During this present period of highflying technology, internet and mega P/E stocks, it is not very avant-garde to be suggesting value stocks for investment - especially since they are significantly lagging the 1999 year-to-date performance of stocks such as BCE, Northern Telecom and Celestica.
But I disagree. As a value investor, I see incredible untapped potential in a number of extraordinarily cheap fundamental value stocks. I believe that they are dirt cheap by any valuation standard ant that many are primed for 1.Takeout, 2. Merger or 3.Reorganization. But two key investor attributes are needed for successful superior performance and that is patience and persistence.
I would like to discuss some key fundamental value attributes which I believe are necessary for our "dirt cheap value category". Please read on to see the ABC Funds' Value Investing '10 Commandments' for the Year 2000.
ABC FUNDS' VALUE INVESTING 10 COMMANDMENTS
FOR THE YEAR 2000
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Low P/E Multiples
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Low Cash Flow Multiples
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Discount to Book/Net Asset Value
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Hidden Assets
e.g. Tax loss carry forwards, real estate, potential spin-offs, IPO's, favourable litigation, etc.
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Management
a) Solid, proactive management
b) Poor management - ripe for proactive acquisition or merger
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Products/Services in tune with 2000 and beyond
- Expandable, growing markets, good margins
- Not outdated, shrinking e.g. buggy-whip manufacturer in pre-automobile period
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Value Catalyst
Significant value creator i.e. new management with new directions; important sale or purchase of a meaningful asset; unsolicited takeover bid; disgruntled and impatient proactive shareholders, etc.
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Discounted Valuations Compared to its Peers
i.e. P/E, cash-flow etc. Could be taken over by relatively expensive Canadian or foreign competitors wanting to expand market presence.
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Contrary Opinion and Under-followed by Investment Analysts
With little investor exposure, undervalued stocks are 'pregnant with possibilities' providing very little buying competition when attempting to accumulate the security.
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Discipline
Stay on track and adhere to strict value discipline of P/E's, cash flow, price targets etc. Do not get sucked into buying the flavour of the day. Combine patience and persistence to attain superior performance. Patience! Patience! Patience!
Irwin A. Michael, CFA
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