Six share tips for value investors in 2017
29th December 2016 12:20
by Richard Beddard from interactive investor
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This is the second year I've used my Decision Engine, a share-ranking process that identifies good long-term investments, to select three growth shares and three income shares at prices that probably undervalue them.
The Decision Engine process doesn't consider dividends. It focuses on the fundamental drivers of profitability and value: the strength of a company's business, its management and share price.
To qualify as an income selection, a share must meet an additional criterion. Dividends paid out in the company's most recent financial year must yield an above average return on the current share price - higher than the median dividend yield for UK shares, just under 3%.
Three of last year's selections, , and , are repeated this year. , an engineering company, manufacturing automation leader Renishaw, which saw a strong rise in its share price, and all miss out this time.
Value-based growth
Science
Share price: 145p*Â |Â Earnings yield: 8%Â |Â Dividend yield: 2.8%
Last year, Science changed its name from Sagentia to reflect the fact that acquisitions have turned it into a group of four consultancies.
It employs hundreds of scientists and technicians to do research and development for other companies and provide them with advice, serving an increasingly broad range of industries.
Having improved its own performance a decade ago by taking a more commercial focus, Science can probably do the same for the consultancies it has acquired.
Solid State
Share price: 420p | Earnings yield: 8% | Dividend yield: 2.9%
For a small company, Steatite subsidiary makes a wide range of products. Solid State Supplies, another subsidiary, distributes even more.
It's a manufacturer and distributor of electronics, specialising in rugged computers, batteries and communication systems. It makes most of the ticket machines you see ticket inspectors lugging on railway trains.
Manufacturing or customising these products is a specialised business. The company requires accreditation to handle dangerous materials and sensitive information, which also narrows down the competition. Like Science, it's growing by acquisition too.
Dewhurst
Share price: 665p | Earnings yield: 10% | Dividend yield: 1.%
Though Dewhurst depends on construction activity, it's proved resilient in tough times, and has grown fairly steadily since the current generation of the founding family took charge in the 1980s.
Dewhurst principally manufactures lift components, most famously push-buttons, but it's moving with the times, assembling control panels that incorporate touchscreens, and hall lanterns required by modern systems that direct people to the next available lift. It also supplies keypads for ATMs.
Value-based income
Next
Share price: 4,950p | Earnings yield: 9% | Dividend yield: 3.2%
In common with many other fashion retailers, by its standards is having a tough year. Despite new store openings, it's going to struggle to increase revenue in the year to January 2017, and profit is likely to contract by a few percentage points.
That, and perhaps wider concerns about the competition, knocked the share price into value territory. Next doesn't deserve to be there. It's highly profitable with a formidable mail-order operation that it's bringing online.
XP Power
Share price: 1,730p | Earnings yield: 6% | Dividend yield: 3.%
makes power converters similar to the common-or-garden converters in computers that convert alternating current to direct current, but designed especially for use in industrial and medical equipment, where reliability is essential.
Originally a distributor, XP Power took control of the product by designing and manufacturing its own converters about a decade ago, informed by its close relationship with equipment manufacturers.
It has opened modern factories in China and latterly Vietnam, where costs are low .
Portmeirion
Share price: 800p | Earnings yield: 8% | Dividend yield: 3.8%
Portmeirion is having a particularly difficult year in South Korea, its third biggest market, where it sells almost as much pottery as it does in the UK, its second biggest.
Even the US, where Portmeirion is prospering and earns over a third of revenue, will not save the company from a rare contraction in profit in 2016.
Portmeirion has enduring brands, though. Botanic Garden, popular in South Korea and the UK, was launched in 1972, while Spode Blue Italian celebrates its 200th anniversary this year.
Strong finances and a prosperous track record imply shareholders can hold in confidence for the dividend and a subsequent return to growth.
*All share prices correct as of 28 November
This article was originally published in our sister magazine Money Observer. Click here to subscribe.
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.
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