Are these 11 shares a long-term buy?

The ones that got away

One of the frustrating things about relying on annual reports* is that, rather like rainfall, new information about companies is not distributed evenly throughout the year. This seasonality occurs because more companies coincide their financial year-ends with the calendar year-end, than any other time.

You might think the rainy season is upon us, but no, it can take months to put together an annual report. The regulations stipulate it must be published within four months of the year-end - six months for companies listed on the Alternative Investment Market.

While some companies are quicker, most take their time, which means that now is midwinter for annual report lovers, and our letterboxes or computer drives will only start filling when the flowers bloom in March and April. As summer turns to autumn, so too the flood of new information subsides.

A sensible squirrel will, of course, put something away for the winter, and over the year I noted the names of companies that may satisfy my criteria for long-term investment, but I have yet to research. I've augmented that list by asking people on Twitter for suggestions of shares to buy and hold and adding any company with an average cash return on capital of more than 8% over the last 10 years (using data from the estimable SharePad service).

A sensible squirrel will, of course, put something away for the winter

Then I decimated the list, in fact I reduced it by considerably more than one tenth if you prefer the more precise usage of the word, to derive a list of stocks that should, with a trickle of companies reporting, give me enough to investigate over the next couple of months.

Generally, I removed those shares costing more than 20 times adjusted profit, those we have yet to witness trading through thick and thin, those that have traded through thick and thin and produced insufficient returns, and those whose executives have no skin in the game. I've overlooked some of these sins if a company was sufficiently interesting in other respects. I've favoured companies that reported less than six months ago**.

It's a very fuzzy screening process, but I know of no better way. I analysed a lot of companies last year. These aren't necessarily better or worse than those, they're just the ones that got away:

Zytronic

New interfaces between man and machine are proliferating. Zytronic makes touchscreen overlays so sensitive they can be embedded under thick glass.

Topps Tiles

Since the financial crisis of 2008, leading UK tile retailer Topps Tiles has steadily reduced debt while growing by "outspecialising the specialists".

Character Group

Toy company Character Group is a nightmare for investors who crave steady profits, but over the long-term it's delivered strong returns.

Renew

Renew's subsidiaries maintain water, rail and telecoms infrastructure and build posh partly subterranean homes. These appear to be reliably profitable niches.

Compass

According to SharePad, caterer Compass has lifted return on capital from 7.5% in 2005 to 15% in 2010 and 20% in 2015. That alone merits attention.

Patisserie Holdings

A chain of cake shops that offer a uniquely sickly high street experience. Judging by the financials, Patisserie Holdings appeals to a lot of people.

Euromoney Institutional Investor

I like the idea of a big publisher that earns most of its revenue from subscriptions. Euromoney does (58%).

Sage

Always a stalwart, I can't ignore the upsurge in profitability at Sage, the giant provider of business software to small(er) businesses.

Carr's

The conglomerate is still grinding out profit despite moribund agricultural and energy markets. I'm intrigued by the sale of Carr's wheat milling business.

WH Smith

It never ceases to surprise me newsagent WH Smiths still exists. In fact it's thriving, kind of like a cockroach.

Murgitroyd

Growth is faltering at intellectual property law firm Murgitroyd. It could be temporary, the result of high levels of investment during a downturn.

Victrex reappraised

Last week I wrote about Victrex in glowing terms, but a reader emailed to prick my bubble. I'm grateful to him. Readers keep me honest. He wrote:

Years ago I used to like Victrex, because it had a monopoly on Peek; but recently the patent has run out.

To my mind the key prism through which Victrex should be looked at is whether it can successfully adjust to a newly competitive environment, which makes some of the historical metrics less relevant.

It's disturbing how this simple observation has revealed a weakness in the article, which acknowledged increased competition right up until the end, but concluded with a valuation that depended on profitability being maintained at the historical average.

Victrex's business model is changing, and the level of profitability in the future is uncertain. I think profitability will increase as Victrex uses up the extra manufacturing capacity it has invested in, but profitability doesn't just depend on the efficient use of assets, it also depends on profit margins, the difference between how much it costs to manufacture polymer and how much Victrex can sell it for.

This quote, from the annual report, indicates costs and prices are likely to change:

Our... strategy involves a move towards the production of selected semi-finished products and components and our cost of manufacture will start to increase to reflect this. However, our strategy also offers the opportunity to capture a higher value share of each application (rather than just the material cost). Remaining focused on growing absolute profits, rather than solely focusing on the gross margin percentage, remains a priority for Victrex.

The strategy is different, and the outcomes will be different too. That doesn't make Victrex a bad investment. But it requires some faith in management.

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*There are good reasons to rely on annual reports. For a start they are primary sources, unfiltered by all the other vested interests and dubious intellects populating the market, and they contain a lot more information than other documents.

**If companies published their annual reports more than six months ago, I might as well wait for the next one!

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

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.