Cigar butt approach to bargain buys

A share may not offer much, but if you buy at a low enough price there will nearly always be a chance to make a profit.

Warren Buffett, the big American investor, calls it the "cigar butt" approach to investing. "A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the bargain purchase will make that puff all profit." Ergo: if you buy a share at a low enough price you'll nearly always get a chance to make a profit at some stage.

Warren Buffett, the big American investor, calls it the "cigar butt" approach to investing. "A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the bargain purchase will make that puff all profit." Ergo: if you buy a share at a low enough price you'll nearly always get a chance to make a profit at some stage.

Barbados-based investor John Harvey obviously agrees with this approach. Ten days ago he popped up in the bus and trucks maker, Mayflower, having spent about £9m of his own money buying a 4 per cent stake. The shares have since jumped about 12 per cent.

Mr Harvey's investment looks to be classic "cigar butt" investing. Mayflower's shares are depressed on fears the US truck market is turning down sharply just as orders for buses in Britain are slowing. It also serves as a reminder not to lose sight of those measures that constitute cheapness in a share.

In Mayflower's case, the key measure is "price-to-sales" - the relationship between the value put on the business by the stock market and the company's annual turnover. May-flower is capitalised at £250m, which compares with sales running at about £670m a year. And it is still expected to make upwards of £60m pre-tax this year.

As a rule of thumb, any company valued at significantly less than one year's turnover is worth a second look - though I confess there are a few of them around in manufacturing right now. Rolls-Royce, the aero engine maker which upset the City a month ago when reporting its figures, is the most celebrated example.

Rolls is now valued at less than half its sales and at under a quarter of the value of its order book (which got another boost last week). The shares may take a while to recover because Rolls' management committed the cardinal sin of springing nasty surprises on the brokers' analysts that follow it, making them look less than prescient in the eyes of clients.

But it is bursting with orders, has taken the knife to costs, and within a couple of years will be making a fortune out of spare parts to service the bulging fleet of Rolls engines now powering the world's airliners.

At the other end of the spectrum, much the same argument can be made for the shares of United Overseas Group. UOG specialises in buying up stocks of toys, toiletries and household goods that the manufacturers are finding hard to shift - and then wholesaling them on at a discount to the big retailers. After buying up a Dutch competitor, it is the European leader in this game.

That did not help much when it got itself stuck with a mass of slow-moving toys 18 months ago and plunged into loss. But there have since been management changes and UOG is back in profit.

The businesses in Europe, the UK and the US are starting to work together more closely, stocks are coming down steadily, and a new broker has been appointed in the shape of Williams de Broe.

At 21p, the company is valued in the market at £29.4m. That is a small discount to asset value and less than half annual sales.

Peter Shearlock is the author of the 'Growth Company Investor Weekly Digest'

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

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

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Mortgage Administration Team Leader

    Negotiable: Recruitment Genius: This company prides itself on its ability to p...

    Recruitment Genius: Mortgage Advisor

    Negotiable: Recruitment Genius: This company prides itself on its ability to p...

    Ashdown Group: Solvency II Project Manager - 10 month contract - £800 p/d

    £800 per day: Ashdown Group: A highly successful, global financial services co...

    SThree: Trainee Recruitment Consulant

    £20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250...

    Day In a Page

    A Very British Coup, part two: New novel in pipeline as Jeremy Corbyn's rise inspires sequel

    A Very British Coup, part two

    New novel in pipeline as Jeremy Corbyn's rise inspires sequel
    Philae lander data show comets could have brought 'building blocks of life' to Earth

    Philae lander data show comets could have brought 'building blocks of life' to Earth

    Icy dust layer holds organic compounds similar to those found in living organisms
    What turns someone into a conspiracy theorist? Study to look at why some are more 'receptive' to such theories

    What turns someone into a conspiracy theorist?

    Study to look at why some are more 'receptive' to such theories
    Chinese web dissenters using coded language to dodge censorship filters and vent frustration at government

    Are you a 50-center?

    Decoding the Chinese web dissenters
    The Beatles film Help, released 50 years ago, signalled the birth of the 'metrosexual' man

    Help signalled birth of 'metrosexual' man

    The Beatles' moptop haircuts and dandified fashion introduced a new style for the modern Englishman, says Martin King
    Hollywood's new diet: Has LA stolen New York's crown as the ultimate foodie trend-setter?

    Hollywood's new diet trends

    Has LA stolen New York's crown as the ultimate foodie trend-setter?
    6 best recipe files

    6 best recipe files

    Get organised like a Bake Off champion and put all your show-stopping recipes in one place
    Ashes 2015: Steven Finn goes from being unselectable to simply unplayable

    Finn goes from being unselectable to simply unplayable

    Middlesex bowler claims Ashes hat-trick of Clarke, Voges and Marsh
    Mullah Omar, creator of the Taliban, is dead... for the fourth time

    Mullah Omar, creator of the Taliban, is dead... again

    I was once told that intelligence services declare their enemies dead to provoke them into popping up their heads and revealing their location, says Robert Fisk
    Margaret Attwood on climate change: 'Time is running out for our fragile, Goldilocks planet'

    Margaret Atwood on climate change

    The author looks back on what she wrote about oil in 2009, and reflects on how the conversation has changed in a mere six years
    New Dr Seuss manuscript discovered: What Pet Should I Get? goes on sale this week

    New Dr Seuss manuscript discovered

    What Pet Should I Get? goes on sale this week
    Oculus Rift and the lonely cartoon hedgehog who could become the first ever virtual reality movie star

    The cartoon hedgehog leading the way into a whole new reality

    Virtual reality is the 'next chapter' of entertainment. Tim Walker gives it a try
    Ants have unique ability to switch between individual and collective action, says study

    Secrets of ants' teamwork revealed

    The insects have an almost unique ability to switch between individual and collective action
    Donovan interview: The singer is releasing a greatest hits album to mark his 50th year in folk

    Donovan marks his 50th year in folk

    The singer tells Nick Duerden about receiving death threats, why the world is 'mentally ill', and how he can write a song about anything, from ecology to crumpets
    Let's Race simulator: Ultra-realistic technology recreates thrill of the Formula One circuit

    Simulator recreates thrill of F1 circuit

    Rory Buckeridge gets behind the wheel and explains how it works