Some New Holdings!

Buying Support Services

Despite my overall concerns for the broader UK Market (an update on this will follow over the next few days) last week I added two shares using a Contrarian Strategy that I hope should bring rewards in the future. Using this approach I am trying to remove the uncertainty of forecasting variables such as business & sector outlook, Economic conditions and Geo-Political risk……I dont think I need to go on any further, the point is that these are things that are incredibly difficult to get right so why bother?

My plan with the two shares that I have selected – one is a little more risky that the other – is to try to benefit from the reversion of the current low price ratios to their average, reasonable financial security is required and forward EPS estimates should be positive.

The full assessment is available to subscribers but here is a sample of what I found: –

Share Assessment July 2016 – Support Services 

I follow a number of different strategies when it comes to share selection, from looking for value at a deep discount, to fast growing firms or contrarian purchases. Over the years I have found that no single strategy works all of the time, it pays to be open-minded and look for shares that suit the situation. Recent years have been difficult with concerns regarding the broader market (that remains at multi-year highs), a still fragile Global Economy and continued Geo-Political risks.

When markets are at high levels a Contrarian strategy is often appealing (anyone interested in this should read David Dreman’s books) as it allows shares to be selected with the focus not so much on overall market direction but on shares that are out of favour and trading at low price ratios to their history. It’s not always easy and there are plenty of “Value Traps”, but sticking to some key criteria and using a checklist of financial security it can be productive.

Following this approach, I noticed recently that both Atkins WS (ATK) and Interserve (IRV) had a number of attributes that made them candidates for this strategy and possible inclusion in my portfolio.

Key criteria

  Atkins (WS) Interserve Sector Median
Market Cap £m £1400.70 £411.30 £922.2
1 Year Return -12.60% -56.30% -13.10%
Dividend Yield 2.90% 8.60% 2.90%
PE 12.9x 6.8x 16.90x
CAPE 10.3x 9.6x 14.40x
CL/CA 0.55 0.90 0.78
TL/TA 0.79 0.71 0.66
Debt/Equity 0.97 0.8 0.67
Interest Cover 20.90x 3.4x 8.45x
Dividend Cover 2.60x 1.7x 1.85x
Current Ratio 1.80 1.10 1.30
5 Year EPS Growth 5.60% 7.90% 8.20%

10 Year EPS Growth

7.40% 10.75% 4.50%

CA = Current Assets               CL = Current Liabilities        TA = Total Assets   TL = Total Liabilities

Both firms trade on Price Earnings (PE) ratios at considerably less than the median for the sector, have healthy dividend yields and on a 10-year annualised basis have enjoyed earnings growth (EPS) that has outstripped the median by some margin.

Overall financial security looks strong for Atkins but weaker for Interserve (the acquisition of Initial last year added a lot of debt and the dividend cover is below 2), however I still feel relatively comfortable about including it given that there are no obvious red flags – for example Interserve has rarely had a current ratio above 1 (it is currently at 1.1) and debt to equity is less than 1.

The main areas of interest for me are the undemanding Price Ratios on which both of these firm’s trade and the declines in value; this added to the fact Analysts two year forward estimates are remaining positive there is the possibility that investors will become attracted to these shares and a reversion to their long term averages occur bringing capital gains for investors.

Atkins (WS) 

A number of key ratios are currently below their long run averages; most notably the Price to Sales and CAPE. Whilst these do not meet previous significant lows they do demonstrate that value potentially exist – below is the CAPE Ratio if Atkins (WS).

CAPE Atkins

In addition to this the dividend yield remains near a three year high, the Price to Sales near a three-year low and the Price to Book ratio close to a 10 year low.

Whilst new long term debt has been issued (many firms could well be taking advantage of ultra-low interest rates to obtain cheap borrowing) revenue growth has been consistent and operating margins are expanding.

Having purchased this share at £13.31 I will be monitoring it to see if it now breaks out of the trend of the last few years and heads back up towards £16; which if it happens would prompt me to review the position – remember the plan is to invest in a Contrarian manner once it reverts to mean or fair value it’s time to sell and look for a replacement.

Interserve 

When it comes to underperformance this share has certainly suffered more than most with declines topping 60% at one point earlier in the year seeing it returning to multi-year lows. Just because a share declines though doesn’t make it worth buying; value traps exist and often this is only discovered in hindsight, so it’s important to seek as much protection as possible in the form of financial security. With Interserve I must admit it does have risks with issuance of new debt and total asset growth in excess of revenue growth (the result of last year’s acquisition of Initial). Looking at key multiples it is easy to see why this becomes an attractive proposition as all of them trade below long run averages from the PS ratio to CAPE all are close or in excess of previous lows in 2002/2003 and 2009 when the share price also bottomed out at around £2 per share

PS INterserve

CAPE Interserve

Interserve has less favourable financial ratios but has declined in value substantially over the last year to leave it trading at similar levels and ratios as previous lows in 2002/2003 and 2008. There may be more bad news to follow but even a modest increase in EPS may prove positive for the share price. It also has a number of attributes that almost make it a deep value purchase.


Buying Some Protection

As mentioned I have concerns for the broader UK Market (FTSE-100) and even more so for the US Market (S&P500); take a look at the US Index and consider whether you would buy at the current level?

 

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For me absolutely no chance! With this in mind I have purchased an ETF that I feel will add to returns (at some point – I cant tell you when!) and that is the Proshares UltraPro Short S&P500 that delivers an inverse return of 3x the daily change in the S&P 500. This is only a small position at under 1% of the portfolio (£500) but a return back to even the lows of fairly recent history in early 2006 would see the index fall by 17% which would give a return of 51% (17% x 3). The risk is small and the potential return big the maximum loss it £500 but its open ended so we dont have to worry about time and a trip to 2009 lows would add 206% and help protect the equity component of the portfolio.


Portfolio Performance

After the strong returns early in the month returns have slipped a little, I am not too concerned as all portfolios have these periods; my overall strategy remains unchanged and I continue to favour a large holding in Index Linked Gilts.

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