Semiconductors and sustenance for value investors

In practice:

Wolfson ‘Interesting’ Microelectronics

‘Interesting’ can be a euphemism for beguiling, and Wolfson Microelectronics  (WLF) is certainly an interesting company.

Profits fell sharply in the year to December 28 2008 as demand for its audio chips collapsed. In its recent annual report, chairman Michael Ruettgers doesn’t know how bad things are going to get so he’s preparing for them to get worse before they get better by cutting costs, but not research and development.

On the other hand, Wolfson had $13m of cash and $92m of short-term deposits in December, far outweighing everything it owes. Total liabilities were $31m, none of them debt.

Although the shares look a little expensive, the price is 16 times average earnings over the last nine years, investors are getting a lot of assets for their money. One day Wolfson should turn them into profit, unless it needs them to fund its way through recession.

Since Wolfson’s a successful company in a hot but cyclical business, supplying integrated circuits for mobile phones, sat navs, TVs, games consoles, hi-fi equipment and other consumer electronics products, recovery seems like a reasonable speculation.

Despite the price of the shares, the company might merit a place in a Thrifty portfolio, if not now, then soon!

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No news is good news at Carluccio’s (CARL). Today’s trading update reported rising sales and new store openings as planned, which is a relief as I picked it for Money Observer’s March Share Sleuth column [PDF].

I’m following Steve Markus’ 140 character condensed company announcements on Twitter (@smarkus).

In theory:

Curse of the value investor is not so bad

When shares are falling, the value investor buys too early and when shares are rising she sells too early. It’s a curse. Because shares trend in the short-term, they’re likely to keep going in the direction they have been recently regardless of our benchmarks for value.

But it’s not such a bad curse, according to our man at Soc Gen, behavioural and value investing specialist James Montier.

He tested the returns of an imaginary investor who bought the US market whenever it fell to 10 times its average earnings in the preceding ten years, which he describes as 'revulsion' levels (i.e. very cheap and, incidentally, around the level of the UK market now).

On average, the investor bought four months before the bottom of the market losing him 20% but it only took a year to recover that loss. It’s a small price to pay, Montier says, for not being able to pick the bottom of the market.

To pick the worst-case scenario (so far), after October 1931 our investor bought eight months before the bottom, losing 53% and having to wait nearly two years to recover.

Buying like this also protected Montier's imaginary investor from loss:
Historically, investors haven’t ever lost money on a ten year horizon when they have purchased in the lowest quartile of valuations.
That is, when the market's ten year PE is less than 13

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Mebane Faber, author of the Ivy Portfolio, tells me momentum “is not quite where we were going”, the three big ideas are:  diversification, timing and following the best investment managers.