12 shares for the future: From chaos to order

Our companies analyst uses proven investing skills to identify a dozen stocks to buy for the long term.

What you read in these weekly columns is the output of my Decision Engine. Most weeks I score a business that I started out thinking might make a good long-term investment. Every fifth week you get a list of the companies I have scored. 

Occasionally, people are interested in what I feed into the Decision Engine, as opposed to the output. Since the last Decision Engine update, which due to an oversight was seven weeks ago, I have scored two companies for the first time: Bloomsbury (LSE:BMY) and PZ Cussons (LSE:PZC). 

It is thrilling to discover how a business makes money, how it will make more, and what might get in the way, for the first time. And the Decision Engine requires a constant trickle of new ideas to replace the shares that are removed, either because they delist, or because they do not turn out as expected, like Alumasc (LSE:ALU) and Colefax (LSE:CFX), which have joined the list of rejects, at least for now. Links to the profiles of these companies and all of the companies profiled recently are in the table below, so you can see how I scored them.

You news, you lose

So to answer that occasional question, even though I follow investors on Twitter and read business and stock market news for insight, investment ideas don't generally come from these sources. 

It sounds horribly egocentric, but it is very easy to be swayed by the stories other investors or journalists are telling. If we are to hold a share through thick and thin, we can do so more confidently if we have formed our own opinions and investigated companies calmly, while they are not making headlines, rather than during the white heat of a big news event or wave of popularity.

People like to read about thrills and spills, which is why news editors serve up a diet of companies going boom and bust, but these are usually the most risky investments, either because they are very popular and potentially overpriced, or there really is a considerable risk they are going bust. 

I read a lot about Thomas Cook when it was failing, but never with the intention to trade. My goal was to learn more about the package tour industry, because one of Thomas Cook's erstwhile rivals, Dart Group (LSE:DTG), owner of Jet2holidays, is in the Decision Engine and, let's face it, it was a dramatic, interesting story in its own right. 

There are exceptions to every rule though, and Smith & Nephew (LSE:SN.) is now a candidate for the Decision Engine because of recent news reports that its chief executive is leaving after the board did not agree to his pay demands. 

Smith & Nephew is a medical company, most famous for manufacturing hip and knee replacements. It competes against American firms like Zimmer and Stryker, who have very highly paid executives. The fact that Smith & Nephew is not willing to compete on pay may be a sign of weakness, but I like the idea of a board with a bit of backbone, willing to test the notion that the chief executive is indispensable (if that is a correct interpretation of events).

Filtering databases for new ideas

Mostly, though, I filter databases for ideas. The big innovators and leaders in the market supplying private investors are SharePad, ShareScope (both made by Ionic) and Stockopedia. 

Within these programs I have collections of filters for shares with particular financial characteristics, filters that trawl company announcements for words like “competitive advantage”, and lists that I have built up over time of companies that have something in common. Lists of companies that have been listed longer than five years jostle for my attention with lists of companies whose directors own substantial shareholdings and companies that have not spent much on acquisitions. I even keep a list of shares that have similar financial characteristics to the companies in Fundsmith, a fund that seeks to invest in shares for the long-term.  

I look to these lists for new ideas. It is chaos, frankly, but in my experience, inspiration rarely comes from order. The Decision Engine is an attempt to impose order on chaos.

Although I had heard of Bloomsbury and PZ Cussons, I hadn't paid attention to them for a number of years. I found them simply by searching SharePad for companies earning positive profits and cash flows and relatively modest levels of debt. 

The one thing I am not too concerned about when searching for new ideas is valuation. Share prices change all the time, and there is plenty of time for valuations to move while I am getting to know new businesses, and, indeed, afterwards, once I am tracking the share in the Decision Engine. 

Porvair (LSE:PRV), for example, a manufacturer of filters and filtration systems, has been a constituent of the Decision Engine pretty much since the outset because I like the business and its management. So too has vinyl flooring manufacturer James Halstead (LSE:JHD) (profiled last week). I keep following them in the hope that one day they will fall out of favour temporarily, and consequently their score will improve as their valuation dips. If their scores were to reach 7 or so, I would consider buying the shares.

Decision Engine

Now, from chaos to order. Here is the Decision Engine, ranked as usual with companies that score highest for profitability, risks, strategy, fairness and value at the top. Each company is scored out of 10, and each criterion is scored out of two, although companies trading on high valuations can receive negative scores, down to minus two.

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