Interactive Investor

Shares for the future: my top 40 stocks after dumping this one

3rd December 2021 15:31

Richard Beddard from interactive investor

Find out why shares analyst Richard Beddard ditched this problematic business and discover how he ranks the remaining companies in his Decision Engine.

Normally, it’s a straightforward process to create the ranked list of shares from my Decision Engine that we publish every month. This month, however, I have been forced to take emergency action.

Currently, the Decision Engine spreadsheet contains 54 individual sheets. There is one sheet for each of the 40 companies it ranks, containing detailed financials going back many years and the individual scores for that company. There are 11 more company sheets for shares I am studying but not yet confident enough to add to the Decision Engine.

In addition to the 51 company sheets, the first sheet in the spreadsheet simply imports 15-minute delayed prices from stock market data platform SharePad, to part-automate the score I give to a companys price, which is one of the five factors that determine a shares overall score.

The third sheet tells me how much I should ideally have invested in each of the shares, and whether my actual holdings are sufficiently divergent from these ideal sizes to warrant a trade.

The second sheet summarises all the information in the other 53 in a big table.

To share the relevant bits of this table with you, all I have to do is copy it from the spreadsheet and paste it into my article. The hard work is done when I score the companies, once a year after they have published their annual reports. Very occasionally, though, events of such magnitude occur that I must intervene, much as I hate to do so.

Seeking protection from Avon

On cranking up the Decision Engine to write this article, I noticed that Avon Protection (LSE:AVON)s score had risen from 4 out of 9 when I scored it in January, to 7 out of 9 (you can read why I scored it 4 here).

The purpose of scoring shares is to determine which are good value. Generally, I consider a score of 7 or more to be good value. Shares that score less than 5 are, relatively speaking at least, poor value. Shares scoring 5 or 6 are in the middle. Broadly speaking I allow these scores to help me decide whether to buy, sell or hold shares.

Avon had gone from a ‘sell’ to a ‘buy’; and since I only score companies once a year, that was not because I thought more highly of it. It could only be because the share price had cratered.

Source: SharePad. Share Sleuth portfolio trades are indicated

Normally, if the share price goes down that is a good thing, and is why the score goes up. The other factors I consider – profitability, risks, strategy and fairness – measure enduring qualities, and they rarely change dramatically from year to year. A lower price gives us the opportunity to buy good companies on the cheap, and the Decision Engine encourages me not to sell out just because everybody else is.

However, while an 80% decline in Avon’s share price may be an overreaction, the events that caused it confirmed doubts I already had about the company’s suitability as a long-term investment.

I downgraded Avons score in January because I had started to lose confidence in the business as well as in its share price; that is why I subsequently ejected it from the model Share Sleuth portfolio, also in January, and after a discreet interval also removed it from my own SIPP.

In particular, the disposal of a dependable business supplying milking equipment and the acquisition of two manufacturers of protective equipment (body armour and helmets) worried me.

Avon, which has grown its own highly profitable respirator business, spent about seven times as much as it earned in profit per year on the two acquisitions (roughly what it raised from the disposal).

The new additions address the same military and first responder markets that the respirators do, but a change of this magnitude in my estimation changed Avon into a different business, one dependent on large contracts with a massive customer: the US Department of Defense.

Meanwhile, the share price had vaulted upwards in recent years, valuing the company at nearly 40 times adjusted profit. I felt it was priced for perfection, but I was looking at something much more imperfect. Even the accounting was inscrutable.

Subsequent events have confirmed these doubts. Delays to body armour contracts, and now the failure of one product in testing, have led Avon to review the body armour business, which is delaying the publication of the full year results. We may not even see the annual report this year.

When we do see the report, it will not make easy reading. While the company says the rest of the business is doing fine, it is preparing to write off some of its investment in the body armour business, which means it does not expect to make the returns it expected when it bought it from 3M. Shareholdersmoney released from the milking business has been wasted.

The most basic criterion for inclusion in the Decision Engine is that I feel I understand each business sufficiently to determine whether it should be a good long-term investment.

Avon no longer meets that criterion, so I cannot re-score it. Perhaps I will be able to do so once it has concluded its review and published the results. Until then, and maybe indefinitely while it remains dependent on the DoD, I must remove it from the Decision Engine.

Then there were 40

I thought removing Avon Protection would reduce the number of shares ranked by the Decision Engine from 40 to 39 until I discovered I had scored Hotel Chocolat (LSE:HOTC) in October but forgotten to add it to the list.

This is how it fits into the new line-up:

Company

Description

Score

Cohort

Manufactures military technology, does research and consultancy

8

Dewhurst

Manufactures pushbuttons and other components for lifts and ATMs

8

PZ Cussons

Manufactures personal care and beauty brands

8

Victrex

Manufactures PEEK, a tough, light and easy to manipulate polymer

8

Goodwin

Casts and machines steel. Processes minerals for casting jewellery, tyres

7

James Latham

Imports and distributes timber and timber products

7

XP Power

Manufactures power adapters for industrial and healthcare equipment

7

Howden Joinery

Supplies kitchens to small builders

7

Portmeirion*

Designs and manufactures tableware, candles and reed diffusers

7

Quartix

Supplies vehicle tracking systems to small fleets and insurers

7

Bloomsbury Publishing

Publishes books and online resources for academics and professionals

7

Next

Retails clothes and homewares

7

Solid State

Manuf's rugged computers, battery packs, radios. Distributes electronics

7

Games Workshop

Manufactures/retails Warhammer models, licenses stories/characters

7

FW Thorpe

Makes light fittings for commercial and public buildings, roads, and tunnels

6

Judges Scientific

Acquires and operates small scientific instrument manufacturers

6

Porvair

Manufactures filters and filtration systems for fluids and molten metals

6

Bunzl

Distributes essential everyday items consumed by organisations

6

Anpario

Manufactures natural animal feed additives

6

Renishaw

Whiz bang manufacturer of automated machine tools and robots

6

D4t4*

Develops and integrates Customer Data Platforms

6

RM*

Supplies schools with equipment and IT, and exam boards with e-marking

6

Churchill China

Manufactures tableware for restaurants and eateries

6

Trifast*

Manufactures and distributes fasteners and other low cost components

6

James Cropper

Manufactures specialist paper, packaging and high-tech materials

6

4Imprint

Sells promotional materials like branded mugs and tee shirts direct

6

RWS

Translates documents and localises software and content for businesses

6

Softcat

Sells hardware and software to businesses and the public sector

6

Tristel

Manufactures disinfectants for simple medical instruments and surfaces

5

Tracsis

Supplies software and services to the transport industry

5

Treatt

Sources, processes and develops flavours esp. for soft drinks

5

DotDigital

Develops marketing automation software

5

Hotel Chocolat

Chocolate maker and retailer

5

Focusrite

Designs recording equipment, loudspeakers, and instruments for musicians

5

Jet2

Flies holidaymakers to Europe, sells package holidays

5

Castings*

Casts and machines parts for vans and trucks, primarily

5

Hollywood Bowl*

Operates tenpin bowling and indoor crazy golf centres

5

Advanced Medical Solutions*

Manufactures surgical adhesives, sutures, fixation devices and dressings

5

Volex*

Manufactures connectivity components and power cord

5

James Halstead*

Manufactures vinyl flooring for commercial and public spaces

5

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

Shares marked with an asterisk* score less than 5 out of 6 for Profitability, Risks and Strategy. They are more speculative

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 companies in the Decision Engine; he tries to balance his portfolio so he owns more of the highly ranked ones.

For more information about Richards 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

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. 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.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

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