"Simplify, simplify." Henry David Thoreau
How we humans love short cuts, compressions and distillations. Is the new Jack Black film Year One worth seeing? Well legendary reviewer Roger Ebert gives it one star. I don't
need to waste my time reading any further (except to see how well Ebert twists the knife). The direction, script, acting and production values are reduced to a single number and one that has only five possible values at that, or nine for Ebert since he is at the sophisticated and discerning end of his profession and uses half stars.
Why then would Thoreau need to exhort anyone to simplify when our brains have evolved to be expert that very act. A great example is our ability to see. The visual field contains far too much data for any brain or computer yet built to analyse every pixel in real time. The brain's amazing optical system reduces what our eyes receive into sets of useful objects. Lines at particular angles stimulate localised parts of the visual cortex. This is then processed by higher levels so we can for example immediately make out a door in a complex scene.
All this invisible processing prevents us from being hopelessly overloaded with data. Simplification, abstraction and symbolisation are vital necessities.
The well loved P/E ratio (usually based on earnings per share adjusted for this and that) is a simplification. It is the most popular measure of a share's expensiveness, alongside price-to-book value, yield, PE-growth (PEG) and so on, yet it does not measure cashflow.
With companies toppling like dominos a measure of financial vulnerability would be useful; all those tiresome debt, asset and cash figures hammered and fashioned like wrought iron into a elegant star rating. Well, forty years ago Edward Altman did just that. He used statistics (so it must be good) to find the factors that had the highest correlation with companies going broke in the following 24 months. His measure is the Z Score and is said to be 70% to 80% reliable in predicting bankruptcy. The lower the figure the shakier the firm, with 1.8 being the threshold of doom.
A filter for shares with bad Z Scores but not cheaply rated, throws up five candidates. The cheapness criteria were PE >10 and PBV > 1. Only companies with a capitalisation over £100m were screened.
| Company | Z Score | Cap /£m | EV/Sales | PE | PBV | PTBV | Gearing |
|---|
| ITV (LSE: ITV.L - news) (LSE: ITV) | -1.75 | 1,352.0 | 1.03 | 20.3 | 2.57 | -2.20 | 138.8% |
| London Stock Exchange (LSE: LSE.L - news) (LSE: LSE) | -1.13 | 1,893.0 | 3.68 | 10.2 | 1.98 | -3.01 | 50.4% |
| Aberdeen Asset Management (LSE: ADN.L - news) (LSE: ADN) | 0.10 | 996.5 | 2.83 | 16.7 | 1.82 | -3.22 | 40.4% |
| Icap (LSE: IAP.L - news) (LSE: IAP) | 0.16 | 2,852.9 | 1.87 | 13.0 | 2.54 | -8.57 | 11.2% |
| Kenmare Resources (Dublin: JEV.IR - news) (LSE: KMR) | 0.32 | 171.0 | NA | 29.7 | 1.14 | 1.14 | 132.9% |
Note (Stockholm: NOTE.ST - news) : data from sharelockholmes.comITV actually has a negative Z score. The broadcaster is certainly struggling. Advertising demand has slumped, competition increases every year and the quality of programmes suffers as budgets are cut. Whilst its crown jewels such as
Coronation Street have undoubted enduring intangible value, as do its channel slots, the recession appears to have its hands firmly round the broadcaster's neck and even the adrenaline shot of hiring Michael Grade has not reversed its decline. Valuable assets have been sold to cut its debt pile, reducing earnings power and diversity.Further down the road, analogue TV switch-off by 2012 will turn ITV's premium one-of-five slot on millions of older TVs into a feebler four-of-thirty on Freeview. In addition, personal video recorders loom darkly over commercial television. I have owned one for years and I hardly ever watch an advert, I just skip them thus devaluing the value of each minute of the damned things.A takeover is always a possibility but the price reflects this. The WNTB table is showing a loss of 16% against 32% in the FTSE All Share Index.
| Buy date | Company | Cost p | Now p | Gain/(Loss) % |
|---|
| March 2007 | Alexander David Securities (LSE: ADS.L - news) (LSE: ADS (AAL-A.TO - news) ) * | 2.5 | 1.2 | (52) |
| April 2007 | British Airways (LSE: BAY.L - news) (LSE: BAY) | 507 | 124.7 | (75) |
| May 2007 | Patientline (LSE: GB0030221088.L - news) (LSE: PTL) | 4 | 0 | (100) |
| June 2007 | Coffee Republic (LSE: CFE.L - news) (LSE: CFE (Brussels: CFE.BR - news) ) | 202.2** | 20.03 | (90) |
| July 2007 | Manganese Bronze (LSE: MNGS.L - news) (LSE: MNGS) | 864 | 237 | (73) |
| August 2007 | Victoria Oil & Gas (LSE: VOG.L - news) (LSE: VOG) | 37.9 | 3.6 | (91) |
| November 2007 | Northern Rock (LSE: GB0001452795.L - news) | 150 | 50 + | (67) |
| December 2007 | iShares China 25 (LSE: FXC) | 7765 | 6633 | (15) |
| February 2008 | Netstore (LSE: NES.L - news) (LSE: NES) | 23.7 | 31.5 | 33 |
| March 2008 | London Town (LSE: LTW.L - news) (LSE: LTW) | 170 | 20.1 | (88) |
| May 2008 | Playtech (LSE: PTEC.L - news) (LSE: PTEC) | 543 | 453 | (17) |
| June 2008 | Coms (LSE: COMS.L - news) (LSE: COMS) | 55 ** | 6 | (89) |
| July 2008 | Avis Europe (LSE: AVE.L - news) (LSE: AVE) | 13.49 | 21.75 | 61 |
| October 2008 | Marshalls (LSE: MSLH.L - news) (LSE: MSLH) | 97.25 | 85.75 | (3) |
| November 2008 | Invensys (LSE: ISYS.L - news) (LSE: ISYS) | 157.2 | 223.5 | 42 |
| January | Sibir Energy (LSE: SBE.L - news) (LSE: SBE (NASDAQ: SBEI - news) ) | 135 | 500 ++ | 270 |
| February | Carpetright (LSE: CPR.L - news) (LSE: CPR) | 451 | 561 | 24 |
| April | Formjet (LSE: FMJ.L - news) (LSE: FMJ) | 0.33 | 0.4 | 21 |
| May | Central Rand Gold (LSE: CRND.L - news) (LSE: CRND) | 24 | 24.25 | 1 |
| June | ITV (LSE: ITV) | 35 | | |
* Reverse takeover of Griffin Group
** Adjusted for consolidation
+ Shareholder compensation is ludicrously delayed so I have assumed a generous 50p
++ Suspended but Gazprom Neft have offered shareholders 500p. Bang goes the portfolio outperformance.
Warning: this is not a portfolio of companies to short sell. Luck, speculation and my being plain wrong may send values up sharply.
Alun has positions in Manganese Bronze, Carpetright, Marshalls, Invensys and Central Rand Gold.
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