Shares to buy, hold and sell: Ed Beal
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. 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.
Ed Beal has managed the Dunedin Smaller Companies investment trust since December 2005. The fund won the UK Smaller Companies award at Moneywise's sister publication Money Observer’s Investment Trust Awards this year; it has delivered a return of 63.2% to shareholders over the past three years, compared to a return from the FTSE Small Cap index of 10%. Here are the latest stocks he has bought and sold and the one he’s holding onto.
"Elementis makes ‘rheological’ products for the paint and personal care industries. Essentially they give liquids viscosity – they make paint stick to the wall rather than dribble down it.
The components are crucial to the end product, yet are a low percentage of the overall cost. That strikes us as a good combination and means large paint and personal care companies don’t squeeze the firm on price.
Another advantage is that Elementis controls much of its own supply chain. Chemicals companies have been hit by rising raw materials prices, but this is not a significant issue for Elementis as it has always managed to pass the cost onto customers. It has pricing power and
some control over its supply chain.
There has been consolidation among the larger chemical groups and this has been helpful for the specialist end of the sector, as those larger businesses have moved away from niche areas.
Elementis’ core business is too small for larger companies to be interested in competing with. We look very long term when we make investments. We see it as buying a company rather than a share. We took almost a year to invest in Elementis, spending lots of time getting to know the company. We never want to look at an investment six months after buying it and fi nd we don’t like it anymore."
"RPC makes plastic packaging. Plastic is different from other parts of the packaging industry, which tends to be differentiated simply by size and has limited innovation. For instance, there’s not much a company can do to improve a cardboard box.
However, RPC can mould plastic into different products, including capsules that go in high-end coffee machines. The company also has some regulatory drivers in its favour. It’s moving to use less metal in packaging because many regulatory targets are set by weight, so customer firms need good lightweighting technology.
We have held this company for many acquisition of injection-loading business Superfoss. This should create economies of scale and increased growth. RPC therefore has the combination of organic and structural growth.
Perhaps more importantly, it has done, this without gearing its balance sheet. If there is a slowdown in the economy, it is not financially constrained."
"We have a number of reasons for selling a stock; one is valuation. If it becomes too expensive, we sell out. We think of the opportunity cost of holding any stock and are always calculating whether we think company A is better than company B. The single biggest reason for selling out of a stock is merger and acquisition activity.
However, sometimes we will sell out because a company no longer satisfies our quality criteria. If this is the case, we will sell it whatever the valuation. It might be because a company no longer has suffi cient growth, or the management has done something to
erode value. For instance, the industry in which it operates might have changed, so that a good position in the supply chain has become a weak one.
An example of this would be Laird, which makes electromagnetic and thermal shielding. It originally had margins of 18%, supported by a degree of intellectual property and some structural growth. However, its biggest customer was Nokia and it became
clear that the telecoms group was heading into very diffi cult times. Nokia changed its approach to supply chain management, insisting that Laird share some of its intellectual property with its competitors. Margins slipped from 18% to 12% at best.
Its balance sheet is quite stretched and the management team appears to be doing relatively little to allay the fears that investors have about the business.
Clarity on the company’s future prospects has largely evaporated. Ultimately, we could find better value elsewhere and we sold."
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.