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15 shares for the future
By Richard Beddard | Fri, 8th January 2016 - 15:10
The process isn't scientific. In calculating valuations and weighing up the strengths of businesses, I feed the engine with my judgements. I am constantly feeding it new companies, which means I know some companies better than others. When my understanding changes, it affects the rankings.
The conceit is, human judgement adds value. The popularity of index tracking funds and the attention given to mechanical trading strategies, both of which eschew judgement in favour of rules implemented by computers, indicates this is an unfashionable view. But I don't think computers are very good at selecting shares for the long-term, and I'm putting my judgement to the test, tracking the performance of the human-powered Share Sleuth portfolio.
The decision engine helps me make sense of a large amount of information. It doesn't take decisions for me, it helps me make decisions.
The shares for the future are the shares ranked most highly. If I were to start a new portfolio today, I would start with these.
|Name||Yr end||Company description|
|GDWN||Goodwin||Jul 2015||Manufactures valves, pumps and other large components for the oil and gas, construction and defence sectors. Also processes minerals used to make moulds for jewellery and tyres, and fire resistant minerals|
|DWHT||Dewhurst||Sep 2015||Manufactures components for lifts, keypads and railway rolling-stock (e.g. pushbuttons, signals)|
|SAG||Science||Dec 2014||Does research and product development for customers in medical, industrial, consumer and energy industries, advises.|
|CGS||Castings||Mar 2015||Manufactures cast iron parts for commercial vehicles: exhausts, transmissions and gearboxes for example|
|BJU||BrainJuicer||Dec 2014||Uses home-grown market research techniques to test peoples' emotional response to advertisements and concepts|
|RSW||Renishaw||Mar 2015||Manufactures probes, sensors, gauges and fixtures enabling other manufacturers to calibrate, test, and control the performance of their machines.|
|CFX||Colefax||Apr 2015||Designs and distributes wallpaper and fabric to decorators and stores. Also decorates houses, sells antiques and manufactures furniture.|
|LTHM||James Latham||Mar 2015||Imports and distributes panel products (MDF, plywood etc.), engineered wood, and timber|
|TET||Treatt||Sep 2015||Sources and processes essential oils, which are ingredients used in flavours, fragrances and cosmetics. Develops flavours.|
|PMP||Portmeirion||Dec 2014||Manufactures tableware. Owns Portmeirion, Spode and Royal Worcester brands|
|VCT||Victrex||Sep 2015||Manufactures and develops applications for PEEK, a kind of super-plastic and other similar polymers.|
|VP.||Vp||Mar 2015||Rents out specialist equipment and tools to construction, engineering, transport, oil and gas and events businesses, and individuals|
|ANCR||Animalcare||Jun 2015||Supplies generic and enhanced pet medicines. Also supplies pet identification and veterinary products.|
|RR.||Rolls-Royce||Dec 2014||Designs, manufactures and services power systems for planes, trains, boats, subs and power generation|
|ITE||ITE||Sep 2015||Organises trade exhibitions and conferences, especially in Russia, Eastern Europe, central Asia and other emerging regions.|
As usual you can find out more about the companies mentioned in this article by clicking on their names.
Latham, Treatt, Victrex, and Portmeirion are not obviously cheap. They trade on earnings yields of around 6%, equivalent to about 17 times adjusted profit. They are probably good businesses, though.
Superficially, shares in ITE and Rolls-Royce are much cheaper, however events have raised questions about the strength of their businesses.
Goodwin is due a reappraisal. The company announced interim results in December, which I have yet to evaluate. The key question for long-term investors is whether it can sustain a reasonable level of profitability irrespective of the oil price. The oil price is significant because Goodwin manufactures large valves for oil and gas pipelines, probably Goodwin's most significant source of profit over the last decade.
Dewhurst, Treatt, Victrex, and ITE published full-year results in December that generally support their anointment as shares for the future, although with bottom-ranked ITE there is considerable uncertainty.
While lift component manufacturer Dewhurst resembles the fabled tortoise more than the hare, the virtues of slow and steady progress should be apparent to long-term investors.
Treatt continues to impress as the erstwhile essential oils trader strives to earn more from the supply of ingredients by developing new flavours and marketing them directly to drinks companies.
I'm less familiar with Victrex, having only recently started covering it again. Like Treatt, the company, which makes a polymer that is light and strong enough to replace metals in a wide range of demanding applications from aircraft to spinal implants, is attempting to move up the value chain by developing products, rather than just supplying the raw material. While growth has slowed, the company is a world leader and I think the strategy is promising.
ITE is walking a financial tightrope. It's acutely exposed to recession in Russia and central Asia due to low oil prices. While Victrex is returning surplus cash to shareholders, ITE is raising money to fund acquisitions in other, mostly emerging economies. The result, ballooning debt and falling profit, doesn't look good, but the company has flexible costs and remains profitable. It may well emerge stronger.
Tristel, which makes disinfectant foams and and wipes for hospitals, principally, is not ranked highly enough to be a share for the future because of its high market valuation. The shares trade on an earnings yield of 4%, about 28 times adjusted profit in 2015. The company's products are making inroads into hospitals worldwide, and having visited Tristel in Newmarket just before Christmas for its Annual General Meeting, I think it might be a share for the future regardless.
Happy New Year.
Just before Christmas I explained why I think AGMs are our best opportunity to learn more about a business.
I'm learning to process most of this information in my sleep. Seriously!
|Share Sleuth:||Objective | Top 50 | Who is Share Sleuth? | Performance|
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.