Ben Yearsley: For the bargain-hunters, it's a numbers game

 

We all would like to acquire things for less than their worth. Whether it's houses, antiques, cars or groceries it's always nice to secure a bargain. What makes Henry Dixon and George Godber of Matterley Undervalued Assets Fund excited is their quest to find cheap companies, wherever they may be in the UK market.

Cheap is of course a very subjective word and clearly has to be used in the right context. Some cheap items aren't worth paying up for and you have to be selective. As Warren Buffett put it, "Price is what you pay, value is what you get". The Matterley managers are therefore looking for two specific features when considering cheap or undervalued shares. First, they identify companies where the share price doesn't fully reflect the value of the assets; ie the company is trading at below its replacement cost. Second, they hope to find businesses whose profit streams have been underestimated by the wider market. In other words the return the firm can generate from its assets is not fully appreciated.

Naturally, these criteria tend to filter out a disparate range of businesses large and small, so this fund could certainly not be accused of being a closet tracker hugging a benchmark. The 40 to 60 stocks in the portfolio enter it based on merit, rather than simply being large constituents of the FTSE100.

Understandably, Messrs Dixon and Godber spend a long time analysing reports and accounts from companies, as well as trading updates as soon as they are announced. This fundamental analysis leads them to construct a valuation matrix that places companies in one of three groups, undervalued assets, undervalued returns or overvalued. Looking at the FTSE100, they currently estimate that about 25 per cent of companies are overvalued, 25 per cent are in the undervalued assets camp and 50 per cent are in the undervalued returns camp. Their database covers almost 800 companies and it is interesting to compare the numbers now to, say, 18 months ago, when they believed that more than 55 per cent of companies in the FTSE100 were overvalued. This focus on the balance sheet and future cash-flows helps them avoid the value traps, companies that look cheap but are fundamentally in decline.

One company they are excited about is Sainsbury's, where they think the market capitalisation of the company is way below replacement cost. The market capitalisation is about the £5.5bn mark, but it would cost, in Matterley's opinion, approximately £14bn to replace their retail space. In other words, for every £1 you invest in Sainsbury's, you are in theory buying far more in physical assets.

And, since the present CEO, Justin King, arrived in 2004, sales have risen by 50 per cent, profits have increased and the dividend has doubled, yet the share price has basically gone nowhere. A more recent addition to the portfolio is Cairn Energy, where Matterley believe that the company has approximately £1.5bn more in cash in the bank than the market capitalisation.

It often takes time for the market to recognise undervalued companies, so this is definitely a fund to buy and tuck away for the long term. Although Matterley is probably a fund management company you have never heard of (it is actually owned by the more widely known Charles Stanley Group), in my view Mr Dixon and Mr Godber are a management team worth following closely.

Ben Yearsley is investment manager at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Payments Operations Assistant

    £23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

    Recruitment Genius: Telephone Debt Negotiator

    £13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

    Guru Careers: Communications Exec / PR Exec

    £25 - £30K: Guru Careers: We are seeking a highly-motivated and ambitious Comm...

    Guru Careers: Pricing Analyst

    £30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

    Day In a Page

    On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

    On your feet!

    Spending half the day standing 'reduces risk of heart attacks and cancer'
    Liverpool close in on Milner signing

    Liverpool close in on Milner signing

    Reds baulk at Christian Benteke £32.5m release clause
    With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

    The big NHS question

    Why are there so few new GPs when so many want to study medicine?
    Big knickers are back: Thongs ain't what they used to be

    Thongs ain't what they used to be

    Big knickers are back
    Thurston Moore interview

    Thurston Moore interview

    On living in London, Sonic Youth and musical memoirs
    In full bloom

    In full bloom

    Floral print womenswear
    From leading man to Elephant Man, Bradley Cooper is terrific

    From leading man to Elephant Man

    Bradley Cooper is terrific
    In this the person to restore our trust in the banks?

    In this the person to restore our trust in the banks?

    Dame Colette Bowe - interview
    When do the creative juices dry up?

    When do the creative juices dry up?

    David Lodge thinks he knows
    The 'Cher moment' happening across fashion just now

    Fashion's Cher moment

    Ageing beauty will always be more classy than all that booty
    Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

    Health fears over school cancer jab

    Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
    Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

    'I forgive everyone, but I don't forget'

    Fifa president Sepp Blatter issues defiant warning to opponents
    Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

    Weather warning

    Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
    LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

    High hopes for LSD

    Meet the volunteer users helping to see if it cures depression and addiction
    German soldier who died fighting for UK in Battle of Waterloo should be removed from museum display and given dignified funeral, say historians

    Saving Private Brandt

    A Belgian museum's display of the skeleton of a soldier killed at Waterloo prompts calls for him to be given a dignified funeral