Three ways to identify the ‘Double Your Money' shares from value traps

by , 18 October 2017
Three ways to identify the ‘Double Your Money' shares from value traps
What if I told you there's a way to find shares that consistently outperform the market?

Sounds too good to be true.

But the fact is, fourteen shares I invested in between 2010 and 2016 provided me with returns outstripping 100% each….

In their 2013 paper titled “Fundamental Based Market Strategies”, Dr Angelo Aspris (research leader), Sean Foley, (researcher), Nigel Finch, and Zachary Meyer (research associates) found that following a number of ‘fundamental' criteria on shares could give you annualised excess returns of 43.1%!

In short, their research found that shares with these specific characteristics will outperform the market, by a big margin…

These include an attractive or “cheap” share price, the companies need to have smart debt levels and make use of their assets efficiently.

 
 
“Double Your Money” shares are proven to make you money – but you need to know how to find them….
 
In March 2014, the Zeder share price was trading at 400c, you were effectively only paying for the company’s investment in Pioneer Foods and Capespan. You got Zaad and Kaap Agri, also part of Zeder, for free.
 
But by February 2015, the value of the businesses Zeder owned nearly doubled and it’s share price shot up.
 
By 23 April 2015, Zeder hit a high of 932c, a gain of 133%!
 
Or, for instance in April 2015, I identified a little known company called Trustco.
 
Trustco owns financial services companies in Namibia. But what I also uncovered was that based on its share price you got a massive portfolio of properties that Trustco owned for free.
 
I bought Trustco at 300c that month, and managed to sell it at a 56% gain by August that year!
 
Or Insimbi Refractories, in January 2016 I identified the company at 84c, but investors were completely unaware of a new acquisition the company had made, merely paying the ‘old’ market price for the company. I immediately knew that the new business the company had bought was being given away for free with the share price back then.
 
And, by May 2016 the Insimbi share price hit 130c as investors realised the value of the newly acquired business. A smashing gain of 54.76% in 5 months!
 
A quick scan of the JSE shows at least 20 potential “Double Your Money” shares
 
Considering the struggling economy, the kind of shares I am looking for today are the ones that have lots of upside potential, but also the ones that are already misunderstood and undervalued by the market.
 
So, I did a quick scan of the JSE to identify a couple of potential shares that might fit the bill…
  
20 penny shares selling for less than they are worth right now
 

Looking at this table you’ll see that I filtered out the penny shares that are selling at a greater than 20% discount to the value of their assets. That means you get at least 20% of these companies for free.
 
Furthermore, I require them to be profitable as well.
 
There are a couple of these shares with explosive potential – and another handful of them you shouldn’t trust at all.
 
So how do I separate the good ones from the bad ones? How do I know that a share could DOUBLE its value instead of halve its profits? 
 
 
  
   
Three ways to identify the Double Your Money shares from the value traps
 
Value indicator #1 – Is the market overly pessimistic or not?
 
You need to remember – shares are cheap for a reason. It may be that there’s a dark cloud hanging over the sector. Think of the new mining charter and how it has negatively affected the entire mining sector shares – even Wescoal, which is more than 50% black owned and will be largely unaffected by the charter…
 
So you need to consider whether the market is discounting a share due to a ‘dark cloud’ (or in Wescoal’s case short-sighted) or whether there’s a strong reason why the market thinks a share price should be rock bottom?
 
In Wescoal’s case, the company will keep on running just as well as it has been in the past year, irrespective of the new mining charter. So we know that the market is merely treating it the way it is because of its sector.
 
Value indicator #2 – Is it accounting tricks, or is there real, verifiable value?
 
When a company has a very high ‘net asset value’ it is sometimes a situation of the company overstating the value of its assets. Sometimes the assets need to be ‘impaired’, meaning a portion of their value has to be written off to reduce their value to something more realistic. This is often the case with mining companies when the value of the commodity they mine drops sharply. Immediately the value of ‘underground assets’ will appear higher than economically possible. So, until the next results release, the asset value will appear high – but because you are looking at historical values.
 
So how do you get past this problem?
 
I base my calculations on verifiable figures.
 
So let’s take Grand Parade as an example…
 
We know how much cash the company has in the bank. That’s 68cps.
 
We know that it recently sold off a portion of its casino’s. So we can use the value of that deal to value the remaining share it has in the casinos. That’s R3.43.
 
This and the cash is R4.11 with the company share price at 275c. So I know, there’s simply no way that assets can be overstated in such a way that the share price could end up more expensive than the value of its assets.
 
You can also base the value on investments a company holds that are listed – many of Zeder’s investments are listed. So their values can be calculated from their share prices.
 
Value indicator #3 – Ignore the past and rather look at the future…
 
What is going to happen at a company in the coming year is actually more important than what has happened in the past year.
 
Now none of us have a crystal ball. And we can’t account for disasters. But we can, using common sense and experience, deduce what will happen in the coming year and use that for forecasts.
 
Take Hulamin for instance:
 
Over a ten year period the share is down 71% as it crashed from commodity boom high’s in 2008 to more realistic levels.
 
But that doesn’t mean we should ignore the company today.
 
In fact, based on its current financials and future prospects the company is super attractive…
 
The aluminium price (a commodity the company trades in) is at its highest level since 2013, and has nearly doubled since 2015.
 
The company has grown profits from 37cps in 2015 to its current 119cps, putting it on a PE of only 5 compared to the JSE All-Share at 20. Clearly the share is super cheap, and in a positive space right now…
 
It’s important that you realise, even in the toughest of markets there are still opportunities out there. It might take longer for your profits to realise – but at the end of the day, someone will make a profit. If you sit out of the market, you will hand the gains over to the next guy. Instead – try and find the next ‘Double Your Money’ shares with me…
 
Here’s to unleashing real value
 
Francois Joubert

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