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This Value Screen Is Doing the Business

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LONDON -- At the start of the year, I devised a value screen designed to get the best of all worlds. And it seems to be doing well so far.

Value screens often throw up boring companies, which is partly the point in doing them. As David O'Hara pointed out last week, there are plenty of boring shares that have been ten-baggers.

In other words, companies that are relatively ignored often outperform. They also tend to be a little more contrarian in nature, which is usually a good thing.

Having said that, value screens based mainly on assets and low price-to-earnings (P/E) ratios generally don't throw up growth stories (though they still can occasionally). They're also no guarantee of success and shouldn't be followed mechanically, in my opinion. A screen tends to churn out the same names and only partially accounts for how competitive a business is. So I prefer to dig deeper in each case and apply a little qualitative judgement.

The screening formula used a P/E maximum of nine, a price-to-book value (PBV) maximum of one, net gearing of 30% or less, and a minimum prospective dividend yield of 3.5%. I also added in a price-to-tangible-book value maximum of 1.4 and a maximum price-to-cash-flow ratio of 6.5.

This trawl then came up with a short list of nine companies, as follows, in descending order of the then-market capitalization:


Opening price 3 January

Closing price 12 June

Cable & Wireless Worldwide (LSE: CW.L  ) 16.25p 35.3p
CSR (LSE: CSR.L  ) 183.5p 200.4p
Keller Group (LSE: KLR.L  ) 266.5p 380p
Fyffes (LSE: FFY.L  ) 31.75p 32.25p
Game Group 8.5p 0p
Fairpoint Group 48p 64.5p
North Midland Construction 140p 135p
United Carpets Group 5.75p 3.75p
Straight 28p 36.5p
FTSE 100  (INDEX: ^FTSE  ) 5,572.3 5,483.8

The performance has been good so far. The overall mean average improvement is 10.65% versus the FTSE's 1.6% drop.

The weighted investment performance, though, has been a remarkably good 51%. This is a theoretical investment in each of an amount in direct proportion to its market capitalization.

This is a bit of a cheat as it skews the statistics hugely thanks to the performance of the largest, Cable & Wireless Worldwide, which also happens to be the best performer on the list. But such a weighted approach does have merit if you believe that larger is also generally safer.

The telecoms group has more than doubled following the weighing of bids by Vodafone and Tata Communications. It is now the subject of an agreed bid from Vodafone at 38p, which may or may not go through.

The worst performer has been Game Group, which went into administration when its suppliers lost confidence in the company's ability to pay up.

Running the screen now
Happy with the weighted performance, I decided to run the screen again. Unfortunately, this repetition only generated three names today. It's mainly the requirement for a decent slug of tangible book value that finds them out. And two of the companies are already on the short list, namely Fyffes and United Carpets.

The one newcomer is the provider of specialist engineering services to oil and gas companies, Lamprell. Unfortunately, the shares have already moved ahead by 11.6% today. This movement isn't down to me having found Nirvana with the screener, sadly; instead, the company has announced the successful delivery of a drilling platform.

A number of Fools looked at Lamprell recently, questioning the timing of directors' share sales shortly before a profits warning.

Of the others, I think Fyffes looks like a solid investment, if only for the 6.6% yield -- though it's one I haven't made as yet. I may need to relax the criteria to cast a wider net, though I'll keep running the screen from time to time and report back on any new names.

Finally, let me finish by adding that more share ideas can be found within this Motley Fool report: "8 Shares Held by Britain's Super Investor." The guide reviews the investing approach and portfolio of City dividend legend Neil Woodford and is free to download today.

Further investment opportunities:

David owns shares in Cable & Wireless Worldwide. He doesn't own shares in any of the other companies mentioned. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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