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.
This is the second in an occasional series looking back at some of my greatest hits over the years and some of the lessons that can be learnt from them. Today we have had a trading update from PZ Cussons (PZC) the personal and home care business which is mostly known for it soap brands like Imperial Leather which seems OK on the face of it. They reported that they expect profit reported in Sterling to be up 6%, although this would have been +17% without the drag from currencies. I won't go into more detail on the results as I no longer hold it, but you can read the full announcement here.
Meanwhile the rating, while still expensive at nearly 19x and around 2% yield still puts me off somewhat. It was a full rating which exceeded my 2% & 20x selling trigger and a slowdown in growth prospects and dividend growth which led me to sell this one back in 2011 and switch into Reckitt Benckiser (RB.) which was arguably similar but cheaper at the time. This worked out well as since then PZC has gone sideways and Reckitt's is up nicely, although as it is no longer cheaper than PZC and showing signs of struggling to grow so I switched that into something else recently.
So what was the story on PZC and why was it such a big winner for me? On the face of it as such a dull business on a high rating today it seems incredible that it could have produced such a huge return. However, when I bought it back in the late 1990's it was very much an out of favour neglected stock, although it had some of the quality characteristics is has today like good margin and ROCE plus a dividend that rose steadily. It was however languishing in the back waters of what then was called Overseas Traders and was then known as Paterson Zochonis and was seen as something of a colonial throwback with its operations in the Far East and Africa. It also had an antiquated share structure with restricted voting A shares which helped the directors to keep control and ruled out a take over by and large. At the time it also had a substantial investment portfolio and as a result the shares also I seem to remember traded at a discount to NAV or book too.
Over time they continued to invest in and modernise the business utilizing the largely liquid investments they had and they also revamped the share structure. They also made some acquisitions to expand their product range and go more up market in some cases. Eventually as Emerging markets became more popular and this one with its oversea exposure and re named to PZ Cussons started to attract a wider audience. Thus as they continued to deliver good earnings and dividend growth the stock got re-rated from a single digit P/E and big yield to in excess of 20x and a sub 2% yield by the time I sold it as a multiple of my original purchase price having enjoyed a steady flow of sizeable dividends along the way.
Summary & Conclusion
So what are the lessons from this one? Well it shows that going into good value, obscure or unloved / neglected stocks and sectors can pay off well if you can find a good quality Company which can grow and you are prepared to wait for it to be discovered by the market and other investors. It takes quite a lot of discipline to stick with these types of stocks especially when you see people making quick gains in .com rubbish or whatever the latest hot sector turns out to be - I guess it is a bit like the fable of the tortoise and the hare in investment terms. It is also another example of one of those family businesses which Lord John Lee the MP investor has written about and held for years too and still does I believe.
Any way if you enjoyed this post and you didn't see the first part you can check it out here. Otherwise check back tomorrow when I'll have a note on some research which when combined with a value screen might help to identify out of favour / neglected stocks.