SELL Ass e t management f irm RE:CM says that it has taken some of its profits from the hotel group and reduced its exposure. The group also reduced its holding in foreign retailer Carrefour. Portfolio manager Daniel Malan told clients: “As with Carrefour, it is still a large investment in the Fund, but share price moves in the early months of 2013 reduced the margin of safety between fair value and the stock price to levels where a reduced exposure was called for.” Keith McLachlan from Thebe Stockbroking recently ran an interesting exercise in an effort to find small-capitalisation shares that may be undervalued. His criteria were as follows:
The price-to-book (P/B) ratio must be less than 1.0 times, i.e. The stock is trading below book.
The price-to-earnings (P/E) multiple must be greater than 0.0, indicating that the company is profitable.
The dividend yield (DY) must be greater than 0%.
The 3-year average return on equity (ROE) must be greater than 10%, which indicates that the company is reasonably profitable during that period.
The 3-year average debt to equity must be less than 0.50. The calculation helps filter out companies where the ROE is inflated due to excessive debt funding in the company’s capital structure.
Using this calculation, the shares that made this list were Richemont, Cafca, Workforce Holdings, Delta EMD, Morvest, Mustek, Amecor, Randgold & Exploration, Sabvest, Brimstone Investment Corporation and Spanjaard.