Interactive Investor

Top 20 shares to buy and hold

22nd July 2016 15:29

Richard Beddard from interactive investor

This month, three former stockmarket darlings appear in the Decision Engine's top 20 shares to buy and hold.

The decision engine ranks shares using judgements and statistics to identify good companies at cheap prices. While the rankings are rough and ready, the highest-ranked shares should be more profitable investments than the lowest over a decade or so. Even the lowest fit many of the Decision Engine's criteria, though, so it should be identifying the best of a good bunch.

Generally, a highly ranked investment will be uncomplicated, profitable and self-funding, stable yet resilient, with straightforward accounting and experienced managers that stand to benefit financially through their ownership of shares. The Decision Engine will probably never find a company that fits all the criteria perfectly, though. Ranking shares always involves trade-offs often between factors we only understand imperfectly.

This is the top 20:

Rank

Name

Description

1

Castings

Manufactures cast iron parts for commercial vehicles: exhausts, transmissions and gearboxes for example.

2

Science

Does scientific research and product development for customers in medical, industrial, consumer and energy industries. Provides strategic advice.

3

Next

Retails clothes and homeware.

4

Goodwin

Casts and machines large components for the oil and gas, construction and defence sectors. Also processes minerals for casting jewellery and tyres.

5

Dewhurst

Manufactures components for lifts, keypads and railway rolling-stock, particularly pushbuttons.

6

Solid State

Manufactures and distributes specialist electronic components and computer systems, used in harsh environments where enhanced durability is a requirement.

7

BrainJuicer

Uses proprietary market research techniques to test people's emotional response to advertisements and concepts.

8

FW Thorpe

Manufactures Thorlux incandescent and LED lighting systems for factories, offices and shops, also signage, and road and tunnel lighting.

9

James Halstead

Manufactures flooring for offices, shops, factories, hospitals, schools, sport and leisure venues.

10

Victrex

Manufactures and develops applications for PEEK, a polymer often used in place of metal where durability and lightness are paramount.

11

Portmeirion

Manufactures tableware. Owns Portmeirion, Spode and Royal Worcester brands.

12

XP Power

Designs, manufactures and distributes power adapters for industrial and healthcare equipment.

13

Dart

Flies holidaymakers to European destinations and provides packaged holidays. Also transports groceries in Britain.

14

Universe

Designs and supplies payment and loyalty systems for petrol stations and retailers.

15

Sprue Aegis

Designs and distributes smoke alarms and carbon monoxide detectors.

16

Dillistone

Develops and supplies recruitment software to recruitment companies

17

Howden Joinery

Manufactures kitchen cabinets and supplies complete kitchens to small builders.

18

Wynnstay

Manufactures and trades feed, grain and fertiliser. Operates country stores and pet shops.

19

Cohort

Supplies technology, services and consultancy to governments and defence contractors.

20

SThree

Specialist recruiter providing skilled scientists, engineers and technicians to ICT, engineering, banking, energy sectors.

Top-ranked Castings, which manufactures parts for commercial vehicles and cars, published its annual report in June. The company says success over many years is due to investment in the latest technologies and manufacturing processes, through thick and thin. It can afford to maintain its capabilities at the highest levels because it retains cash to fund investment whenever it's needed, even when demand for trucks is relatively low and Castings' profitability is under pressure. It's a simple formula, but Castings' competitive advantage may be that companies rarely have the discipline to follow it.

When disruption happens, it can happen very quicklyWhen I reported on Castings' performance in last month's Decision Engine update, a reader questioned whether the future would be as prosperous as the past. He thought I might be underestimating the threat posed by battery technology, which is developing apace and likely to bolster the popularity of electric vehicles at the expense of diesel and petrol engines. The impact on Castings could be significant, since electric vehicles generally require fewer parts. They don't, for example, have transmissions, which Castings manufactures.

Dealing with change

Obsolescence gives investors nightmares. My correspondent directed me to a YouTube video of a talk by an advocate of electric vehicles. The presentation starts with two photographs of 5th Avenue in New York. In the first photograph, taken at the dawn of the twentieth century, the traffic is drawn by horses. In the second, taken thirteen years later, it's propelled by internal combustion engines. There isn't a single horse in the picture. Instead there's a procession of cars. The message is clear. When disruption happens, it can happen very quickly. The internal combustion engine could meet a similar fate to the horse-drawn carriage.

Castings doesn't mention the threat to the internal combustion engine in the Principal Risks and Uncertainties section of its 2016 annual report.

The report also predated the UK's vote to leave the EU. Castings has made no statement on the possible repercussions, but, since it exports to the EU, the vote is another source of uncertainty.

Castings mostly supplies parts for heavy trucks - not a focus for electric car developersGenerally, good companies adapt to changes in their markets, but robust though Castings is, my correspondent's email scared me enough to put the question to its chairman Brian Cooke. He's worked at Castings since 1960.

Cooke says Castings mostly supplies parts for heavy trucks. Because of their weight, the distance they travel, and the sheer size of the batteries that would be required to propel them, trucks have hitherto not been the focus of electric vehicle developers.

Cooke says Castings has also won a contract to supply an estimated 70,000 differential housing castings a year for a Jaguar Land Rover vehicle still in development, demonstrating, perhaps, robust demand for auto components too, and manufacturer's current commitment to the internal combustion engine.

Castings, he says, is continuously evaluating new materials and technologies.

We don't know what Brexit means yet, but if the implications are clear next year, Cooke says the company will write something in its annual report then. In the meantime the pound is weaker, so Castings will make the most of the export opportunity.

There's a risk, if not two or three years out, then ten years outCooke's not one to speculate, which has served shareholders extremely well for decades while the internal combustion engine was the only way to haul cargo and people on a road. Reading Elon Musk's second 10-year plan for Tesla, the electric vehicle company he founded, I wonder though.

Ten years ago, his first "master plan", to build an electric sports car that would fund the development of an affordable electric car, would have seemed like science fiction, had I read it in 2006. Today, in 2016, I have a neighbour who leases an affordable electric car.

Part two of Tesla's plan includes heavy trucks, vehicles with solar roofs, and factories that are five to ten times better at producing vehicles. I have no idea how much of that will come true, how quickly. But I think my correspondent has a point. There's a risk, if not two or three years out, then ten years out, and it would be easy to underestimate it.

Three return to the top 20

This month I've bowed to the Decision Engine by adding two highly-ranked Shares to the Share Sleuth portfolio, the model portfolio I manage. They are Next, the famous retailer, and Solid State, a smallish manufacturer and distributor of custom electronics.

Portmeirion, the manufacturer of dinnerware and, since the acquisition of Wax Lyrical last year, candles, may well be another good company entering value territory because of uncertainties that will prove short-lived. The company thinks so. It's planning to raise the interim dividend despite warning profits for the full-year are likely to be "materially" below the record set in the year to December 2015.

People are spending less on luxury goods in the Far East, the company says, in particular Portmeirion's third-biggest market in South Korea remains weak. An 18% decline in sales last year was Portmeirion's first big setback in South Korea since it started trading there almost two decades ago. The company also reports weaker demand in the UK pre- and post-Brexit.

Dart returns to the Decision Engine's top 20. The company, better known as holiday airline Jet2.com and grocery distributor Fowler-Welch, announced that it doubled profit in the full-year to March 2016. If the increasingly uncertain economic and political backdrop in Europe is giving investors pause for thought, especially when Jet2 has committed itself to a large order of planes, Dart's chairman and founder, Sir Philip Meeson, seems unconcerned:

"...we are confident that our customers will need our specialist food distribution services and will be keen to travel from our rainy islands to the sunspots of the Mediterranean, The Canaries and to European Leisure Cities."

Specialist food distribution is a sideshow though. Jet2, which has developed a highly profitable integrated package tour business, has provided the momentum behind Dart's impressive growth over the last 10 years.

Cohort, perhaps, completes this trio of growth companies at attractive valuations. At the end of June, the company, which supplies defence technology, reported full-year results for the year ending April 2016. Revenue increased 13%, profit increased 23% and Cohort acquired a majority stake in EID, a Portuguese supplier of military hardware that, conveniently, gives Cohort a post-Brexit base in the EU.

Renishaw and N Brown have dropped out of the Decision Engine's top twenty for different reasons.

Renishaw's share price has risen about 50% this year, which depresses the valuation component of the Decision Engine's algorithm and makes it a less attractive investment. It's lurking just outside the top 20, and it probably remains a good long-term investment.

N Brown has fallen further down the rankings after I thought again about the risks inherent in its rebirth as an internet retailer.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard

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