Deep value investing: not died out just yet!

I have recently discovered the Capital Employed podcast and deep value investor David Flood. He’s a UK private investor that looks at old-school book-value bargains. I thought this style of investing had died out years ago but happy to see someone having success with the approach. Makes a refreshing change from listening to yet another quality/growth investor!

These are David’s interviews with Capital Employed:

What’s impressive is David’s work ethic. He does not use screeners to screen on fundamentals, but simply looks through microcaps one by one, checking each one by hand so to speak. That approach suggests some dedication and knowledge to his stock picks.

He talked about AIM-traded MyCelx Technologies (MYX) in February, and wrote about it on his blog:

"Market Cap = $7.27 Mil
Share price = $0.37 (£0.27)
Common outstanding = 19.44 Mil
BV= $17.1 Mil
Cash = $4.255 Mil
Total Liabilities = $5.547 Mil

These are the types of stocks I look for. I want to find tiny companies whose shares are thinly traded and are sat way down on the price chart. I don’t care if they are currently losing money, I’m looking to buy assets and sell earnings. Provided debt is at a reasonable level and the share price is backed by some hard assets I’m willing to bet that at some point the situation will improve. All I need to know is that the firm has enough supplies to wait out the storm till the good times return."

MYX’s net current assets then were $8m, so the $7m market cap was even below that. Share price then was 27p, now it is 60p following 2020 results that talked of a trading recovery and mentioned a property sale well above book.

David’s latest podcast and blog highlighted Holders Technology (HDT):

Market Cap = £1.86 Mil
Share price = 44p
Spread =18%
Common outstanding = 4,224,164
Public Float = 41.43%
TBV = £3.62 Mil
TTM Revenue = £9.84 Mil
TTM Net Income = (£0.26)
Div Yield = 1.18%

Market cap a teeny £1.9m! But it is much lower than net current assets of £3m and tangible book value of £3.6m. Similar to one of the comments, I could not find any glaring ‘book value’ issues with this company following a very quick skim.

I have dabbled with traditional value investing in years gone by. But never had any consistent success, because the businesses were never that good and the value was always slow to out (or was never really there in the first place!).

From my previous holdings, Electronic Data Processing, French Connection and 3 Legs Resources were value-type investments.

EDP just never grew earnings and so its share price never went anywhere until a bid finally arrived (after I had departed of course). French Connection always traded below book because of the group’s ‘hidden’ lease liabilities and its awful founder-boss-major shareholder, who seemed hell bent on running the business into the ground. 3 Legs, if I recall correctly, traded below cash but exploration costs kept chipping away at the bank balance. All three shares were subject to varying degrees of activism during my time as a shareholder, and I think only EDP came good after a very protracted strategic review.

So a traditional value strategy is not for everyone. Especially if you are looking at nanocaps, where share-trading liquidity is a major problem. Once you have built up a position, you can’t get out in one go – and often you have to depend upon an activist to shake things up. I think David said he holds about 30 shares, and getting involved with these tiny companies may not be a ‘scalable’ strategy if you have lots of money to invest.

Mind you, the beauty of this approach is you don’t have to do too much business research. No need to assess ‘moats’ or management or ten-year track records or calculate ROE or anything like that. Just look at the accounts very carefully to make sure the numbers stack up and decide whether genuine value exists or not.

Anyway, I am glad to see somebody is giving the deep-value approach a go in the UK. Would be interested to know if anyone else follows a similar strategy.

Maynard

It’s an approach I have used but with very mixed results. As I wrote in another post, I trawled the market about 18 months ago for shares where the dividend yield was higher than the PE ratio and invested in Plus500 and Walker Greenbank (now Sanderson SDG). Plus had seen a rapid decline from £20 to £5 on account of regulatory problems but, otherwise, all seemed fine and it was starting to rise. I bought in at about £8 and recently sold out because it looks as if growth is stalling and, besides, I am not very happy about owning such a company. SDG had declined from £2.40 to 90p in just over a year and looked in terminal decline. But a board change looked as if it might be a catalyst for change, so I bought in. Then came lockdown and the shares dropped to 36p! I stayed invested and even topped up when they began to rise in price. Now at £1.78, I have a dilemma about what to do next. But at least it is a good dilemma to ponder over.

However, I also fell for the lure of FCCN and the thought that either Mike Ashley or other takeover artists might make something of what is still a good brand. I only lost 60% the value of my stake. On that note, it looks as if HDT is another company with an elderly Chair. I hope he is not another deal killer and value destroyer.

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I read this on a bulletin board. Apologies for not being able to attribute it to the author.

The value investing cycle:

  1. Ooh this looks cheap, has net cash and is trading well. It is illiquid but I’ll risk it.
  2. Hmm, that last trading update wasn’t great. And hang on, that balance sheet isn’t as good as I thought. This isn’t as cheap as I first thought.
  3. They are now loss-making, they don’t respond to shareholders readily, the management are on £200k-£500k each despite the losses! And there is a pension deficit. This is uninvestable.
  4. Ooh this looks cheap…

It seems a familiar story to me :thinking:

(Edit by @MaynardPaton: Here is the source)

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