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value investing

Bermuda's stock exchange is a Lilliputian among the world's bourses, a tiny market listing 15 domestic companies. Most days, it's trade by appointment only: shares go for months on end without any activity, and when they do change hands, it's usually in modest volumes.

But this sleepy corner of the world's capital market holds some interesting plays for deep-value investors. The market is one of the least-expensive around, and holds many bargains, provided investors are patient and don't mind being limited to buying small amounts of stock.

The reason it's cheap: this obscure market, located on a subtropical vacation island in the middle of the Atlantic Ocean, is chock-a-block full of small-caps and micro-caps, businesses that are overlooked by most investors because of the tiny amount of stock outstanding.

The combined value of all the domestic companies on the exchange is around $2-billion (U.S.) or about the same as a medium-sized Canadian company like miner HudBay Minerals. The size makes the companies unappealing to institutions that need to own easily tradable securities they can buy in enough bulk to make an impact on their results, while the lack of name recognition means most individual investors who aren't familiar with the island have never heard of them.

Cheap, cheap, cheap

"You can certainly make the case that it's undervalued," says Jeremy Dyck, a broker at LOM Securities (Bermuda) Ltd., of companies on the exchange.

Mr. Dyck is one of the few analysts who follow Bermuda companies. "I've been advising some clients … to take a look at some of these stocks at certain prices."

The stocks are ideal for long-term buy-and-hold investors, provided you are "happy with a large dividend and you don't mind not having too much liquidity," he says.

Among the interesting stocks is Bermuda's Ascendant Group, the country's biggest energy utility. It trades for half of book value and sports a 4.4-per-cent yield, according to figures compiled by the exchange. The exchange's other two utilities also trade at a fraction of book, and one of them, KeyTech, has an even juicier 6.5-per-cent yield.

Three of the banks change hands around book value or just slightly above, compared to Canadian banks that go for double book value and even more. Among these beaten down banks is Bank of NT Butterfield, the country's biggest capitalization stock at $835-million, in which Canadian Imperial Bank of Commerce recently made a major investment.

Bermuda's two listed insurance companies, Argus Group and BF&M Ltd., trade at single-digit price earnings multiples, another rarity.

Because the shares on the exchange seldom trade, Mr. Dyck recommends placing limit orders, or orders to buy stock at a fixed price. The Bermuda dollar is pegged at the same value as the U.S. dollar.

He believes Bermuda stocks as a group have been beaten down because the island's economy is heavily dependent on insurance and other financial industries, the businesses that have been hammered by the international banking crisis.

One Problem

There is one potential difficulty in buying Bermuda stocks. The country requires that 60 per cent of shares to be held by residents, restricting the amount available to offshore buyers.

The stock exchange has been trying to raise its profile. Stock exchange president Gregory Wojciechowski was in Toronto last week pitching Bermuda to investors.

The exchange is trying to broaden its offerings, and lists some esoteric securities, such as insurance bonds whose payouts are linked to whether or not catastrophes such as earthquakes and hurricanes occur, as well as securities based on Indian and Chinese stocks.

Mr. Wojciechowski says the domestic stocks on the exchange are inexpensive. "These things are hugely undervalued," he says. "That's why they don't turn over."