Today, I see many opportunities, but that doesn't mean all these stocks make it into our selection—far from it.
The two main reasons a stock isn't selected are the price and the fact that its future is too difficult to predict. These are companies I don't spend too much time on, as it often becomes clear within 10 to 15 minutes.
During the survey, I was asked to provide examples of companies that didn’t make the cut but that I spent more time on. Today, I have two examples, each with a specific reason why they ultimately ended up in the "no" pile, and it had nothing to do with the price. Hopefully, this gives some insight into how I work.
Originally, I had three examples, but as I started writing down why the third company was rejected, I wasn't convinced by my own arguments anymore. So, I deleted that part.
I'll take another look at that company in a few weeks with a fresh perspective. This is part of investing and searching for opportunities; sometimes, you have to do the same work multiple times before you're sure. For those interested in researching it themselves, the third company was the American firm Alico.
Digital Value
Digital Value is an Italian company specializing in providing IT services and solutions for large enterprises and public institutions. The company focuses on digital transformation, offering services in cloud computing, cybersecurity, networking, data management, and IT infrastructure.
Digital Value collaborates with major technology providers to deliver innovative solutions tailored to clients' specific needs. It operates in various sectors, including finance, telecommunications, energy, and the public sector. The company is known for its expertise in integrating advanced technologies to optimize business processes and improve operational efficiency.
The company caught my attention through a stock screener, which I use to find undervalued companies. I employ various methods, such as price/book value, EV/EBIT (enterprise value divided by operating profit, where enterprise value includes market value plus net debt), or EV/EBITDA, which excludes depreciation and amortization, unlike the first screener.
When I saw ratios of 0.88x TEV/EBITDA, 1.2x EV/EBIT, and 0.75x price/tangible book value (excluding goodwill, patents, etc.), the last one stood out, especially for an IT company.
When selecting stocks through a screener, instead of generating ideas through reading or other investors, I always start by looking at the numbers. I don’t focus on stock price movements or read news articles.
With a company like Digital Value, showing such ratios, I try to figure out from the numbers what might be wrong. And I found nothing. The debt ratio is low, liquidity is sufficient, there’s no slowdown in the figures, and growth is stable at around 20%. Returns are also high: a return on equity (ROE) of 23.5% and a return on capital (ROC) of 14.2%.
The numbers showed no red flags indicating any issues.
The next step is to investigate the management, and that’s where it became clear. The CEO was repeatedly filmed paying bribes to government officials to secure projects.
Here, my method worked against me. If I had checked the stock price, I would have immediately noticed the 75% drop in one day and quickly discovered the situation through a simple search.
Despite this, I still stand by my approach: first look at the numbers without bias. This works best when you know nothing about a company. For well-known companies like Stellantis, it wouldn’t work as well. But for a company like F.I.L.A., it would have had no chance otherwise—who still believes in paper and writing instruments?
Crest Nicholson
Crest Nicholson is not an unfamiliar name. We know this British homebuilder as a takeover target of our own Bellway. Bellway ultimately decided to withdraw from the acquisition because Crest Nicholson faced damage claims for poorly applied stucco on several facades. Bellway had similar issues and cited this as the reason for backing out.
When Crest Nicholson then appeared in a search because it was trading below its NCAV, it naturally caught my interest. NCAV, or Net Current Asset Value, is the value of current assets minus all liabilities. Current assets include cash, investments, receivables, inventory, and other items that can be quickly converted to cash.
A stock trading below its NCAV is very cheap, and there's often a reason for that. In this case, I suspected the damage claims were the cause. Otherwise, Crest Nicholson seemed like a solid company.
It’s important to note that most of Crest Nicholson's NCAV consists of inventory, specifically land and buildings, whether partially finished or not. That's a type of inventory I can usually accept.
However, if you look further back into their history, you’ll see that Crest Nicholson has had to make significant write-downs on that inventory several times. They valued it too optimistically during good times, which doesn't align with our conservative approach. Due to the combination of damage claims and their valuation practices, this stock also ended up in the "no" pile.
Articles and Updates this week
Investor AB published Q3 numbers
Read the update of Investor AB: Strong holding, but also strong price?
On Tuesday, the article Cheap is the Foundation was published.
Tomorrow, the update on Bonava will be released. What I can already reveal is that today's price increase is mainly due to the positive outlook.
Next week will be busy. Not only will several of our companies present their results, but I’ll also introduce a new stock—at least, if further research goes well.