Stocks to watch in March
Picture in your mind companies reporting their full-year results as a conveyor belt rolling by bearing items for inspection. As they pass, the value investor's job is to pick those that don't look broken: companies that have resilient businesses and strong finances that ought to make good long-term investments, especially if the price is right.
Sometimes, though, the price is too high or the business faces a problem and it's not possible to determine whether this will have a permanent impact on the company's ability to earn profits.
Some of the companies rolling by may be worthy of investment now. The remainder must be watched as we wait for the uncertainty to abate.
Cambria Automobiles should appeal to value investors. It has a value-conscious strategy and its shares are cheap.
The company, established in 2006, buys distressed and poorly performing motor vehicle dealerships and turns them around. Cambria's management must have been delighted when the credit crunch threw up so many opportunities. To date, it has made eight acquisitions and owns a network of 39 dealerships in the south-east and north-west.
It inducts new dealerships in a culture change programme, introduces standard financial controls, implements growth strategies based on social networking and after sales service, and leaves local management to operate autonomously.
Last year was a poor one for profitability, but the company remains in reasonable financial shape. It has as much cash as debt, it is profitable and it is quite possibly undervalued.
Although it only owns garages in the UK, Cambria's car manufacturing partners tried to make up for their poor performance in Europe by eating into their UK distributors' profits. However, conditions in the new car market have improved, and so have Cambria's performance figures.
The biggest risk may come from a change in strategy. To date, Cambria has refused to pay for goodwill, which makes it a value investor. That may change. Turning dealerships around takes time and investment, which reduces profit in the short term.
Now the company is considering paying more for profitable dealerships that will enhance earnings immediately. However, that's only acceptable, if they continue to perform well.
Domino Printing Sciences
Maybe it's the awards curse. In 2011 Domino Printing Sciences was voted company of the year. But its recent full-year results reveal a marginal decline in turnover, ending its 33-year record of unbroken growth, a record that had has stood since the company was formed in 1978. Profit fell by a more significant 10%.
Domino manufactures industrial printers that print barcodes, sell-by dates and product authentication codes, particularly on food, beverage, pharmaceutical and building products as well as automotive components.
Domino is a potential star. Some 60% of sales originate outside Europe and it has a strong position in a specialised market that it can defend by continuously improving its products. Moreover, the company augments manufacturing profits by providing maintenance services and consumables, ribbons, ink and filters, which together account for most of its revenue.
Because 2010 and 2011 were years of rapid growth, the fall in turnover and profits in 2012 may signify a return to a more sustainable level of profitability. The company's management has blamed uncertain economic conditions in western Europe and China - which has led customers to put off investing in new printers - for the disappointing results.
Domino's move into full colour digital printing and printers that print labels and packaging, rather than just the codes on them, could be a sign the company foresees slower growth from printing codes on lottery tickets and eggs in future.
Successful niche companies inevitably outgrow their niches and diversification into related niches is logical. But hopefully this more risky strategy is temporary.
Highly rated RWS's full-year results announcement came with unmistakable hints that this very profitable business faces a significant threat.
RWS accounts for 70% of patent translation sales, mostly in Europe, where the great number of languages and states makes patent translation a core market. The number of patents filed in Europe has doubled in the past decade.
However, the EU is adopting a unitary patent that does away with the need to translate patents into different languages for each country's patent office - only Spain and Italy have declined to participate in the scheme.
The new patent regime is likely to come into effect in 2014, but RWS believes its clients may continue to seek patent protection in individual countries for some years after that date.
No wonder RWS has been trumpeting its impressive growth in Japan and China and its ProBase patent database - which allows lawyers and corporate customers to search for and monitor patents - as areas of the business that will not be affected.
RWS's latest acquisition, however, may snuff out much of the company's hefty cash balance. RWS has bought one-third of Innovia and plans to take full ownership at a maximum total cost of $31.2 million (£19.5 million) in September. Innovia is a patent filing system, but the company is barely profitable. RWS expects to profit from the purchase by translating Innovia patent files.
Innovia aside, the company's strategy since 2005 has been to target non-patent technical translation businesses. However, just 23% of revenue comes from technical translation and the localisation of other legal, commercial and financial documents, and this business is more competitive. RWS's share price suggests investors may be underestimating the threat to the company.
Victrex has the hallmarks of a proper growth share. Despite a poor 2009, the company has grown revenue, profits and cashflow at a compound annual rate of more than 10% in recent times. It manufactures lightweight, robust plastics and reinvests its returns in developing industrial applications for these materials.
The sheer range of applications that already exists and the number of potential applications in an industry continuously seeking to produce lower-cost and more-efficient components suggests the company's markets have plenty of growth potential.
This year Victrex only grew fractionally, though, and the company might have contracted had it not developed more applications than it did last year.
Victrex's Invibio business, which manufactures the biocompatible polymers used to make surgical devices, is developing implants for dentures and bone fractures to augment its existing range of spine and joint repair devices. While the global economy is restrained, Victrex may have to work hard just to grow more slowly, so a share purchase would be a speculative buy.
Electronic Data Processing
Electronic Data Processing can't seem to grow. Its revenue rose modestly in 2012 and its operating profit more substantially, but the long-term revenue trend is flat.
Maybe that's not surprising, since the software developer principally provides builders merchants and electronics distributors - two sectors that have suffered from recession and stagnation since the credit crunch - with enterprise software.
EDP is a small company. Its flagship software, Quantum VS, has just 16 customers, none of which earn the company more than 5% of overall sales. Its other service, Vecta, provides web-based sales intelligence, sometimes to the same customers.
EDP's cash balance of nearly £6 million represents half of all its assets, and barring calamitous trading performance, cash should increase again in 2013, when the company is due to sell surplus property for £1.8 million. My view is that the company doesn't need the cash, which makes it look very cheap. But even if it does need it, EDP is still pretty good value.