Aiming to uncover hidden value

published 10 October 2006

Recently, views of the world economy seem to have been changing with the tides; investment themes are moving in and out of fashion even more rapidly than usual. However, this opens up opportunities for shrewd investors: the valuations of quality companies and attractive growth stories slip back as popular opinion turns against them.

New Star Hidden Value fund, with its multi-cap approach (it's able to invest in firms of all sizes) seeks to manage the trade-off between risk and reward. We have been using the recent sell-off to add to large, dividend-paying stocks that complement some of our holdings in riskier, but higher-growth smaller firms.

Wolseley (WOS) is one large company that has recently fallen victim to concerns about a slowdown in US property. As the world's leading plumbing supplies group, it is vulnerable to a weaker housing market. But its low price/earnings (p/e) ratio of just ten times expected 2007 earnings means the economy can afford a few leaks and the stock should still look cheap. The share price appears to be discounting a US recession, because even if a worst-case scenario came to pass, the group would still be trading at 14 times 2008 earnings. Wolseley is attracting speculation about a possible takeover or break-up of the company, although management appears determined to grow and invest in current operations. With the share price down sharply on its March peak, Wolseley looks cheap.

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Taylor Woodrow (TWOD), a UK house builder with a US division, is another play on this theme. The company practically trades at tangible book value, which within this sector has historically heralded good value. Backing this up is a p/e ratio of just 6.7 times 2007 earnings. Given what we believe is a demand/supply imbalance of housing in the UK, exacerbated by high immigration, the group's quality land bank is particularly attractive.

Just as the tide quickly turns, so does the weather. While August may have been a washout, the fact remains that this was another very dry summer. This has proved a bonanza for Straight (STT), the specialist container group that is the UK's biggest supplier of water butts. This company is well positioned to profit from Government targets on environmental issues. It is the leading supplier of wheelie bins to UK councils and is benefiting from a surge in designated recycling bins. It will also benefit from plans to tag bins with radio frequency identification tags so that councils can potentially charge for the weight of waste they collect.

For those prepared to take the plunge, a riskier play is Central African Mining (CFM). It is an Aim-listed junior miner, with assets in the war-torn Congo... but don't let that stop you from reading on. The firm has a market capitalisation of around £450m, cash in the bank and is geographically diversified across Africa in assets that include coal, uranium and cobalt. It controls the vast majority of the logistics in the Congo and owns hundreds of large trucks that enable it to mine and deliver commodities, which separates it from most other juniors. The firm currently has cash flow from its cobalt unit (15% of global supply) and is ramping this up to take advantage of steeply rising cobalt prices.