10 top shares for 2012

If you put a gun to my head and forced me to pick the 10 UK companies I would be happiest to invest my own money in, the companies I would choose would have strong finances, they would be making products or providing services we are likely to need over the next 10 years and their shares would be trading at cheap prices.

It's a short list of requirements, but it's an exacting one because good company shares rarely trade at cheap prices. However, shares in two groups of good companies do often trade at low prices.

First, there are the 'reliables'. These companies are dull but consistently profitable without recourse to large amounts of debt. Because they are not in exciting sectors and don't make the headlines, their strengths are unappreciated by many investors.

The second group consists of the 'recoveries'. These companies have hurt investors, and the memory of the financial loss keeps investors away even when the problems that caused the pain are receding.

Since investing in such companies means investing in firms that are out of favour, the immediate prospect of a rise in their share prices is poor. Investors must change their minds about reliables and recoveries for the value in them to be realised, and that can be a slow process. The situation that creates the opportunity - a lack of interest - means investors overlook the evidence of impressive financial performance until it can no longer be ignored.

Reliables and recoveries don't always reward investors, but because they're conservative businesses and their share prices aren't hyped, they should be of interest to investors prepared to hold shares for as long as it takes for other investors to take notice.

My editor has metaphorically pointed the gun. So here are my top 10 share picks. Not surprisingly, these are in the Thrifty 30 portfolio, which you can follow on the Interactive Investor blog.

Autologic

Judging by its financial performance over the past two years, vehicle transporter Autologic appears to be turning itself around. Chief executive Avril Palmer-Baunack says the company's prolonged restructuring is complete and, amid miserable conditions in the industry, it's profitable once again and receiving income from a more diverse range of services.

The share price, however, continues to decline slowly. Ultimately, the lie behind one of these two trends will be revealed. My money is on Palmer-Baunack and finance director Andrew Somerville to complete the turnaround, as they did at Universal Salvage in 2007, but I'd be even more confident if their money was on Autologic - neither owns shares.

Castings

As its name suggests, this company makes castings that are subsequently machined into components, such as differentials and steering knuckles for trucks, tractors and cars. It exports 60% of its sales to companies such as Scania, DAF and BMW.

Castings remained profitable through the recession and emerged stronger from it, so its shares are not as cheap as they were. It's trading at a reasonable 1.5 times book value and it typically earns a 13% return on equity. But Castings is a financial fortress, so maybe it's one to watch, and buy if the market falters and short-sighted investors sell.

Colefax

Colefax may be the archetypal safety-first investment: profitable, unburdened by debt and operating in a prosaic business - upmarket fabric and wallpaper. It owes its stability to chairman and chief executive David Green, who has been in charge since 1986 and owns almost a third of the shares.

Green is downbeat about the company's immediate prospects, even though 2011 seemed to herald a return to pre-credit crunch levels of profitability when profits were enhanced by the completion of major decorating projects. Economic uncertainty and high cotton, linen and silk prices mean a full and sustained recovery could be years away.

Meanwhile Colefax continues to buy back shares, and since Green has a lot to lose if the company turns out to have paid inflated prices, he must be confident that the shares are cheap.

Dewhurst

Lift component manufacturer Dewhurst maintains high levels of profitability without recourse to debt and there's a controlling family interest. Short-term investors dislike controlling interests because they block potentially quick routes to profit, but for long-term investors, stability can be an asset.

Dewhurst reached record levels of turnover and profit in 2010. Sales rose again in 2011 according to recent full-year results. But falling demand in the UK - due to reductions in public spending - dented profits, as will rising costs as the company spends money on a new factory and integrates three small acquisitions.

However, it has proven management, and still-strong finances. I expect any damage to be limited and share-price weakness to be an opportunity for investors.

French Connection

Earlier this year, fashion brand French Connection returned to profitability after two years of losses forced it to close many of its foreign stores and dispose of designer brand Nicole Farhi.

Its wholesale division, which supplies international joint ventures, franchises and other retailers, is growing. But retail stores in the UK, Europe and North America are still losing money. This situation is looking intractable while customers remain frugal because French Connection is tied into long-term leases it cannot easily shed.

While a very low share price makes this iconic brand attractive to value investors, the payoff could be years away and depends on founder and majority shareholder Stephen Marks' ability to wring profit from his stores or get rid of some of them.

Games Workshop

War gaming hobby store Games Workshop is the most unusual company in my selection. It invented the fantasy world customers inhabit whenever they play Warhammer and its derivatives using Games Workshop rules, scenarios and, most importantly, model soldiers.

Its share is unusual in being both a reliable and a recovery share. Games Workshop has recovered from an expensive expansion that undermined its profitability. A return to its war gaming roots has restored profitability.

I think its share has the most earning power and would countenance a price of 2.6 times book value, making it by far my most expensive selection on this measure.

Haynes Publishing

If you think of a motor manual propped on the cylinder block of an old Cortina when you think of Haynes Publishing, you've probably missed the publisher's diversification into a wide range of lifestyle and leisure titles.

The catalogue of forthcoming releases is crammed with distinctive titles and Haynes is still conservatively managed - it has cranked out profit without incurring debt.

Digital technology is revolutionising publishing, which makes the future unpredictable and investors wary of publishers' shares. However, Haynes operates in a niche and its acquisition of a European electronic publisher of workshop manuals in 2008 will allow it to grow beyond its traditional English-speaking markets and develop online manuals and ebooks.

International Greetings

For two years now, greetings card, gift wrap and Christmas cracker producer International Greetings's mantra has been about increasing profit and paying back debt, exactly what I want to hear from companies that have erred. Its new chief executive is concentrating on the basics: reducing production costs, targeting major retailers and focusing on profitable products.

FW Thorpe

Since 1936, FW Thorpe has been designing and manufacturing lights under the Thorlux brand - and the Thorlux division remains by far its biggest.

Thorpe is a truly reliable company. Despite the fact that its light fittings and control systems are installed in public and commercial buildings, such as hospitals, shops, laboratories and prisons, the company has remained highly profitable through the recession. Refurbishment programmes have continued during a drive to reduce energy costs.

Quality like this comes at a price, but it's an affordable one - 1.6 times book value.

Victoria

Profitable carpet maker Victoria is the newest addition to the Thrifty 30 portfolio (Money Observer, November 2011). Its business is in recession in the UK. However, more of its sales come from Australia, which gives it some diversification.

With property prices falling in Australia and the economic outlook in the UK looking grim, Victoria is planning to build its brand, rather than grow, in the year ahead. For patient investors, the shares are surely good value. They trade at only half book value.

Richard Beddard is companies and markets editor of Interactive Investor. You can follow these shares, and the rest of the Thrifty 30, on his blog.