There are a number of different types of value shares. I've discussed many times the approaches of Benjamin Graham and Warren Buffett, and, of course, my own as applied to contemporary UK shares. Today we look at the five categories Anthony Bolton concentrated on.
These are businesses that have been performing poorly for quite some time, but there is good reason to believe that matters are about to improve.
Investors, generally, like to be associated with companies that are doing well, which can lead to those in trouble receiving little attention. When a change for the better occurs, most investors miss their chance to invest at a low valuation.
Change can come about because of new management, restructuring or a refinancing.
One area where Bolton has done well is in purchasing shares coming out of bankruptcy, because these companies tend to be completely ignored by most equity institutional investors.
Recovery shares must be split into two groups: those that have a strong economic franchise and those that do not. Only go for the good ones – poor franchise businesses will never recover.
With recovery shares Bolton usually takes a small stake to start with – it is easy to be too early – then as his conviction grows that the worst is over, he adds to the holding.
This could be in areas unfamiliar to most investors, such as an obscure industry.
Another possibility is the firm has a terrific division hidden within the company by the less attractive divisions (e.g., Nokia).
For example, a share is the cheapest in its sector when it does not deserve to be.
Another possibility is that those shares with few trades become underpriced because the market tends to over-price the highly liquid shares and underprice illiquidity.
Bolton agrees with Peter Lynch that firms that sound dull, ridiculous, depressing or doing something disagreeable are disregarded and not owned by institutions.
‘I have always started my search amongst the stocks that
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