Shares for future: this small-cap is top of my latest rankings
30th July 2021 15:00
by Richard Beddard from interactive investor
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After tweaking his Decision Engine system, our companies analyst explains why there’s an interesting twist to this month’s top 40.
This month, I have changed the presentation of the Decision Engine table very subtly, by branding some of the shares with an asterisk.
The first of these shares is sixth ranked Portmeirion (LSE:PMP). It is followed by Cohort (LSE:CHRT) (ranked 7), RM (LSE:RM.) (17), Trifast (LSE:TRI) (19), Jet2 (LSE:JET2) (29), Castings (LSE:CGS) (37), Advanced Medical Solutions (LSE:AMS) (38), Avon Protection (LSE:AVON) (39) and Hollywood Bowl (LSE:BOWL) (40).
Latest Decision Engine scores
Company | Description | Score | |
1 | Casts and machines steel. Processes minerals for casting jewellery, tyres | 8 | |
2 | Manufactures power adapters for industrial and healthcare equipment | 7 | |
3 | Supplies kitchens to small builders | 7 | |
4 | Manufactures PEEK, a tough, light and easy to manipulate polymer | 7 | |
5 | Manufactures pushbuttons and other components for lifts and ATMs | 7 | |
6 | Designs and manufactures tableware, candles and reed diffusers | 7 | |
7 | Manufactures military tech. Does research and consultancy | 7 | |
8 | Acquires and operates small scientific instrument manufacturers | 7 | |
9 | Retails clothes and homewares | 7 | |
10 | Manufactures filters and filtration systems for fluids and molten metals | 7 | |
11 | Manufactures personal care and beauty brands | 7 | |
12 | Publishes books and online resources for academics and professionals | 7 | |
13 | Supplies vehicle tracking systems to small fleets and insurers | 6 | |
14 | Manufactures/retails Warhammer models, licenses stories/characters | 6 | |
15 | Distributes essential everyday items consumed by organisations | 6 | |
16 | Develops and integrates Customer Data Platforms | 6 | |
17 | Supplies schools with equipment and IT, and exam boards with e-marking | 6 | |
18 | Manufactures rugged computers, battery packs, radios. Distributes electronics | 6 | |
19 | Manufactures and distributes fasteners and other low cost components | 6 | |
20 | Manufactures tableware for restaurants and eateries | 6 | |
21 | Imports and distributes timber and timber products | 6 | |
22 | Makes light fittings for commercial and public buildings, roads, and tunnels | 6 | |
23 | Manufactures natural animal feed additives | 6 | |
24 | Manufactures connectivity components and power cord | 6 | |
25 | Manufactures specialist paper, packaging and high-tech materials | 6 | |
26 | Translates documents and localises software and content for businesses | 6 | |
27 | Manufactures vinyl flooring for commercial and public spaces | 6 | |
28 | Whiz bang manufacturer of automated machine tools and robots | 6 | |
29 | Flies holidaymakers to Europe, sells package holidays | 6 | |
30 | Sells promotional materials like branded mugs and tee shirts direct | 5 | |
31 | Supplies software and services to the transport industry | 5 | |
32 | Sources, processes and develops flavours esp. for soft drinks | 5 | |
33 | Sells hardware and software to businesses and the public sector | 5 | |
34 | Manufactures disinfectants for simple medical instruments and surfaces | 5 | |
35 | Designs recording equipment, loudspeakers, and instruments for musicians | 5 | |
36 | Develops marketing automation software | 5 | |
37 | Casts and machines parts for vans and trucks, primarily | 5 | |
38 | Manufactures surgical adhesives, sutures, fixation devices and dressings | 5 | |
39 | Manufactures respiratory protection equipment and body armour | 5 | |
40 | Operates tenpin bowling and indoor crazy golf centres | 5 |
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).
The shares are still scored against five criteria, which are:
- Profitability: Does the business make good money?
- Risks: What could stop it growing profitably?
- Strategy: How does its strategy address the risks?
- Fairness: Will we all benefit?
- Price: Is the share price low relative to profit?
The first four criteria relate to the quality of the business and each gets a score of 0, 1, or 2.
The fifth criterion compares the share price to normalised profit and is scored on a sliding scale from -2 to +1. I use minus scores to prevent me from paying silly prices for good companies (explained in more detail here).
As usual, the maximum score a share can achieve is 9 (2+2+2+2+1), but shares that score nine are rarer than a New Caledonian Owlet-Nightjar.
The lower the score, the less confident I am that a company is a good long-term investment, but how long is long?
To add clarity I have added the asterisk, and to explain why I need to tell you about an email conversation with a reader, always my biggest source of inspiration.
When is a decade not 10 years?
Marc emailed to ask why, despite my intention to hold shares for at least a decade, sometimes I remove them from the Share Sleuth portfolio after only a few years.
He points out that annually reappraising a share gives me nine opportunities to change my mind before the decade is over, which does not sound conducive to buy and hold investing.
The truth is I would quickly run out of decent shares to write about if I were only to cover them once every ten years, and my updates would not be very useful to investors looking for information about shares they are considering in the intervening periods.
As an investment writer, I need to keep my analysis up to date, so I might as well use it in my investing.
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There should be an investment benefit too. Every year we learn more about a business through the annual reporting cycle: Half-year results, full-year results, the annual report and the Annual General Meeting.
The act of re-scoring shares for the Decision Engine means it is a kind of learning machine.
That is why I frame my decade or more holding period as an intention, and not as a commitment.
I invest in shares that I believe will be good long-term investments, but reserve the right to change my mind.
In the last Decision Engine update though, I proposed almost whimsically, that there may come a time when I will make the intention a commitment.
Planning for the future
I use the Decision Engine to inform trades in my own Self Invested Personal Pension (SIPP) as well as the Share Sleuth model portfolio you can read about here on interactive investor.
My idea (I almost said plan, but it has not got to that stage yet) is to seal the lid on my SIPP when I retire.
By then I hope my work will be done. Decades of share sleuthing will result in me having identified 20 or more shares that I am happy to buy and hold in perpetuity.
In this cosy la-la-land, I will be an armchair or perhaps hammock investor rather than a desk jockey. I will keep abreast of my portfolio, no doubt holographically, and challenge myself to find one new share every year just in case one of my forever picks is taken over, taken private, or, shudder the thought, goes bust.
Tell us about the bloomin’ asterisk Richard!
A difficult thing about buying and holding shares for the long-term is that it takes a long time to know if you are any good at it.
It was only when the Share Sleuth portfolio reached its 10th birthday that I accepted its performance might not just be the result of a very long series of mostly good coin tosses.
If I am to get comfortable with the idea of a forever portfolio, I should start an experimental virtual version soon so I can run it long enough to tell me something meaningful before I commit.
The asterisk was conceived as a way of helping me decide which shares in the Decision Engine to exclude from a forever portfolio.
The companies branded by an asterisk score less than 5 out of a total possible 6 points achievable for the middle three criteria: Risks, Strategy and Culture.
A sub-par score for these three criteria means one of two things. Either I do not understand how the business will make more money as well as I would like to, or I do, and the business is not that good.
In other words, their total scores, which may still be attractive, depend more heavily on the other two criteria: past profitability and price.
This does not mean the likes of asterisked Portmeirion and Trifast are bad investments compared to un-asterisked XP Power or Howden Joinery, all of which score 7.
Currently, I believe Portmeirion and Trifast are undervalued. They are not bad businesses and their low share prices probably compensate for my doubts.
But prices change all the time and if their share prices rise and I still have doubts about how they are positioned for the long-term future, their scores will decline.
At that point it might be a good decision to sell the shares, which is what makes it hard to commit to them in perpetuity.
If my verdicts on risks, strategy and culture are correct, quality should persist, which makes it easier to commit to XP Power and Howdens.
Richard Beddard is a freelance contributor and not a direct employee of interactive investor.
Richard owns most of the shares in the Decision Engine, and a particularly high concentration of those with the highest scores.
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
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.
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