13 shares for the future

Analyst Richard Beddard sorts out the firms that should grow, from companies that are pouring money down the drain. Here are his current top picks.

Long-term investments ranked

While it pains me to deter you from reading this article, if rising share prices give you security I would stop now. You are entering a zone where low share prices and strong businesses are prized most of all.

I have not changed my mind about XP Power since I declared the power adapter manufacturer "electrifying" in April, but traders currently disagree. The share price has declined 18% since its August high, which has sent the already highly rated share to the top of the Decision Engine table:

Every five weeks we publish this table on the interactive investor website. Last time I explained in some detail how I score shares, so this time I will make do with the briefest of summaries. 

•    XP Power shares: They're electrifying!

•    17 shares for the future

I am looking for businesses that are profitable, adaptable, resilient and equitable that are cheap at the current market price. I score each of these five factors out of two, for a total score out of ten, although outrageously expensive shares like Renishaw, a very good business that I will review next week, score minus points for cheapness. No business, however good, is cheap at any price.

Contenders for long-term investment

Since the last update, I have reviewed the annual reports of four companies, three of the them, Cohort, Dart and Goodwin, are contenders for long-term investment because they score seven or more out of ten.

Cohort is undervalued in my view. Traders have probably been scared off by its shrunken order book. Reductions in spending and shifting priorities at the company’s main customer, the Ministry of Defence, are making life difficult for companies supplying the military but the firm’s increasing focus on products, rather than easily substituted services,  and exports, should see it through in the long-term.

A sudden revenue burst at Colefax is something of an illusion, conjured by the weak pound and a profitable year for its inconsistent decorating division. The luxury fabric designer has been a steady performer, but at the current share price shareholders are probably relying mostly on dividends and share buy backs for returns.

Words can hardly express my affection for Dart, but I have given it a good go. The expansion of Jet2.com, a leisure airline, has made it one of the outstanding growth stories of the last decade. Worries about overcapacity, Brexit and rising fuel and staff costs abound, but it is not apparent in the results or Dart's statements about the future (yet) and while the impact of Brexit is unfathomable, it is a unique and well managed business. That is good enough for me.

Goodwin has moved significantly up the table from 17th five weeks ago to 9th position. The manufacturer of valves, pumps and antennas has all but promised recovery, based on military contract wins, a potential resurgence of orders from customers in the oil and gas industry and the continued growth of a separate group of businesses supplying minerals used on the casting of jewellery. Since it has stabilised profit and opened a valve through which cash has gushed, I am inclined to agree.

Recipes for growth, or money down the drain?

We need to be somewhat cautious about the rankings of six of the companies tracked by the Decision Engine. They have published preliminary results, but I will not review them until they have published full annual reports. Their positions are unlikely to move dramatically, annual changes in a company's performance rarely alter my view on the fundamental strengths and weaknesses of a business or its valuation, but occasionally I discover something that makes me think again.

Alumasc doesn't believe a sudden drop in profitability has holed its specialist building materials strategy. That strategy has delivered five years of growth in revenue and profit, and most importantly, return on capital. Until the financial year just gone, Alumasc was not just making more profit, but proportionally more profit on the money invested in the business. 

While I favour businesses that specialise, I wonder if impact of a very cold winter, the collapse of Carillion, and general economic and political uncertainty means Alumasc’s less diversified business model is more susceptible than it was. I will be wondering about how low return on capital could go in a recession when I review Alumasc, later this month.

Traders seem to have taken large write offs relating to a business acquired by Finsbury Food some years ago in their stride. I am not so sure, and await October's annual report with some trepidation. The baker has recovered from a debt-fuelled binge on acquisitions in the last decade and if the leopard hasn't changed its spots I don’t want to be involved now it is on the acquisition trail again. 

Old faithful FW Thorpe, a manufacturer of lighting systems for public and commercial buildings, treaded water in the financial year ending in June, if we strip out the positive effect of an acquisition. This is a poor result by historic standards, and also one the company doubts it will match in the current year because economic uncertainty is weighing on customers in the construction industry. 

Over the last decade, sales and profits have been stimulated by the switch from fluorescent lighting to LED lighting but FW Thorpe says it believes the LED boom has peaked. There will always be replacement and upgrade work, but it looks as though the company will become more dependent on new buildings, which will limit growth and perhaps make it profitability more susceptible to recession. 

I visited the factory of FW Thorpe's main brand, Thorlux, earlier in the month for the second time and it will take a lot to shake my faith in this business.

Ricardo sits near the foot of the table and is in danger of expulsion. The company has a proud heritage in engine design, a skill set that may be all but swept away by electrification. It is diversifying into hybrid and electric vehicle and battery development, as well as the broader transport and energy markets. 

Last year I was concerned about burgeoning receivables and whether the company would get paid. When I re-evaluate Ricardo later this month, I will reconsider. Perhaps I have been too harsh on a company that is clearly adapting.

Haynes Publishing and James Halstead complete this group of companies currently under review. 

Both Finsbury Food and Alumasc have encapsulated their strategies in pithy three word slogans. Baker Finsbury's is, "Recipe for Growth", while Alumasc, a supplier of guttering, downpipes and drains, goes for "Rain to Drain". Probably by the next Decision Engine update in five weeks' time, I will have evaluated whether these strategies are recipes for growth, or money down the drain.

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

Richard owns shares in all of the companies mentioned except Quartix and Ricardo.

Richard Beddard is a freelance contributor and not a direct employee of interactive investor.