To recap, I pick these shares from the 50-odd companies tracked in the Share Sleuth portfolio spreadsheet. They share two qualities: I believe their long term prospects are good (although the short-term may be a different story) and their market valuations are humdrum. They're good companies at cheap prices.
The list shouldn't change much from month to month, or even year to year. I expect these businesses to be as profitable in ten years time as they are now.
The two criteria I use to define a good company are trust and stability. These characteristics should be enduring. Value, however, is much more fickle. It depends on what other investors and traders think, which may or may not be a fair reflection of what is going on at a company. These varying perceptions give us the opportunity to acquire good companies at cheap prices.
If a share leaves the top five because it's become too expensive, that's good news. It means investors and traders have recognised the value I identified, and other stable and trustworthy companies are probably better investments now.
If a share leaves the top five because I have decided it is not as strong or trustworthy as I thought, it's bad news. The mistake may be the result of a great deception or fraud. More likely though, the mistake will have been in my analysis.
This month, I have removed trade show organiser ITE from the top five because I was over-optimistic about its stability. To cut a long story short (company names are linked to previous analysis so you can get the long story in a click), in a normal year the exhibitions business is very profitable.
The most obvious point of differentiation between ITE and other exhibitions businesses is it's focus on Russia and its neighbours. Past crises involving Russia have not damaged ITE, but the present one is changing the company. ITE has accelerated its programme of acquisitions, mostly in other emerging markets, China, India, and Indonesia, but also in developed ones. This should reduce the risk to profitability should economic distress in Russia persist, but the company is borrowing at a time when profit is under pressure. I still think ITE's a good bet, but it fails the stability test. It remains in the Share Sleuth portfolio (my top 25).
If you're wondering how I could have included a company dependent on such an unstable economy in my five most stable and trustworthy companies, I'll explain, to the extent I can. ITE has a commanding position in Russia and neighbouring states, and its costs are flexible. It can roll with the punches, and short-lived crises like that of 2008 have little impact on its long-term profitability. I believed the strength of the business trumped the weakness of the economy. The reality I am coming to terms with, and maybe ITE is too, is that economic crises need not be short-lived. Russia is dependent on oil, at a time of surprising abundance, and its foreign policy is increasingly at odds with that of Europe and the USA, resulting in economic sanctions.
ITE is replaced by Brainjuicer.
Brainjuicer [395p, earnings yield 7%]
Brainjuicer uses behavioural science techniques to conduct market research for a fee. It specialises in measuring peoples' emotional response to advertisements, products and concepts, which, it says, is more predictive of their marketability than traditional market research methods. I added Brainjuicer to the Share Sleuth portfolio in January because it is unique, profitable, financially strong, committed to long-term investment, and explains itself well. The biggest weakness in the investment case is the valuation. An earnings yield of 7% (probably 8% based on 2014 profits already trailed in a trading update) is not obviously cheap unless the company lives up to my modest growth expectations.
Castings [390p, earnings yield 12%]
Castings manufactures iron castings in foundries in the Midlands, which it also machines into axle, suspension, exhaust, transmission and gearbox parts for big European truck and car manufacturers. It sounds like an old-fashioned business, but it is highly technical and through financial prudence and continuous investment the company has found a way to prosper in most years, even when its customers can't. After a disappointing first half when a forecast increase in demand floundered, profit in 2015 is likely to be lower than it was in the year to March 2014. That shouldn’t worry long-term investors.
Dewhurst [480p, earnings yield 17%]
Of the 90-odd companies I track, Dewhurst could be the most undervalued. The company is a manufacturer of push-buttons and components for lifts, ATMs, and railway carriages, as well as bollards and signage for roads. Although its illiquidity is off-putting for some, it shouldn't be off-putting for long-term investors. Dewhurst is a respected specialist, which probably explains its record of high profitability, maintained in the year to September 2014.
Goodwin [2,900p, earnings yield 9%]
Goodwin's full-year results for the year ending in April 2014 showed another year of strong growth for a company that has grown strongly for decades (with modest interruptions). It manufactures valves for oil and gas pipelines, rigs, refineries and applications in the energy, chemicals, fertiliser, and water industries. Subsidiaries also manufacture steel castings, radio antennae, and process minerals used in casting.
Lower oil prices are encouraging oil producers to reduce investment, limiting growth more than it has in the past, but Goodwin is confident that oil consumption will continue increasing in the decades to come and the company is, from the incentives it pays executives to its commitment to investment, built for the long-term.
Rolls-Royce [820p, earnings yield 9%]
The immediate prospects for Rolls-Royce are not exciting, however the valuation is if it resumes growth as promised by the company's pedigree and strategy. Rolls-Royce has warned shareholders to expect revenue to be slightly below the high levels reached in 2013, and profit to be much the same as they were then when it reports results for the full-year to 31 December. Most of its businesses should grow modestly, but the Defence Aerospace division is contracting due to NATO budget cuts.
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