Five top picks for the future
6th March 2015 11:43
by Richard Beddard from interactive investor
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This month, there is no change in the top five picks from the 50-or so shares tracked in the Share Sleuth portfolio, good companies at attractive prices that should prosper over the long-term although their short-term prospects may be less rosy.
A month of sleuthing has unearthed no better shares to displace them, and February's news, while not always comforting, has done nothing to dislodge my faith in the enduring qualities of these companies.
Top five
On an earnings yield of 7% (price 385p), Brainjuicer is still priced at the top end of my comfort zone, but the market research consultancy's behavioural approach marks it out from the competition. It should publish full-year results later this month.
Iron casting manufacturer and machinist Castings, is experiencing lower demand from European truck and car manufactures but the company has weathered previous cycles only to emerge stronger and more prosperous. The earnings yield is 11%.
Dewhurst, perhaps first among equals in this list, published its annual report in February. I didn't like it. Not because of what it said. But because of what it didn't say. While the function of an annual report is to report on a company's progress in the year and the state of its finances at the year end (and the news from Dewhurst couldn't really be much better), fully listed companies are being encouraged by the Financial Reporting Council to be more explicit about their business models, how they make money, their strategies, how they plan to make more, and the principal risks, what might stop them. Dewhurst is AIM-listed, and not obliged to follow the new rules, which makes finding this fundamental information difficult. Everything I've learned in years of following Dewhurst is good though, and the earnings yield is highly attractive at 15%.
I'm slightly more nervous about Goodwin because of the potential impact of low oil prices. Goodwin has a tremendous multi-decade record of profitable growth, riding out short-lived dips in demand for oil, but it remains to be seen how the manufacturer of valves for pipelines and rigs copes with a potentially longer period of increased supply. However, the company is somewhat diversified and the founding family's long-term ethos has served it well for decades. Goodwin's earnings yield, based on profit earned before oil companies started reducing investment, is 11%. It publishes full-year results in the summer, but an interim statement may be imminent.
The behemoth of the group, Rolls-Royce, published full-year results in February. As the company had warned, reduced NATO defence spending caused a modest decline in revenue and profit, and though defence seems to be stabilising, falling revenues from the oil industry means profit is likely to fall again in 2015. Rolls-Royce supplies engines, parts and machinery for rigs and service vessels. Fortunately its biggest market, civilian aero-engines is prospering.
I think Rolls-Royce's long-term future will be prosperous. Very few companies have the financial strength, engineering expertise, and intellectual property to build advanced engines and service them for decades. The world needs more efficient engines and the company's four "C's" strategy, a focus on customer, concentration, costs and cash is probably the right one to maintain its advantages. Rolls-Royce's earnings yield is 8%.
Contenders
Among contenders for the top five, I attended the AGM of East Anglian flavours supplier Treatt. The company, formerly a distributor of essential oils, is attempting to develop novel flavours and sell them direct to drinks companies, by-passing its usual customers, the big flavour houses. These unique "Treatteromes", earn Treatt higher profit margins and should make it more profitable if they take off. Its earnings yield is only a marginally off-putting 7%.
Research and development consultancy Sagentia announced it had acquired another consultancy based in Cambridge, Oakland Innovation, and along with it about 30 more scientists. The company, which has more cash than it needs, failed to interest its major shareholders in a potential £10 million tender offer so it has shelved the plan. I wouldn't have been keen to sell either, the earnings yield is 11%, and although the company says profits in 2014 will be lower than they were in 2013 due to the strong pound, they're surely undervalued. Full-year results are imminent*.
XP Power's full-year results, showed again that the company is much more profitable as a manufacturer of power converters for industrial and medical equipment than it was as a distributor. It's earnings yield is 6%.
(*Sagentia's full-year results have now been published)
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