Shares for the future: one of my 26 good value shares just hit a record high
2nd June 2023 15:15
by Richard Beddard from interactive investor
Share on
An extra share makes it into Richard Beddard’s portfolio this month, and our columnist explains why he just gave up a guaranteed quick 25% gain for bigger profits over the long term.
Last month Goodwin (LSE:GDWN), a member of my Share Sleuth portfolio, foisted a trading decision on me by tendering to buy shares from holders. That meant gearing up the Decision Engine to help me decide what to do...
Goodwin is a conglomerate of engineering companies. For nearly a decade now it has been investing heavily in its steel foundry to win new business from defence and nuclear customers.
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From now on its capital expenditure is likely to be lower, its workload higher, and its foundry and machine shops will be operating more efficiently. Goodwin believes it will be more profitable (although not much more in the current financial year), and calculates that it needs less funding.
To tender or not to tender...
The company wanted to return capital to shareholders, but there was a problem.
Most of the shares are in the hands of family members (about 53%), which means the shares are illiquid. Buying the shares back at the market price would quickly move the price up, making the prospect of a buyback an expensive and unpredictable option.
Instead, the company offered to buy back up to 180,000 shares, 2.34% of the total, from shareholders at £48.00 per share, 25% more than the share price before the tender was announced on the 5 May. The tender was approved by shareholders on 30 May, a result that was never in doubt because of the Goodwin family’s majority shareholding.
Share Sleuth is a model portfolio, but I try to keep it real by behaving exactly as I would if I owned the shares.
There are two situations in which I would tender the portfolio’s shares. The first is the shares are overvalued at £48.00. The second is if, at that price, the portfolio’s holding is worth significantly more than its ideal size, a calculation described in the links at the end of this article.
Naturally, I used the Decision Engine to work this out. One of the good things about having everything in a spreadsheet is that I can substitute the actual share price for the tender price to see whether these conditions are met.
I performed this exercise on 11 May.
The £48.00 share price only reduced Goodwin’s score fractionally, in round numbers it remained seven, which to my mind is the lower end of good value. Under the right circumstances, if the portfolio had only a modest-sized holding and there were no better shares to invest in, it would encourage me to add more Goodwin shares at £48.00.
But the portfolio already had quite a big holding. The ideal holding size for Goodwin was 4.8% of the portfolio’s total value, and at £48.00 its actual size would be 6%. The difference, 1.2% of the portfolio’s value (£2,165) was not sufficient to trigger a reduction in the holding because to protect me from trading all the time I have a minimum trade size of 2.5% of the portfolio’s value (£4,525 at the time).
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If I had big doubts about my most recent verdict on Goodwin, I may have accepted the offer, but I do not have big doubts, and I declined. I gave up a guaranteed gain in the short term for the bigger gains I anticipate over the next 10 years.
This decision did cause me some head scratching though. Since the share count declined by 2.34% after the tender offer, shareholders who did not tender their shares own a bigger proportion of the business. But our proportionate interest in the company has only grown by about 2.4%.
Other things being equal, we might have expected the share price to increase by the same proportion because nothing has really changed about Goodwin’s prospects, and each of our shares represents a slightly bigger claim on its profits.
This is far less than the 25% premium the company was offering in the tender, which begs the question: was there a trade in this? Could I have sold the portfolio’s shares to Goodwin and bought them back afterwards more cheaply?
I am not a trader, and I had no idea what would happen to the share price as a result of the offer, so I was not tempted.
The price was moving anyway. In the few days between the announcement of the tender offer (5 May) and the day I sat down to think about the price (11 May), it had increased by more than 11%.
On Wednesday 31 May, the day after the result of the tender was announced, the shares closed at £45.40, 18% above the price before the offer was made and a record high. It is not quite the 25% premium the shareholders who tendered their shares will receive (although who knows what the share price will be when they receive the money on 14 June).
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It is tempting to believe the tender offer shone a light on the business and investors liked what they saw, but dwelling on share prices for a moment has made me profoundly uncomfortable.
My next Goodwin trade will, like the decision not to trade this time, be guided by the Decision Engine’s rules.
26 shares for the future
I re-score each share in the Decision Engine once a year, after the publication of the annual report.
Since the last update a month ago, Bunzl (LSE:BNZL), Judges Scientific (LSE:JDG), Garmin Ltd (NYSE:GRMN) and Howden Joinery Group (LSE:HWDN) have been through the process. To see how I scored them, or any share, please click on the share’s name in the table below.
Macfarlane Group (LSE:MACF), Next (LSE:NXT), 4imprint Group (LSE:FOUR), Advanced Medical Solutions Group (LSE:AMS), and Churchill China (LSE:CHH) have all published annual reports and are due to be updated.
Now that the rush of annual reports from companies with reporting dates that coincided with the calendar year end is over, I expect to score some new candidates in the summer and autumn.
Generally, I consider shares that score 7 or more out of 9 to be good value. This month there are 26, one more than last month. Shares that score 5 or 6 out of nine are probably fairly priced.
0 | Company | Description | Score |
1 | Designs recording equipment, loudspeakers, and instruments for musicians | 9 | |
2 | Supplies kitchens to small builders | 9 | |
3 | Manufactures tableware for restaurants and eateries | 8 | |
4 | Manufactures pushbuttons and other components for lifts and ATMs | 8 | |
5 | Translates documents and localises software and content for businesses | 8 | |
6 | Distributor of protective packaging | 8 | |
7 | Imports and distributes timber and timber products | 8 | |
8 | Manufactures filters and filtration systems for fluids and molten metals | 8 | |
9 | Retails clothes and homewares | 8 | |
10 | Distributes essential everyday items consumed by organisations | 7 | |
11 | Online marketplace for motor vehicles | 7 | |
12 | Makes light fittings for commercial and public buildings, roads, and tunnels | 7 | |
13 | Supplies vehicle tracking systems to small fleets and insurers | 7 | |
14 | Manufactures surgical adhesives, sutures, fixation devices and dressings | 7 | |
15 | Casts and machines steel. Processes minerals for casting jewellery, tyres | 7 | |
16 | Manufactures/retails Warhammer models, licenses stories/characters | 7 | |
17 | Manufactures natural animal feed additives | 7 | |
18 | Manufactures power adapters for industrial and healthcare equipment | 7 | |
19 | Whiz bang manufacturer of automated machine tools and robots | 7 | |
20 | Manufactures PEEK, a tough, light and easy to manipulate polymer | 7 | |
21 | Manufactures military technology, does research and consultancy | 7 | |
22 | Sells promotional materials like branded mugs and tee shirts direct | 7 | |
23 | Manufactures sports watches and instrumentation | 7 | |
24 | Sells hardware and software to businesses and the public sector | 7 | |
25 | Sources, processes and develops flavours esp. for soft drinks | 7 | |
26 | Manufactures personal care and beauty brands | 7 | |
27 | Publishes books, and digital collections for academics and professionals | 6 | |
28 | Manufactures power adapters for industrial and healthcare equipment | 6 | |
29 | Manufactures specialist paper, packaging and high-tech materials | 6 | |
30 | Develops and integrates Customer Data Platforms | 6 | |
31 | Online retailer of domestic appliances and TVs | 6 | |
32 | Manufacturer of scientific equipment for industry and academia | 6 | |
33 | Operates tenpin bowling and indoor crazy golf centres | 6 | |
34 | Manufactures disinfectants for simple medical instruments and surfaces | 6 | |
35 | Manufactures vinyl flooring for commercial and public spaces | 6 | |
36 | Manuf's rugged computers, battery packs, radios. Distributes electronics | 6 | |
37 | Supplies software and services to the transport industry | 5 | |
38 | Acquires and operates small scientific instrument manufacturers | 5 | |
39 | Flies holidaymakers to Europe, sells package holidays | 4 | |
40 | Chocolate maker and retailer | 4 |
Scores and stats: Richard Beddard. Data: SharePad and annual reports
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, including Goodwin. He weights his portfolio so he owns more of the higher scoring shares.
More information about Richard’s investment philosophy and how he implements it.
Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard
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.
Please note that our article on this investment should not be considered to be a regular publication.
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