With high technology and telecommunication common shares the current flavour of the day many investors are shunning traditional value investing. We believe, however, that value investing, which encompasses fundamental corporate accounting and analysis pertaining to liquidity ratios, book value, cash flow, earnings per share, etc. offers tremendous long-term benefits in today's frenetic investment environment.
As difficult as it may be in this current high technology mania, we believe strict investment disciplines should be followed. In practice, we remain focussed on value and continue to abide by our ABC Funds' Ten Commandments of Value Investing.
Generally, with value investing out of favour and investor psychology so poor, we are discovering innumerable out-of-favour and extraordinarily undervalued Canadian common shares. These companies at unduly depressed prices are excellent candidates for takeover, merger or reorganizations. Several recent examples include Scotts Restaurants, First Marathon Inc., SMED International and CTV.
Please continue to see the ABC Funds' Ten Commandments of Value Investing
ABC FUNDS' VALUE INVESTING 10 COMMANDMENTS
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Low Price to Earnings Multiples
We search out stocks trading at under ten times price to earnings multiples, which reduces the risk of overpaying for a security.
- Low Cash Flow Multiples
We look for companies trading at under five times price to cash flow. This also reduces the risk of over paying and uncovers many "dirt cheap" equities.
- Discount to Book/Net Asset Value
We like to buy stocks trading at a discount to book/net asset value. In many cases, this not only uncovers significantly undervalued stocks but also prime takeover candidates.
- Hidden Assets
Some examples of hidden assets that can be uncovered after a thorough analysis are tax-loss carry forwards, over-funded pension funds, real estate, potential spin-offs, IPOs, and favourable litigation.
- Management
Two types of management could be key in the search for a turnaround candidate: a) Solid, proactive management and b) Poor management, which leaves the company ripe for a proactive acquisition or merger.
- Products/Services in tune with 2000 and beyond
This includes expandable, growing markets with good margins. We tend to avoid companies with outdated, shrinking products.
- Value Catalyst
In order to push up the value of a stock, we look for a significant value creator. Some examples of possible value creators are fresh management with new directions, an important sale or purchase of a meaningful asset, an unsolicited takeover bid, or disgruntled and impatient proactive shareholders who may put pressure on management to make changes or sell.
- Discounted Valuations Compared to its Peers
Comparative valuation measures such as price to earnings and cash flow could indicate a take-over by relatively expensive Canadian or foreign competitors looking to expand market presence.
- 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. Generally an undervalued and under followed security will offer terrific capital gains opportunities.
- Discipline
Stay on track and adhere to strict value discipline of low P/Es, strong cash flows and price targets. 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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