Five stocks to watch in April
The thinking behind the Watchlist is that current market valuations of companies can only be interpreted by understanding the past and what it tells us about what might happen in future.
Wynnstay's gradual expansion from its Welsh agricultural heartland is proceeding steadily, and for a business in capricious markets, it is developing a steady record of profitability too.
The company converted from a co-operative of Welsh farmers in 1994. Today its agricultural division manufactures animal feeds, processes seeds, supplies fertilisers, imports raw materials and trades in grain. Its retail business, which is smaller but more profitable, consists of 31 Wynnstay country stores and 21 Just For Pets stores.
Diversity has protected Wynnstay's profitability from the effects of foul weather, which reduced demand for fertilisers in 2012, and treacherous commodity prices, which increased costs in 2011.
However, the company says debt increased this year as expansion soaked up more working capital. Although Wynnstay's overall debt is not high, a continuation of this trend would be worrying.
Otherwise, Wynnstay's claim that it will profit from agricultural consolidation is credible while alarm over the adulteration of imported beef with horse meat might increase our appetite for indigenous food.
Wynnstay expects to benefit from initiatives from government and retailers to buy British, but overcoming our taste for cheap imports will not be easy.
The company has prospered, but despite its strength - it is on an earnings yield of 6% - the shares aren't currently in bargain territory.
It's easy to be impressed by Unilever. It grew revenues by 10% last year and underlying profit by 9%, while fighting the good fight: promoting Flora margarine, which lowers cholesterol, and encouraging hand washing with Lifebuoy and water conservation with Surf, Omo, Persil and Comfort. It also uses Fairtrade ingredients in Ben & Jerry's ice cream.
Unilever wants to double in size while reducing its impact on the environment by investing in "sustainable living" and innovating faster than the competition.
These sound like contradictory goals. Unilever is one of the biggest companies listed in London, with an enterprise value of £78 billion. Its growth ambitions mainly lie in emerging markets, which are already worth more to it than developed markets.
Magnum, a brand of ice cream, recently joined 13 other super brands in achieving sales of over €1 billion (£0.86 billion) a year. It's hard to agree selling Magnums to Filipinos makes the world a better place, and some of its marketing - Persil's "Dirt is Good" campaign, for example - seems self-serving.
Contradictions are unavoidable in big corporations. Maybe Unilever can bring its twin goals closer together, but it's too early to judge whether the Unilever Sustainable Living Plan has substance or just style - it only launched in 2009.
It has made a good start. But enthused by Unilever's performance, investors buying the shares on an earnings yield of 6% may be tacitly expecting relentless growth from emerging markets that have, until recently, been regarded as more unstable than our own.
Once-in-100-years wet weather in 2012 undermined the peat harvest, and William Sinclair, which supplies farmers and garden centres with famous brands, was forced to buy in peat at high prices or use more expensive substitutes. Turnover fell and it barely broke even in 2012.
It could be the kind of one-off event that provides patient investors with an opportunity to buy shares at a low price, but with earnings so volatile, it's difficult to establish what a low price might be.
Sinclair's use of peat in its products makes it something of a sin stock, and although the company says it can put right the environmental damage left by peat harvesting, it agrees harvesting peat may hasten climate change and ought to be phased out in favour of alternatives, which it supplies.
The government is mandating public organisations to use peat-free products, and pressurising garden centres and the horticultural industry, but Sinclair wants legislation. It can't phase peat out unilaterally because the alternatives are more expensive and would hand competitors still making peat-based compost an advantage.
Although Sinclair will earn higher profits in future - the run of wet summers must come to an end or Sinclair's investment in peat-drying technology will mitigate them - the industry is in as great a state of flux as the weather. The company faces financial risks that are not obvious on its balance sheet: it has defined benefit pension and lease obligations. It's a risky recovery play.
Profits almost doubled at LPA, a manufacturer of cables, connectors and lighting, mostly for the transport industry. It's doing well out of LED lighting, and did well out of the Olympic Games. If it can sustain profitability, it is worthy of investment.
LED lighting sales account for 21% of sales, but grew more than 60%. LEDs use less energy and last longer than the incumbent fluorescent technology, and companies have increasingly specified LEDs when refurbishing or ordering new buildings and equipment.
However, other manufacturers are experiencing softening sales as cost-conscious customers turn away from LED, despite the long-term benefits, because of the higher initial cost.
The company's predicament is worsened by a rush of new entrants seeking to profit from the growing market.
LPA may be protected from competition because of its niche - it has close relationships with train builders supplying the UK - but it admits the UK is such a small and volatile market it has developed markets abroad, where it generates 30% of sales.
This year, it's increasing the size of its LED factory and relocating its electromechanical business. Investment shows confidence but also causes disruption.
The government's botched re-franchising of the railway network is also disrupting customers, so although the company has a strong order book and new contracts, 2013's results are hard to predict.
Looking back, LPA's profitability has been less impressive. One year of good results doesn't make the company a champion - especially a company this small. It's not possible to say with confidence that its good performance is repeatable for years to come.
Chemring's profits halved in 2012 because of declining defence spending as armed forces pull out of Afghanistan and governments switched their spending priorities.
The company's new managers say the old management failed to anticipate the changing economic and military scene, and reacted slowly. They were responsible for project delays, technical problems and production shortfalls, which increased costs and hit revenues.
Looking back, Chemring's profits reached lows in the mid to late 1990s after the first Gulf War, and exploded when the wars in Iraq and Afghanistan began. Profit is now ebbing again. The question is: what happens next?
Deciding a typical level of profitability is tricky. Chemring supplies the munitions, mortar rounds and aircraft countermeasures used in war. However, the products produced by perhaps its most profitable division are more strategic: counter-IED systems, sensors for detecting mines, and biological and chemical devices.
If this year's earnings are typical, the shares look expensive. However, the company has been unusually unprofitable in the past. Using an average over the past five to 10 years might give a better indication of underlying profitability, but those years may have been particularly marked by war. That makes Chemring a speculative proposition, particularly given its considerable debt.
This article was written for our sister publication Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Defined benefit pension
Often referred to as a “final salary” pension, benefits paid in retirement are known in advance and are “defined” when the employee joins the scheme. Benefits are based on the employee’s salary history and length of service rather than on investment returns. The risk is with the employer because, as long as the employee contributes a fixed percentage of salary every month, all costs of meeting the defined benefits are the responsibility of the employer. (See also Final Salary).