Shares for the future: four stocks on my new list have issues

Tweaking how he runs his list of 40 shares for the future means analyst Richard Beddard will give us a warning if his view on any of them may be about to change.

Regular readers of this monthly article will know that its subject, The Decision Engine, is a ranked list of shares that should be good long-term investments.

It is the beating heart of the investment process I use to invest my own pension and the model Share Sleuth portfolio published here on interactive investor.

It ties together the scores I give individual shares when I research them (also published on interactive investor) and helps me decide which shares to buy or sell.

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This month, I have made a few tweaks to simplify things and make it clearer how the system hangs together.

Notes and addenda

One of the factors I use to score shares – price - changes whenever the stock market is open and people are trading. I decide the others, profitability, risks, strategy and fairness, once a year soon after each company has published its annual report.

Things happen, though, or I grow more concerned about issues, in between annual reviews. Very occasionally I might change a company’s score, but I am reluctant to because the whole point of the Decision Engine is to avoid knee-jerk reactions and consider every relevant facet of a company when I score it.

The rationale for this deliberately plodding approach to investing is that I am not confident I can reliably predict stock market twists and turns, or indeed a company’s performance in the short term. I do not want to react to events, I want to own shares in companies that are strong and adaptable enough to duck and dive for me.

I achieve this by focusing on the qualities I can observe in a company now that mean it should thrive over 10 years or more. Since these qualities are enduring, they should change gradually and infrequently.

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In the past, I have signalled to readers when I might be adjusting my view on a company on an ad-hoc basis, but I think it will be better if I keep a rolling record, a list of notes and addenda relating to things I am not sure about that I will consider and include in the score at the next annual reckoning (at the latest).

My inaugural list contains four shares. Bear in mind I still think these are all good businesses. You can read my last evaluation of each of them by clicking on the links in the Decision Engine table at the end of this article.

Here, I am only briefly describing issues troubling me that I did not explore, or did not adequately explore, when I last evaluated them.

Anpario: meat is a much less efficient source of protein than plants. Even though Anpario (LSE:ANP)’s feed supplements improve animal health and farm productivity, its prospects could be diminished if, over the long term, the growth of global meat consumption slows or turns negative as people and governments mitigate climate change.

Hotel Chocolat: in a series of announcements over the summer, Hotel Chocolat (LSE:HOTC) has abruptly ditched its international growth strategy, shutting down businesses in the US and Japan. The focus now is on the profitable growth of its UK operations.

Marks Electrical: the founder of this online retailer of cookers, washing machines and TVs, and his sons have a controlling interest of more than 75% of the shares. So far, the family have done nothing to indicate they would act against the interests of small shareholders, but Marks Electrical (LSE:MRK) has only been listed for a year, so we do not have much of a record to go on.

Treatt: a warning in September that profit will decline in the year to December 2022 related mostly to temporary issues. The admission that Treatt (LSE:TET) had been unable to increase the price of flavours sold to major multinational beverage companies, is making me wonder about the balance of power in the relationships it values so highly. 

Speculative and sustainable shares

Apart from keeping readers better informed, the notes and addenda enable me to disambiguate the meaning of the asterisk, which remains by the name of some of the Decision Engine companies.

Hitherto, the asterisk has had two functions. Sometimes I have used it to signal that I am having second thoughts about a share’s score, now the purpose of the notes and addenda.

Its other purpose is now the only one, which is to highlight those shares that score less than five out of six for the three factors I consider to be fundamental to the long-term prosperity of a business: risks that might stop the company making money; strategy, the actions the company is taking to address risks and make more money; and fairness, whether we will all benefit (customers, employees, suppliers, shareholders, and society).

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These factors are very important to me because they are forward looking and score the quality of the business, which requires much more judgement. I believe this is where I have the potential to add most value, and if I have made the right decisions, healthy long-term returns should follow.

An investor concerned with buying shares cheaply might put more emphasis on the other criteria, price and profitability. There is some judgement in the calculation of these ratios (principally the period I use to normalise them), but they are backward looking.

I consider the asterisked shares, those that score less than 5 out of 6 for risks, strategy and fairness, to be more speculative. Those that score more highly are more sustainable (by which I mean profitable growth is more likely to be sustained).

When I invest, I use the asterisk like a tiebreaker.

Given a choice between companies on similar scores, I will generally invest in the one without the asterisk.

Decision Engine

Since the last update on 30 September, I have re-scored four companies: FW Thorpe (LSE:TFW), Oxford Instruments (LSE:OXIG), PZ Cussons (LSE:PZC), and Renishaw (LSE:RSW).

All 40 shares in the table are probably good long-term investments, but those ranked nearest the top are the ones I am most confident about.

Scores and stats: Richard Beddard. Data: SharePad and annual reports

Shares marked with an asterisk* are more speculative. They score less than 5 out of 6 for profitability, risks and strategy

Click on a share's name to see a breakdown of the score (scores may have changed due to movements in share price)

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

Richard owns shares in most of the shares in the Decision Engine, especially the high scoring ones.

For more information about Richard’s scoring and ranking system (the Decision Engine) and the Share Sleuth portfolio powered by this research, please read the FAQ.

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