Watch out for the competition

Have you ever entered one of those investment competitions that they run in the newspapers or on internet bulletin boards? They can be quite fun, but I rarely get around to entering for a whole host of reasons. Even when I do, if it requires you to actively manage your fantasy portfolio then I just don’t have the time. However, about a year ago I did enter one of the newspaper competitions that required you to pick a choice of funds, and there were monthly prizes and an overall prize for the best performer(s). I certainly hadn’t the time or inclination to look at the funds in detail, and decided that on the information given I would select the funds that had underperformed over the previous year. It took about 10 minutes, and then I just left it alone, although it could have been actively managed for those who wished.

Guess what, I won first prize. Actually that’s not true. In fact I didn’t win anything at all (as you might expect with such little research). However, what is remarkable is that overall I did manage to finish reasonably high up the table, and was quite close to winning a monthly prize; during the final week of that particular month I briefly shared the top spot. Given that the competition attracted 25,000+ entrants, surely that’s not bad for 10 minutes effort.

So what’s my point? Well it’s really that this simple selection process probably works quite well because the stocks in the funds that have underperformed the previous year have, in some instances, become undervalued and hence perform better the next year.

This brings me on to Vodafone. Whilst I don’t invest in large cap. companies, I read in one of today’s newspapers that over the past 10 years Vodafone shares are down more than 17% whilst the FTSE 100 is up nearly 7%.  This is quite an underperformance. Cursory research shows that Vodafone pay a near 5% dividend, it has a modest p/e ratio (from ADVFN data) and a Chief Executive who appears to have a sensible approach to creating shareholder value.

It will be interesting to see if Vodafone moves from being the under-performer to the out-performer over the next few years.

I see that the Director buying at Avanti continues. HMV released a less than inspiring trading update, and 600 group have had to raise some cash with a placing (at 30.5p) (“My only concern would be that there appears to be less than £0.5m cash” on the balance sheet. See weekend blog). These are all companies I have mentioned in previous blogs.

It's fun to look at E B I T D A

I noticed in one of the Sunday newspapers that HIT entertainment (Thomas the Tank Engine – owner) are looking for a sale of the company for between $1bn and $1.5bn. This would be between a multiple of 12.5 and 18.7 times their 2010 EBITDA figure. Whilst this looks ambitious, media companies are often valued and bought on a multiple of earnings before interest, tax, depreciation and amortization.

This prompted me to take a little look again at the last full year’s accounts for two of the media companies that I currently hold.

DCD Media produced an EBITDA figure of £2.3m last year. If you applied the multiples above then you could argue that DCD is potentially worth between £28.75m and £43m. DCD’s current market cap. is around £5m.

Avesco produced an EBITDA figure of £19.7m. Again applying a multiple of 12.5 to 18.7 gives a potential value of £246m to £368m. Avesco’s current market cap is around £23.5m.

Of course EBITDA is only one value measure, and disliked by some investors. However, DCD is currently on a fully diluted p/e ratio of about 3, and had more cash on its balance sheet (£5.4m) than the company is currently worth. Avesco is also cheap on all sorts of value measures including it’s tangible NAV (£1.43 per share), a forward single digit p/e ratio for 2012 and a possible £1.79 payout per share from Disney. Hence, I don’t envisage selling either in the foreseeable future.

Note: I feel that it is important to point out that Warren Buffett is particularly unflattering about managers who continually stress the EBITDA figure. However, as I mention above, DCD and Avesco are attractively priced on a range of important measures.