, , , , , , , , , , , ,

Continued from here. I highlighted we’ve another 20 or so stock valuations to work through, but we’re now finished with all the ISEQ-listed Irish stocks. Whenever you consider Irish stock performance or are investing in some type of Ireland focused fund/product, it’s only these ISEQ stocks that will (likely) be relevant. We’re therefore at a good point to pause and provide some interesting stats & comments. I’ll use the TGISVP V Excel file from this post, but I’ve updated it here with current market prices as of March 7th (and included my TOT & FBD valuation updates):

TGISVP V (Mkt Prices Updated Mar 7th)     (xlsx file)

TGISVP V (Mkt Prices Updated Mar 7th)     (xls file)

I’ll use a EUR Market Cap (fyi, hidden column AL) for all companies, to put them on an equal footing. I’m mostly going to exclude Allied Irish Banks (ALBK:ID), however, from my stats/commentary because of its utterly absurd Mkt Cap. [For reference, AIB’s Mkt Cap is EUR 56.5 bio, and per my fair valuation there’s a (71)% Downside Potential from the current market price.] And people say markets are efficient..?!

Right, let’s begin with the ISEQ Top 10, by Mkt Cap:

Stock EUR Mkt Cap
Tullow Oil 15,658
CRH 10,850
Ryanair 6,144
Kerry 5,705
Elan 5,600
Bank of Ireland 3,887
Dragon Oil 3,571
Aryzta 3,247
Paddy Power 2,359
Irish Life & Permanent 1,717

If you prefer to frolic ’round at the other end of the spectrum, here’s the ISEQ Bottom 10, by Mkt Cap:

Stock EUR Mkt Cap
Ovoca Gold 23.7
Worldspreads 17.5
ISEQ 20 ETF 17.5
Conroy Gold 9.4
Merrion Pharm 6.5
Great Western Mining 4.5
Zamano 3.8
Siteserv 2.5
Karelian Diamond 2.2
Prime Active Capital 1.4

People can never seem to agree on Large/Medium/Small Cap classifications. I’ve my own views on that (and it plays into my portfolio risk management), but with a ‘closed system‘ like the ISEQ, I think there’s another simple and elegant solution. Just divide the market into thirds!:

Mkt Cap Segment Mkt Cap Range Mkt Cap Avg
Large Cap >= EUR 970 m EUR 4,034
Medium Cap > EUR 55 m, < EUR 970 m EUR 268
Small Cap <= EUR 55 m EUR 22

Per my fair valuations (you might disagree!), here are the ISEQ Top 10 Undervalued Stocks:

Stock Upside
Petroneft 554%
Prime Active Capital 427%
Aer Lingus 143%
Worldspreads 117%
Donegal 113%
Bank of Ireland 108%
Smurfit Kappa 98%
Total Produce 94%
Irish Life & Permanent 82%
FBD 67%

And here are my ISEQ Top 10 Overvalued Stocks (you might violently disagree..!):

Stock Upside
Elan (49)%
Greencore (56)%
Tullow Oil (76)%
Great Western Mining (79)%
Kenmare Resources (82)%
Karelian Diamond (85)%
Conroy Gold (100)%
Merrion Pharm (100)%
Siteserv (100)%
Zamano (100)%

If you prefer to buy the market, rather than pick individual stocks, how does that look? Well, for all ISEQ stocks I see the Average Upside Potential at 19%. This is a little deceptive arithmetically, however, as upside on undervalued stocks can far exceed the maximum (100)% downside on overvalued stocks. A better approach is to calculate a mkt cap weighted average upside.

I’ll first include AIB to illustrate a point – the Average Mkt Cap Weighted Upside Potential is (40)%. Obviously, the average is dis-proportionately impacted here by AIB’s Mkt Cap, and my evaluation of its (71)% downside. My point is to beware of this kind of things when investing in a country fund/product! The risk is that a price anomaly like AIB’s causes a fund (which is tracking/hugging its benchmark) to allocate 43% of its assets into AIB. Yeah, I know this sounds absurd, but it has happened before and fund mandates/methodologies often meant this type of risk wasn’t monitored, or couldn’t actually be avoided…

These days, most funds/products are smart enough to restrict individual stock allocations to a specific max. %, and/or restrict/eliminate stocks that have a limited free float. [IIRC, AIB’s free float is only 0.2%! Presumably (?!), if AIB’s free float was substantially higher, some sanity would be restored in the share price through short-selling and/or a satiation of demand]. Always check this aspect when investing in any fund/product.

The best approach of the bunch is therefore Average Mkt Cap Weighted Upside Potential (excluding AIB). Unfortunately, this is also negative, with a (16)% downside. What a shame. This can be explained by a reposting of the ISEQ Top 10, by Mkt Cap, but with the Upside Potential now attached for each stock:

Stock Upside EUR Mkt Cap
Tullow Oil (76)% 15,658
CRH (20)% 10,850
Ryanair 11% 6,144
Kerry (28)% 5,705
Elan (49)% 5,600
B/I 108% 3,887
Dragon Oil (2)% 3,571
Aryzta 10% 3,247
Paddy Power (24)% 2,359
Irish Life & Permanent 82% 1,717

It also illustrates a classic problem with investing in country funds/products (especially true with index trackers, like ETFs). I’ll break this down into two components. The first is Exposure: Most funds will really only offer you exposure to the largest mkt cap/blue chip stocks. Sometimes this is intentional, and/or a minimum mkt cap is specified for all stock holdings. If not, the end result’s often similar as the top 10/20 mkt cap stocks constitute such a large weighting in a fund anyway. This table (for the ISEQ) serves as a good illustration:

Mkt Cap Segment % 0f Total Mkt Cap
Top 10 Mkt Cap 80%
Bottom 10 Mkt Cap 0.1%
Large Cap 93%
Medium Cap 6.5%
Small Cap 0.5%

This means you’ll be essentially foregoing the exposure/investment return from the majority of stocks in a market. In fact, in many markets, the largest mkt cap stocks are often the stocks with a higher level of international exposure (generally, small caps offer better domestic exposure).

The second is Valuation: This is something people forget about far too often. For me, and I suspect most value investors, the most popular blue chips in the market often appear fairly/over-priced (unless they’re ‘broken‘ in some way). If you wouldn’t buy these stocks individually, why would you buy them collectively? There’s also the more general problem of bubble valuations. Most funds will just keep merrily buying more of stocks that are soaring (simply due to their increasing mkt caps), no matter how over-valued they become. Oh, and at the same time, they are just as feverishly chopping their holdings in declining/unloved/under-valued stocks. ‘Buy high, sell low‘ has never been a big recipe for success, whether you’re trading or investing..! Do you really want to pay someone to manage your money on that basis?

So, does this mean the Irish market’s over-valued? When you consider the average mkt cap weighted overvaluation I highlighted above, it appears to be! Then again, being a value investor, if I looked at most other markets I’d tend to find large caps/blue chips over-priced in many instances.

There is a school of thought that says a low P/E & P/B market is no more or less attractive than a high P/E & P/B market – it simply reflects/equalizes the differing prospects & risks for each respective market. There’s some truth to this, of course, but I’d generally disagree as I think investing in a low P/E, P/B, P/S market is compelling (below a certain absolute cut-off point) as you’re really stacking the deck in your favour. Russia, for example, is on a P/E of just over 6 times! Sure, earnings will change this over time, but the market’s at a point where multiple compression is literally v difficult, while multiple expansion‘s a far easier future path for the market to take based on any improvement in sentiment, and/or unexpected newsflow.

In Ireland’s case, I haven’t tracked stocks & the market simply from a P/E perspective, but valuations appear to incorporate all possible bad news, any good news doesn’t appear to be discounted, cost structures are continuing to decline for Irish companies, we’ll see (presumably) see an increasing government emphasis on (and support for) export-led growth, and any potential European sovereign debt resolution would improve credit spreads/access.

I guess my best answer to the question is I don’t have to care! Yes, I’m not so keen to buy the Irish market (or funds, like the ISEQ 20 ETF (IETF:ID)), but I do see plenty of juicy individual Irish stock picks on offer!