchase. Now that’s the kind of return I like to see.
I had a look through Greenblatt’s Screen, and although there were some good candidates, I thought that there would be too much repetition of sectors. So I decided to try a variation: I created a Stockopedia Screen where the P/FCF (Price to Free Cashflow) was less than 10, and sorted the results by descending StockRank. I also wanted a yield at least 1.1 times that of the dividend yield of the market, and reasonable debt (PBT < net debt/3).
My criteria were a blend of ideas from Bruce Berkowitz, John Dorfman, and Robbie Burns. Berkowitz often said that he looked to buy companies on the P/FCF of less than 10 where he couldn’t kill the company. Dorfman has his “robot” where he buys companies on cheap PEs with debt less than equity. The Dorfman Robot has proven to be a considerable success. I have used dividend yield as a proxy for PE ratio. Dividends are real, though, and everyone loves them. Well, nobody hates them, let’s put it that way. Burns follows a simple rule that he requires debt to be under the limit I stated in the preceding paragraph.
RMG (Royal Mail) looked a reasonable candidate on that basis, so I chose that. We all know what RMG does, of course. I doubt it is going to shoot the lights out, but we’ll see how it goes. The vital stats on RMG are: P/FCF 8.2, yield 5.7% and StockRank of 97. It has a Quality score of 97, and a Value score of 91, so it is very much in keeping with the philosophy of Greenblatt.
I bought RMG for my own portfolio back in June 2018. It is down 7.8% since purchase, which is, of course, a little disappointing from my viewpoint.
As I noted on a Twitter post today, it was fairly easy to pick out candidates that were less than 10X FCF, had good divvies, and little debt: CTO, AIR, PSN, FXPO. Those ones really just off the top of my head.
IAG (Int’l Cons Airlines) – which owns British Airways – also fits the bill, depending on which data source you use. Stockopedia shows a P/FCF of 10.8, but I wonder if it’s mixing up Euro cashflows and GBP in market cap. I can’t quite reconcile it. Another source I had puts the the P/FCF as significantly less than 10. Stockopedia also puts it EV/EBITDA at 3.2. That is as cheap as chips, where you would expect something to go horribly wrong. But the trading outlook on 3 Aug was quite benign:
At current fuel prices and exchange rates, IAG still expects its operating profit for 2018 to show an increase year-on-year. Both passenger unit revenue and non-fuel unit costs are expected to improve at constant currency.
I also own shares in IAG, and I’m up 12% on these.
Another big company I noticed, but don’t own any shares in is BLT (BHP Billiton). Same deal: low P/FCF, reasonable debt, and fat yield. Everyone is nervous about commodities at the moment. It relates to perceptions about stalling Chinese growth, as I understand it.
I’ll stop the examples now. I think I’ve proven my point, which is this: it’s possible to find, fairly easily, even large companies that everybody knows about, trading at cheap valuations, with reasonable debt, offering some nice dividends.
I’ve heard a number of commentators say that they think that the current bull market is long in the tooth. But I’m finding stuff that’s worth investing in, so I’m actually fairly sanguine.
[Deleted pontifications about Brexit]