Nine top picks for the future

This month no companies have dropped out of my list of top picks for the future, and four companies join it as we expand coverage to all of the 50 or so companies tracked in the Share Sleuth spreadsheet.

These are the most promising long-term investments, those I'd add to the portfolio today if I were starting again, yet they're unfancied. Their immediate prospects may be grim or perhaps they are unfashionable businesses that should nevertheless prosper over the next five to ten years.

Low demand for the shares may be providing the opportunity to buy them at favourable prices, but there are no guarantees. So-called "value traps" keep on getting cheaper until they wink out of existence because the business is fundamentally flawed. Apparently good companies often continue declining in market value until events change investors' minds. Deciding whether a company is misunderstood, or in permanent decline, is a matter of judgement. Timing is difficult.

The companies in this list share many of the qualities I believe identify highly profitable businesses that should remain so. Strong finances and high levels of return on capital suggest past profitability, the strength of the company's business model, how it makes money, and the credibility of its strategy, how it will make more money, indicates future profitability.

To hold these shares through thick and thin and identify misjudgements it is essential to understand the risks the companies face, which is why I focus on what could go wrong, as well as what should go right. Most companies strive for profit, but it only happens over the long-term if things don't go badly wrong.

The hyper-linked company names heading the profiles below lead to more detail on the promise and pitfalls of investing in these companies.

Animalcare

Along with FW Thorpe and Treatt, Animalcare is rated relatively highly by the market, which is why it did not appear when this list was restricted to five picks. The company, which manufactures generic pet medicines and supplies pet ID and veterinary products is valued at about 13 times adjusted profit in 2014, although following a strong performance in the first-half, profit in 2015 is likely to be significantly higher. The earnings yield is 8%. Already a strong, stable business, it’s financing the development of enhanced, and therefore unique and potentially more valuable, medicines. The risk Animalcare might not succeed is mitigated by the fact the existing business is probably worth the asking price.

Brainjuicer

Quirky market research agency Brainjuicer published its full-year results in March. Growth in recent years has not matched the levels recorded by the company when it was smaller, leading BrainJuicer to moderate shareholder expectations because, the company says, it takes time to change the habits and beliefs of customers.

Rival agencies are starting to adopt techniques of behavioural science similar to those BrainJuicer is pioneering, but BrainJuicer believes the industry giants cannot embrace major changes without invalidating their traditional research methodologies. Young nimble agencies, on the other hand, would have to work hard to replicate BrainJuicer's intellectual property.

There is a risk the company, which is for the first time mooting acquisitions, will resort to short-term tactics to boost profit, but that would require an about-turn in its strategic thinking. At 380p, the shares are valued at about 12 times 2014 earnings, The earnings yield is 8%.

Castings

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 shares cost 385p, valuing Castings at 9 times adjusted 2014 profit, an earnings yield of 12%. Although the company will not have earned as much profit in the financial year that closed at the end of March, it probably will again soon. Vacillating profitability is a feature of the industry it supplies with cast iron parts and not indicative of problems at the firm.

Dewhurst

Probably the most undervalued company of the nine, Dewhurst shares cost 550p, or about seven times adjusted 2014 profit. The earnings yield is 15%. The family-owned manufacturer of pushbuttons for lifts and ATMs as well as component systems is performing well, as it usually does, but investors seem to be completely disinterested.

FW Thorpe

Lighting manufacturer FW Thorpe is nearing the end of its financial year. Although the shares are not obviously cheap - a share price of 155p values the shares at about 15 times adjusted 2014 profit - half-year results published in March indicate that 2015 profits will be significantly higher. The earnings yield is 7% of adjusted 2014 profit. Although Thorpe is carrying the cost of maintaining increasingly outmoded ranges of traditional incandescent lighting systems in addition to the LED systems now responsible for the majority of revenue, it’s handling the transition well. The company is broadening its reach to street lighting and export markets in Europe.

Goodwin

Engineer Goodwin has a tremendous record of profitable growth but, temporarily at least, it's coming unstuck because of falling demand from the oil and gas industry, principally for check valves that control the flow of oil in pipelines and rigs. The company says 60% of revenue comes from oil and gas, and as oil prices are low - and consequently energy companies have cut investment - it will seek to engineer more components for other industries, defence, and large civil engineering projects primarily. The impact of the downturn will only be partly felt in 2015's results, as the company has been working on orders won prior to the collapse in oil prices at the turn of the year, so uncertainty about Goodwin’s prospects is likely to continue beyond the publication of full-year results in the summer.

The earnings yield, based on profit earned before oil companies started reducing investment and a share price of £22.12, is 12%. The shares cost eight times adjusted 2014 profit. While recent earnings are unlikely to be repeated for a while, longer-term Goodwin should prosper as it adapts, and oil prices recover.

Rolls-Royce

Engine manufacturer Rolls-Royce has experienced a period of modest contraction, due to reductions in NATO defence spending and is also under pressure due to falling investment in the oil and gas industry. Fortunately, its biggest market, civilian aero-engines is prospering, although it must invest heavily to meet demand.

Long-term, very few companies have the financial strength, engineering expertise, and intellectual property to build advanced engines and service them for decades, though, 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. At 950p, Rolls-Royce shares cost 12 times adjusted 2014 profit. The earnings yield is 8%.

Sagentia

Research and development consultancy Sagentia reported full-year results last month. As expected, revenue and profit contracted slightly due to unfavourable exchange rates as the company earns much of its income in dollars, but the company's commercial focus is still delivering high levels of profitability unrecognised in its valuation. A share price of 150p values the company at about 11 times earnings. The earnings yield is 9%.

Treatt

After a slightly protracted courtship, flavour processor and manufacturer Treatt joined the Share Sleuth portfolio in March, you can read all about it here. The shares currently trade at about 150p, 14 times adjusted 2014 profit or an earnings yield of 7%.

ShareSoc Investor Masterclasses

I'm on the panel at the next ShareSoc Masterclass where four investors will discuss how we construct and manage our portfolios, how we avoid value traps, and a company: Plus500. If you'd like to join us in Peterborough on 23 April it costs £35 for members and £60 for associate/non-members, who also receive six months free membership. ShareSoc is the UK Inidividual Shareholders' Society.

The masterclass is part of a bigger event, The Mello Investor Workshop, on 23 April and 24 April. General admission is not required if you only attend the Masterclass, but, if you wish to attend other workshops and company presentations you can get £20 off the price of one day's admission, or £35 off both days, using this booking code: STOCKDISC.