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

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.

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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 company’s price, which is one of the five factors that determine a share’s overall score.

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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 Avon’s 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.

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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.

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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. Shareholders’ money 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:

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 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