Screening for Decent Businesses at Decent Prices - 7 U.K. Stocks

by Geoff Gannon

I’ve mentioned before how Richard Beddard’s Interactive Investor blog is probably my favorite blog.

Well, reading Richard’s posts finally inspired me to start using Sharelockholmes. It’s a site that screens stocks in the United Kingdom. And it’s very, very good.

It’s also reasonably priced. About $8 a month at the current exchange rate.

Anyway, I was thinking about how I’d just written an article where I said Warren Buffett looks for a good business priced to return 10% a year initially and grow from there. It used to be 15%. But he’s lowered his standards. Berkshire simply has too much cash to invest. It doesn’t help that stock prices aren’t real low right now. But you play the cards you’re dealt.

It shouldn’t be too hard to find the kind of decent businesses at decent prices that Warren Buffett might invest in, right?

This is the quote I had in mind when designing my screen:

If we were working with $25 million – so we could sort of look at the whole universe of stocks – I would guess that you could find 15 or 20 out of three or four thousand that you would find that were A) selling for substantially less than they’re worth, and B) that the intrinsic value of the business was going to grow at a compound rate which was very satisfactory. You don’t want to buy a dollar bill that’s sitting for 50 cents, and it demands positive capital, and it’s going to be a dollar bill ten years from now. You want a dollar bill that’s going to compound at 12%...And, you want to be around some competent people. Just the same thing as if you went in and bought a Ford dealership in South Bend. The same exact thought process goes through your...mind about all the other businesses that are in Standard and Poor’s.

I figured I could do a quick screen and come up with a preliminary list of stocks that looked like they could both start you off with a 10% initial return – basically, a P/E ratio under 10 – and then reinvest future earnings at an acceptable rate.

Well, the preliminary list actually turned out to be quite short.

My requirements may have been a smidge too strict.

I asked Sharelockholmes to find companies with a 10-year ROE of at least 10% and a price to 10-year EPS of no more than 10. I also demanded the Z-Score be at least 3 since that’s the clearly “safe” cut-off.

I then threw out any homebuilders myself, because I couldn’t trust their Z-Scores. I didn’t feel right including them in a list intended for Americans and other investors who might be looking at the U.K. stock market for the first time. Development works a little differently over there. It’s tough to judge homebuilders by their 10-year records since there was a housing boom. So I just felt better leaving homebuilders out of this for now.

Once that was done, I went through each stock by hand adding up the 10-year or 11-year or 12-year average operating income – the length of the financial history differs from one company to the next – and comparing that number to the enterprise value. Basically, I checked to make sure the following inequality held true:

(Market Cap + Net Debt) / (Average Operating Income * 0.65) < 10

So, basically if you issued stock to replace all the debt and you took the operating income and taxed it at 35%, you’d still end up with after-tax income equal to at least 10% of your purchase price.

Again, I may have been too picky.

But then that is what we’re trying to do here – pick stocks. The best businesses at the best prices.

Oh, I also threw out companies that reported any operating losses in the last 10 years.

Again, picky.

This list is based on the data Sharelockholmes gave me. So it’s subject both to their errors and my own.

Here’s my stab at a list of 7 decent U.K. businesses selling at decent prices:

  1. T. Clarke (CTO:LN) – Reports
  2. Flying Brands (FBDU:LN) – Reports
  3. Clinton Cards (CC:LN) – Reports
  4. Game Group (GMG:LN) – Reports
  5. Bloomsbury Publishing (BMY:LN) – Reports
  6. Fletcher King (FLK:LN) – Reports
  7. Andrews Sykes (ASY:LN) – Reports

Now, obviously, there’s no way Warren Buffett is actually going to buy any of these stock. They’re far too small for Berkshire Hathaway.

And looking over the list, I’m not even sure these are the kinds of stocks Buffett would have bought back in his partnership days or his first few years at Berkshire Hathaway.

Still, a couple of the companies look interesting. Maybe not interesting enough for Warren Buffett to invest in. Maybe not even interesting enough for me to invest in. But certainly interesting enough for me to write about.

I plan to write articles about some of these 7 U.K. companies. I’ll try to look at them the way Warren Buffett might.

Watch for those articles over at GuruFocus.

In the meantime, start reading Richard Beddard’s blog if you haven’t already.

He’s written about several of these companies already, like…

Flying Brands

Game Group

Andrews Sykes

Talk to Geoff About Screening for Decent Businesses at Decent Prices