20 great value shares for your ISA

The Decision Engine is a giant spreadsheet that sorts good companies from bad, and overpriced shares from undervalued ones.

Today, the Decision Engine contains data on 56 businesses that I follow as a private investor and columnist for Interactive Investor and Money Observer, but that number is increasing as I add new companies. It scores each company by its valuation, the lower the better, and by its prospects of maintaining high levels of profitability.

The profitability criterion incorporates everything I think about when judging a long-term investment, including factors like the quality and motivation of management, how the company makes money and how it plans to make more (its business model and strategy), and the extent to which financial performance is susceptible to external forces (like recessions or raw material prices).

While the Engine is not precise, I believe the top 20 are better investments than the bottom 20Both criteria, valuation and my confidence in the business, are scored out of ten, then summed and ranked*.

Highly ranked shares may not perform particularly well in the short-term - their valuations are probably low for a reason - but their underlying qualities should shine through over many years. They should, in other words, be shares to buy and hold.

While the Decision Engine is not precise (the company in position five is not necessarily a better investment than the company in position seven) I believe that the top twenty are better investments than the bottom twenty and, if I were to start a new portfolio today, I would draw from the top of the list.

These were the highest ranked shares on 10 March:

Although the list is unlikely to change much in the short-term, you can see which shares are ranked highest at any time on the Share Sleuth pages of the Interactive Investor website. Once a month we publish an update reviewing developments, entitled "Shares for the Future".

The top shares in the top 20 scored 20/20, and the twentieth share scored 15/20. In contrast, the lowest-ranked of the 56 shares tracked by the Decision Engine scores 4/20. Controversially, perhaps, it's patent translator RWS, a company with a superb record of profitability that is something of a stockmarket darling.

By comparison, the highest ranked share, Goodwin, is a former stockmarket darling that has fallen out of favour because of diminished expectations for profit. Goodwin manufactures check valves for oil pipelines, for which there is much less demand than there was a year or two ago.

The contrasting fortunes of the top and bottom shares shows the contrarian design of the Decision Engine. RWS is highly rated by the market, but I wonder about the sustainability of profit as machine translation improves and as the European Union brings in its Universal Patent, a development that may reduce translation work. Goodwin's valuation has dropped very low, and I believe it has valuable products and expertise and alternative markets that will allow it to weather the downturn in the oil and gas industry and ultimately prosper.

I've created a model portfolio, investing 1,000 imaginary pounds in each of companies in the top 20 list. I've charged the portfolio £200 in broker's fees (£10 for each trade), and £50 in stamp duty in lieu of tax on the trades in companies listed on the main market of the London Stock Exchange (AIM shares don't attract stamp duty).

Every year I will replace any companies that have have delisted, gone bust, or been taken over. These eventualities are, to varying degrees, unwelcome and, thanks to the quality of the companies I have selected, they should be rare.

For the purposes of the test I'm defining the long-term as five years. Although that's at the very shortest limit of what might be considered long-term, it's probably long enough for companies' strategies to bear fruit.

On the fifth anniversary of the portfolio, I shall compare its performance with the bottom-ranked shares and shares invested in a FTSE All-Share Index tracking fund**. Then, perhaps, I will replace any shares in the portfolio that are no longer ranked in the top twenty with shares that are.

I expect the Decision Engine to come out on top by some margin.

*Here's a more detailed description of the Decision Engine and how it ranks shares.

**A test like this cannot be definitive, but perhaps it can be indicative. To be sure the strategy designed into the Decision Engine works, and the twenty top-ranked shares are not the equivalent of lucky die-roll, we'd need to test it over many five year periods. There probably aren't enough left in my investing lifetime!

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.