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I've finally tackled a project that's been top of my to-do list ever since starting my value investing blog:

I wanted to identify all the listed Irish companies out there, (RE)-acquaint myself with their business fundamentals and financials, come up with a rough and ready valuation for each stock, and thereby arrive at a list of the most potentially under- and over-valued Irish stocks.

And what better time to invest in Ireland than now, after the crash, and with valuations still a little fragile..? If it's good enough these days for Wilbur Ross and Prem Watsa, it should certainly be good enough for the rest of us!

If you'd like to follow the entire blog series (in greater depth) on my Great Irish Share Valuation Project, here's the first post, and the latest. I've another 20 or so foreign-listed stocks to work through, but I've now finished with all 54 ISEQ-listed Irish stocks. When you consider Irish stock performance, or are investing in an Ireland focused fund, it's only these ISEQ stocks that will (likely) be relevant. This is therefore a good point to pause and provide some interesting stats & comments. Note I'm mostly going to exclude Allied Irish Banks (AIB), however, from my analysis because of its utterly absurd Market Cap. [For reference, AIB's Mkt Cap is EUR 56.5 bio, and per my fair valuation has 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 (EUR mio):

Stock

EUR Mkt Cap

Tullow Oil (OTCPK:TUWOY)

15,658

CRH (CRH)

10,850

Ryanair (RYAAY)

6,144

Kerry (OTCPK:KRYAY)

5,705

Elan (ELN)

5,600

Bank of Ireland (IRE)

3,887

Dragon Oil (OTCPK:DRAGF)

3,571

Aryzta (OTCPK:ARZTY)

3,247

Paddy Power (OTC:PDYPY)

2,359

Irish Life & Permanent (OTC:ILPMF)

1,717

If you prefer to frolic 'round at the other end of the spectrum, here's the ISEQ Bottom 10, by Mkt Cap (EUR mio):

Stock

EUR Mkt Cap

Ovoca Gold

23.7

Worldspreads

17.5

ISEQ 20 ETF

17.5

Conroy Gold (OTC:CDMDF)

9.4

Merrion Pharm (OTC:MNHPF)

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 a simpler, and more elegant, solution. Just divide the market into thirds!:

Mkt Cap Segment

Mkt Cap Range

Mkt Cap Avg (EUR mio)

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 my ISEQ Top 10 Undervalued Stocks:

Stock

Upside

Petroneft (OTC:PNFTF)

554%

Prime Active Capital

427%

Aer Lingus(OTC:AELGF)

143%

Worldspreads

117%

Donegal

113%

Bank of Ireland

108%

Smurfit Kappa (OTCPK:SMFTF)

98%

Total Produce (OTC:TTPPF)

94%

Irish Life & Permanent

82%

FBD (OTC:FBDHF)

67%

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

Stock

Upside

Elan

(49)%

Greencore (OTCPK:GNCGY)

(56)%

Tullow Oil

(76)%

Great Western Mining

(79)%

Kenmare Resources (OTC:KMRPF)

(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.

A better approach 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 (EUR mio), 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

There's also the classic problem with investing in country funds (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

% of 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 news flow.

In Ireland's case, I haven't tracked stocks & the market simply from a P/E perspective, but valuations now 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 iShares MSCI Ireland ETF (EIRL) or the New Ireland Fund (IRL) CEF), but I do see plenty of juicy individual Irish stock picks on offer!

Source: Time To Try Some Luck Of The Irish