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How I pick shares- Part 2 (Value)



The person who turns over the most rocks wins the game. Peter Lynch

This is a timely post* in the United Kingdom as for the first time this week in a while, Markets have paused for thought and stopped their relentless rise upwards. Coupled with that, football (soccer) fans, very much including myself, are excited by the prospect of the return of the sport at a competitive level for the first time in 3 months this week. This blog talks of the strange marriage between football and shares.

I wrote a fortnight ago the first part of my series on how I pick shares. In that article, I focused on Knowledge, applying the principles from the post I wrote back in January on how Fantasy Football taught me how to gain an edge in share investing. 

Well I'm now going to build on the concept of Knowledge with a further principle- that of Value. This from my Fantasy Football article:

Value

(4)  Being constantly on the lookout for “value”. There is an interesting trend in Fantasy Football that after about 4-6 weeks of the season, most competitors have got a good array of high performing players in their squads. To stay ahead of this pack, you need to be identifying the forward who is about to hit a new vein of form or the mid-table promoted team that concedes few goals (with bargain bucket defenders scoring well). The sooner you snap them up, the better chance you have of picking up points before the competition. So screening for rising stars is recommended.

In short if you want to find an "edge" to beat the returns that you would derive from simply tracking the whole of the Market, you have to be prepared to do your research and cast your net suitably wide to find companies that fit the profile of a share that is likely to outperform.

Of course the Share Price will only rise once others realise that this Company is undervalued and are willing to buy the shares and bid up the Stock. If the Company can consistently beat expectations that will really help. If the Company is promoted up the FTSE and grows from being a small cap to a medium or large cap that will also help.

So where do you start? Well it is always worth keeping you ear to the ground on share chatter- whether it be Twitter or Facebook as the chances are that if a few people are talking about a stock, then there is a potential army of ready buyers. However if you buy on this alone, you are taking a very dangerous risk. Just because it is "hot" now does not mean that it will stay hot. Just because it is popular, does not means that those ramping it have done any fundamental research on the stock. Often if a stock is cheap, it is cheap for a reason. Its promise may outweigh its delivery (see any number of companies promising COVID-19 vaccines).  Its niche has not yet resulted in a flood of paying customers (see anyone with a new technology concept). It may not have made a profit yet (see most micro cap stocks). It may in fact be a fraud (see Quindell or Globo as a good examples of much hyped shares that went sour). All that said, sensible people (and I follow a few on Twitter) do come up with some good starting ideas from time to time and it is worth looking into them.

I also read a lot and keep my eyes open when I'm out and about to look at companies that are doing well. When you buy a share in a company, you are buying a right to the future profits of that business. If you think that they are going to grow the turnover and profits of that business, then by buying now you may be on to a winner. A good example of this is Domino's Pizza (DOM). I got to know them through their store roll-out in the early 2000's. They were so little known back then that they used to hitch on the back of Pizza Hut's sponsorship of the Simpsons with a short strategically placed advert and their orders apparently used to go through the roof. If you'd bought Domino's shares back in 2004, they were round about 20p. They now push £4 (even before splits). Regrettably I didn't buy back then.....

If you were keeping an eye on the streets this year, you will have seen Supermarket Deliveries increase significantly. Ocado (OCDO) has been a shining light of the FTSE100, nearly doubling in price since November 2019. I looked at them and didn't see the value proposition- more fool me.

I also keep an eye on what my wife and children are buying whether by way of goods and services. Two companies that caught my eye in recent years through this were Fevertree (FEVR) and JD Sports (JD.). Happily in both cases I did buy in and rode them up to what I saw to be full value before exiting.

I've been a Stockopedia subscriber for eight years. I have no endorsement with them. I just think that they have come up with a great product, which (if well used) is worth its weight in gold. In essence, any idea that I receive or company that I see that is dong well is run through Stockopedia. If it hits certain key metrics then I consider looking to take a position.

Equally Stockopedia also comes up with gems from time to time that you may not ordinarily consider. Games Workshop (GAW) constantly used to pop up as highly ranked on their value screen and it baffled me as to why the share price was not higher. GAW bounced around £5 for ages and then suddenly started to move upwards to £9, bringing up another Stockopedia indicator- Momentum (always worth keeping an eye on). Given this near doubling in price, I was intrigued and saw that GAW's Market updates were noticeably improving. Even though the shares had nearly doubled, the value was not stretched as their improving guidance meant that the shares were nearly as good value as they had been. I saw this as an optimum time to dive in and bought some in my ISA. When they reached £14, they came up on a screen again and I decided to buy some more for my SIPP. 

In the last week, the GAW hit nearly £80 per share. I would love to say that I am still holding on to my original holding, but regrettably I have sold out my holdings on the way up- the final shares going at £50 in March of this year (when the Corona Crisis caused my stop-loss to be hit). I have however made a handsome sum for both my ISA and SIPP through Games Worksop and I'm sure that others have enjoyed similar gains. Although GAW is now well overvalued in my humble view, they do continue to beat Market expectations- a truly remarkable run.

Shares like  GAW don't come around very often, however if you keep turning over the rocks (or the screens) you do find companies like them from time to time. I do take great pleasure in finding these companies and buying their shares before well known  bloggers or tipsters spot them. A sudden rise in share price is usually indicative of someone having tipped or bought into a stock. Unlike in Fantasy Football  I really don't mind other people also owning the share. After all the more in demand the share is, the higher the Market will bid it up.

I will write in the next couple of articles about how I determine whether a share represents good value once I've spotted it. At the end of day, buying something below what you assess its value to be is key to share investing. I never forget the mantra, "Price is what you pay. Value is what you get."

*As ever this blog is written subject to my disclaimer

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