I wrote recently about a service called Quant Investing and their Screener service which has introduced a way of screening for low liquidity stocks which I have written about in the past. Well a quick update for you as I have got around to trying it out and one of the first things I decided to do was to run their version of a low liquidity screen which you can read about here.
In essence it screens for companies by defining liquidity as "adjusted profits to yearly trading value and not as the number of yearly shares traded divided by the company’s total shares outstanding." Thus qualifiers therefore have a low level of turnover (value of annual volume traded in shares) in relation to their profitability. I screened for the top 20% in the UK which gave a list of just over 100 names.
The list does include some recent issues like AA and Shoe Zone so probably short history factor there. It also includes quite a few AIM stocks which I guess is perhaps not a surprise. Of the AIM names some of the quality names that I like such as James Halstead (JHD) and Nichols (NICL) are included. Interestingly for me it also includes a few other stocks l have written up like Computacenter (CCC) and PZ Cuzzons (PZC) and two of the more recent ones like Hill & Smith (HILS) and Connect Group (CNCT).
Otherwise the biggest surprise for me was to find BHP Billiton (BLT) on the list. Trying to rationalise it I guess investors have lost interest in miners recently, hence low turnover in the shares and they probably still have historically high profitability. That may however be under pressure going forward and it has certainly seen some down grades recently on the back of weaker commodity prices. However, as it is coming up on some of my other screens and it offers a reasonably well covered near 5% yield, it might be worth a look on a contrarian basis as a three year under performer.
Food for thought and other than that it is a list that might provide the basis for some further research as just because a stock is on this list doesn't mean it will necessarily outperform. However the research suggests that stocks as a whole with this type of characteristic have tended to outperform.
If it is of interest you can access the full list in the file below, cheers.
...that you may not have heard of has reported a pre close trading update today. The stock concerned is called James Halstead (JHD) which is a commercial flooring manufacturer and distributor with a £570 million market cap. As there are lots of results today which will get lots of comment I thought I would highlight this one to provide you with something different.
I call it a quality stock because it has a high return on capital employed of 37.2% currently and this has averaged around 40% over the last five years according to Stockopedia. Their operating margin is currently around 18 to 19% and this has averaged 18.8% over the last five years. They also have around £38 million of cash on their balance sheet and have increased their dividend every year for the last 37 years and in the statement they say they expect this years dividend to be increased again - nice.
In the statement they also mentioned that after the slow first half with limited turnover growth the second half had seen a pick up leading to their confidence in raising the dividend. They did however mention currency and while they said the strength of sterling would not hit margins due primarily to offsetting raw material costs they did highlight that it will impact on translation of of profits in common with other companies with overseas activities.
The other thing I like about them apart from the Global nature of their operations is the way they invest in improving the business to the benefit of their customers, staff and shareholders alike. As a shareholder you would want them to reinvest in the business if they can given the financial metrics. From the graphic above you can see they have done this over the years and you can click on this to read more about them and their products.
So the shares themselves have done well over the years but have stalled more recently around the 300 to 340 pence level as trading became more difficult and the rating had got rather full. Consequently I sold out and do not currently have a position, but it is certainly one I'm looking to get back into at some point on a bad day, so it is on my watch list. On the chart it seems to have found support in the 240 pence to 260 pence region recently. Thus for now I would expect it to trade in a 240 to 340 pence range until they deliver further or there is another economic downturn which might curtail their growth further, especially as flooring tends to be late cycle. The current 17x or so next years earnings and forecast 3.6% yield are the low and higher end respectively of what they have been in recent years, so I wouldn't put you off if you have done your own work on it and are prepared to pay up and take a longer term view. However, when I have bought this one in the past it has been on much lower ratings so I'm inclined to wait for a better opportunity for now.