Value Investing Portfolio Review: Aga Rangemaster, Airea, Enterprise Inns, Hampson Industries

At the end of January my fund was down over 1% taking the rolling one year figure to 13%, slightly lagging the FTSE 100. 13% is down a long way in relation to the December one year figure (22%) but that's due to what happened last January rather than in this one (last year's was much better).  The goal as ever is to out-perform the FTSE 100 by an annualised 5% in any rolling 5 year period, but it's more of a hope than a goal. Having a returns goal in stock market investing is a bit like having the goal of it being sunny tomorrow. The current effort to increase the number of holdings to twenty stumbled slightly as two companies were sold and two were bought, as detailed below.

Sold - AGA Rangemaster (LON:AGA)

Somewhat surprisingly, AGA turned out to be the 'least undervalued' company on a quantitative basis and its sale returned 22% in only three months.  I bought AGA using version 0.1 of my evolving scoring system, which is a quantitative model to sort and screen stocks for further analysis. I'd say about 80% of any buy decision is based on this score with the remaining 20% going to soft qualitative research. The model looks for equity selling cheaply relative to its historic earnings and AGA certainly fitted that description.

My quantitative research is quite limited and if you like that sort of thing you will find many better exponents of it listed on the web site. When doing this soft research I typically ask just four things:

1. First, is the company that I'm buying now substantially the same company that produced the historic earnings? It can often be the case that valuable assets are sold off during restructuring and a special dividend pays out the proceeds to shareholders. In that case the company is not the company that earned the historic returns and so the numbers are misleading. As far as I could see the AGA I bought was more or less the AGA of the last 10 years, minus their foodservice company which they sold in 2007. 
2. Second, why are the shares so cheap? For AGA the drop in share price started in late 2007 and seemed to be directly tied to the recession rather than anything specific to the company. 
3. Third, is this fixable? Personally I couldn't see any reason why after the recession AGA wouldn't return to more or less the position it was in before, when the shares were in the 300-400p range rather than around 100p. Various commentators were worried about the pension fund, but this was outside my circle of competence, so I ignored it. 
4. Finally, how are they fixing it? According to Frederick M. Zimmerman's book The Turnaround Experience, successful turnarounds typically focus on core operational issues and incremental improvements rather than launching into new markets, products or businesses. In AGA's case they seemed to be dropping non-core businesses even before the recession in order to focus on their consumer operations. Savings are being re-invested to improve and organically grow that core business. 

In a nutshell that's why I bought AGA. It scored well through a fundamental screen and ranking system and ticked each of my simple qualitative boxes.  AGA was sold because after only three months as the rise in share price made it the lowest scoring holding since the higher the price goes the less 'value' is left in the shares. In part this change from scoring high to scoring relatively low was due to a minor change in the scoring system. Hopefully such changes will become limited in time. It was also a sell target as it took up over 10% of the portfolio and I'm in the process of reducing the size of each holding to increase diversification. 

Sold - Airea (LON:AIEA)

Another leaver this month was Airea, the design led specialist flooring company. Airea was a victim of the move from version 0.1 to 0.2 of my quantitative model mentioned above. Version 0.2 places more emphasis on recent earnings compared to earnings over five years ago and in that respect Airea had done badly. This meant that the future outlook for the company appeared weaker than I first thought and according to version 0.2 it was already fairly priced which is an automatic sell signal.  The sale resulted in a loss of about 13% in a holding that was about 1% of the fund.

Bought – Enterprise Inns (LON:ETI)

Enterprise Inns owns a large collection of pubs (almost 7,000) which it leases out to landlords and provides them with additional support in return for various monetary returns. Going by historic earnings the current price is very cheap, debt is high but not high enough to stop the company coming near the top of my screen.

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The four qualitative questions give these answers: 

1. Has the company changed dramatically in the last year or three? Not that I can see. 
2. Why is it cheap? The recession is the obvious and rational reason. People are squeezed and don't have the money to spend on quite so much booze. The company also has a lot of debt which seems to scare some investors, but that is already factored into my quantitative model and the potential rewards outweigh this risk. A detailed analysis of the debt is not my area of expertise. 
3. Is it fixable? I don't think that pubs are going the way of Blockbuster, so this looks like a cyclical downturn rather than a terminal decline to me. 
4. What are they doing to fix it? They seem to have two main strategies. One is to sell non-core pubs and the other is a sale and leaseback scheme which sold 71 pubs in 2010 and it's expected to be around the same figure next year. Both of these are focused on the core business rather than trying some new fangled idea. 

On that basis around 4% of the fund went into Enterprise Inns with a current target price of 330p which I don't think it will get anywhere near within the next year.

Bought – Hampson Industries (LON:HAMP)

Hampson Industries is an international group serving the global aerospace industry. According to the web site, "Hampson is now the world's largest supplier of highly engineered, close tolerance tooling systems for the fabrication and assembly of both metal and composite structures for commercial and military aircraft and space applications". My model suggests a possible share price increase of around 150-200%, which of course is up to Mr Market and not me, unfortunately. And so to my four questions: 

1. Is it still the same company? Yes, more or less. They have been buying companies over the last few years and selling some, but overall the basics of the business appear to be the same as they have been for the past few years. 
2. Why so cheap? The recession is once again the answer; although in this case the global recession rather than the UK one. 
3. Is it fixable? As with Enterprise Inns, this isn't a problem with the company as such, it's just a knock on effect of the global downturn. 
4. How are they fixing it? The response seems to be operational improvements and major restructuring where required, which is what I like to see rather than a radical shakeup of the business. 

Again about 4% of the total fund went into Hampson as I'm aiming for around 20 holdings.

New Stockopedia fund

Since there is a good chance that I am making up these results I have started a mirror fund on Stockopedia. They are entirely independent of me and so I cannot fix the results (of course if my results are rubbish they are unlikely to be fixed). The trades will be the same as for my personal account, just a day or so later. Don't be too critical of its performance though as the fund only began a few weeks ago; please give it a year or three before passing judgement.