Undervalued17 May 2013 18:20
IC Article from Feb
Seeing the Light:
I am currently researching my 2013 Bargain Shares portfolio, which will be published in early February. Not only does this involve screening the whole of the London market for hidden gems where the value in a company's assets is not being adequately reflected in the valuation investors are attributing to its equity, but it also involves a fair degree of stockpicking on my part, too.
That's because many companies appear lowly rated for a very good reason and realistically also lack a catalyst to change the apparent undervaluation. In fact, every year I rip through the annual report and accounts, trading statements and broker notes on around 50 companies during a three-week period at this time of year while researching my annual Bargain Shares portfolio. Having gone through this lengthy process, I then whittle this number down to 10 stocks, which must not only offer great value but importantly have a realistic chance of re-rating over the following 12 months.
This process involves a great deal of work on my part, but this balance sheet approach to investing has been well worth doing and has undoubtedly stood the test of time. In fact, over the past decade, an investor would have generated an average annual return of 16.8 per cent by buying each portfolio and subsequently reinvesting the proceeds into the next portfolio the following year. To put that into perspective, an investment of £10,000 in February 2003 would now be worth over £47,000, which compares rather favourably with the same investment in the FTSE All-Share which would now be worth £26,411 including the reinvestment of dividends. In other words, my Bargain Shares portfolio have generated a return double the 8.4 per cent on the benchmark index over a 10-year period that has covered two bull markets and one savage bear market.
That's not to say that my Bargain Shares portfolios are sure-fire winners every year. No investment technique can ever guarantee that and I have had two bad years in the past decade: in 2008 when the stock market crashed and, in 2011, when heightened risk aversion meant small caps were largely shunned again by investors that year. But if you take a long-term view when it comes to investing in equities, then the rewards can be significant from following this particular investment strategy, even after factoring in those two down years. Moreover, there is always scope for share prices to recover after a bad year, which is why I am revisiting the investment case of solar-wafer manufacturer PV Crystalox Solar (PVCS: 12.15p), a company that proved an unmitigated disaster in my 2011 portfolio.
The problem facing the company, and one which I underestimated when I advised buying the shares two years ago, has been savage price cutting by Asian rivals resulting from both overcapacity in the industry and oversupply, primarily from China. In turn, this has led to a 77 per cent plunge in spot wafer prices s
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