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29 March 2019VALUE & QUALITY 1

1/04/19

Last month major indices either declined a little or went up a little but really not much of anything.

We are not buyers, but we are looking hard at quality and value as we may be at or near to arresting the decline of the last few months.

So, what would value look like? It could be a share that is selling for less than its book value ie it has intrinsic value built in. An example might be of a share selling at $£Euro/Yen 1 with a asset value of 2. In other words you are buying $£1 etc  for 50 cents which is good. However it is not that simple as the company may be selling at these levels for a reason. It may be suffering losses, its Income may be in decline because competitors are taking its market share and so on. You need to look at how it is generating cash, whether it has high levels of debt, whether it spends as much to generate the cash as it generates in cash ie Cash Flow – Capital Expenditure = Free cash Flow.

To illustrate the difference, you could argue that a business like (say) insurance will not have to spend a lot on generating its Cash Flow, while an Iron Foundry might have to spend a great deal on heavy equipment just to keep producing the product. If the company is paying a Dividend has it been cut or even stopped as profits decline. Check the Dividend cover to ascertain the sustainability of the Dividend.

If none of the above is present and the company is profitable and generating cash consistently over the past few years then you may have hit on a market anomaly. Perhaps the sector has “fallen out of favour”, perhaps an event which on examination would not impact on the ability of the company to continue being profitable, whatever the reason, if the company is still sounding optimistic with its forward guidance you may wish to make an investment. After all should the very worst happen the assets will be worth more than you paid for them so you should be alright.

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