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10 ultra-cheap stocks for aggressive investors
When Ben Graham and David Dodd wrote the book Security Analysis in 1934, they urged investors to rethink their approach to analysing shares. Stung by heavy losses on the stock market a few years earlier, they counselled against chasing expensive "glamour" and obsessing about earnings growth. Instead, they showed that it was mispriced and undervalued shares that offered the best chance of outperformance.
Ever since, investors have employed a multitude of metrics to help them find shares that don't reflect the expected value of the companies behind them. Usually, that means comparing a company's share price against what it earns - such as the price to earnings ratio - or against what it owns - such as the price to book ratio.
Choosing a value measure
While some investors steadfastly stick to their favourites, others think it's too simplistic to use just one ratio to value and compare shares. This issue has attracted increasing attention from investment analysts in recent years.
James O'Shaugnessy, a well-known American fund manager, has researched investment trends over many decades. His work has concluded that a "trending value" approach that uses a composite of valuation measurements is far superior to using just one ratio.
In 2014, the equity research team at investment bank Societe Generale picked up on this approach with a value strategy for what it called 'brave' investors. Rather than rely on one single ratio, it combines five well known value measures to find shares that are cheap relative to their sectors. Bravery is needed because these could well be companies with problems. And that means there can be sharp initial losses before the value in them eventually 'outs'. Even so, the global value index that SocGen created has performed very strongly against its benchmarks.
Screening for deep value shares
To get an idea of the stocks that could be cheap based on several valuation ratios, Stockopedia created a screen for Interactive Investor. It includes a Value Rank, which scores and ranks every share in the market based on six common valuation measurements from 0 (potentially poor value) to 100 (potentially good value). The list is limited to a minimum market cap of £100 million.
It's vital to remember that deep value investing means picking over some potentially troubled and misunderstood companies. Detailed research and broad diversification are essential - and it is likely that some shares won't recover.
|Name||Mkt Cap £m||Value Rank||Sector|
|Highland Gold Mining||156.1||98||Basic Materials|
Out of favour…
From this list, it's clear which sectors are currently out of favour. Oil & gas services companies like Lamprell (LAM) and Hunting (HTG) have been beaten down by uncertainty in the oil sector over the past year. Likewise, pension fund consolidator Phoenix (PHNX) and insurance group Novae (NVA) operate in sectors that tend to be less well understood by investors.
Elsewhere, the list throws up a mixed bag of shares, ranging from Russian mining company Highland Gold Mining (HGM), corporate broker Cenkos Securities (CNKS) to Indivior (INDV), the pharma group that was spun-out of Reckitt Benckiser last year.
Also appearing is retail voucher and giftcard company Park Group (PKG) and corporate services business, Hogg Robinson (HRG). And despite a strong performance in its shares over the past year, fashion retailer Debenhams (DEB)remains potentially cheap on a number of measures.
Watch the risks of deep value
Digging around among the cheapest stocks in the market isn't for the faint hearted. Often these companies come with uncertainty surrounding their financial strength or business viability. It was for that reason that Graham and Dodd encouraged wide diversification - a portfolio approach should harvest the deep value premium and absorb the inevitable losses. In the decades since they introduced the concept of buying undervalued stocks, numerous financial ratios have been used as a measure of what's cheap. But rather than relying on a single measure, a value composite using several value factors could be a more effective way of navigating one of the trickiest parts of the market.
Interactive Investor's Stock Screening series is written by Ben Hobson of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard's review of Stockopedia.com and learn more about the site.
● Interactive Investor readers can enjoy a two week free trial and £50 discount to Stockopedia using the coupon code iii014 - click here.
● To learn more about Ben Graham and his deep value investing strategies, you can download the free Stockopedia book, How to Make Money in Value Stocks.
It's worth remembering that these and other investment articles on Interactive Investor are simply for generating ideas and if you are thinking of investing they should only ever be a starting point for your own in-depth research before making a decision.
*No fee for publication is involved between Interactive Investor and Stockopedia for this column.
About the author
Ben Hobson is Strategies Editor at Stockopedia.com. His background is in business analysis and journalism.
Ben writes regularly on investment strategy performance and screening ideas for Stockopedia. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook".
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
|PHOENIX GROUP HOLDINGS||751.00p||-0.20%|
|HIGHLAND GOLD MINING LTD||156.50p||-0.32%|
|HOGG ROBINSON GROUP||77.50p||1.14%|
|All data 15min delayed as of: 02:14:19 24/11/17|