Top 10 stock picks for 2012 - part one
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.
If you put a gun to my head and forced me to pick the 10 UK companies I would be happiest to invest my own money in, the companies I would choose would have strong finances, they would be making products or providing services we are likely to need over the next 10 years and their shares would be trading at cheap prices.
It's a short list of requirements, but it's an exacting one because good company shares rarely trade at cheap prices. However, shares in two groups of good companies do often trade at low prices.
First, there are the 'reliables'. These companies are dull but consistently profitable without recourse to large amounts of debt. Because they are not in exciting sectors and don't make the headlines, their strengths are unappreciated by many investors.
The second group consists of the 'recoveries'. These companies have hurt investors, and the memory of the financial loss keeps investors away even when the problems that caused the pain are receding.
Since investing in such companies means investing in firms that are out of favour, the immediate prospect of a rise in their share prices is poor.
Investors must change their minds about reliables and recoveries for the value in them to be realised, and that can be a slow process. The situation that creates the opportunity - a lack of interest - means investors overlook the evidence of impressive financial performance until it can no longer be ignored.
Reliables and recoveries don't always reward investors, but because they're conservative businesses and their share prices aren't hyped, they should be of interest to investors prepared to hold shares for as long as it takes for other investors to take notice.
My editor has metaphorically pointed the gun. So here is the first part of my top 10 share picks.
Judging by its financial performance over the past two years, vehicle transporter Autologic appears to be turning itself around.
Chief executive Avril Palmer-Baunack says the company's prolonged restructuring is complete and, amid miserable conditions in the industry, it's profitable once again and receiving income from a more diverse range of services. The share price, however, continues to decline slowly.
Ultimately, the lie behind one of these two trends will be revealed. My money is on Palmer-Baunack and finance director Andrew Somerville to complete the turnaround, as they did at Universal Salvage in 2007, but I'd be even more confident if their money was on Autologic - neither owns shares.
As its name suggests, this company makes castings that are subsequently machined into components, such as differentials and steering knuckles for trucks, tractors and cars. It exports 60% of its sales to companies such as Scania, DAF and BMW.
Castings remained profitable through the recession and emerged stronger from it, so its shares are not as cheap as they were. It's trading at a reasonable 1.5 times book value and it typically earns a 13% return on equity. But Castings is a financial fortress, so maybe it's one to watch, and buy if the market falters and short-sighted investors sell.
Colefax may be the archetypal safety-first investment: profitable, unburdened by debt and operating in a prosaic business - upmarket fabric and wallpaper. It owes its stability to chairman and chief executive David Green, who has been in charge since 1986 and owns almost a third of the shares.
Green is downbeat about the company's immediate prospects, even though 2011 seemed to herald a return to pre-credit crunch levels of profitability when profits were enhanced by the completion of major decorating projects. Economic uncertainty and high cotton, linen and silk prices mean a full and sustained recovery could be years away.
Meanwhile Colefax continues to buy back shares, and since Green has a lot to lose if the company turns out to have paid inflated prices, he must be confident that the shares are cheap.
Lift component manufacturer Dewhurst maintains high levels of profitability without recourse to debt and there's a controlling family interest. Short-term investors dislike controlling interests because they block potentially quick routes to profit, but for long-term investors, stability can be an asset.
Dewhurst reached record levels of turnover and profit in 2010. Sales rose again in 2011 according to recent full-year results. But falling demand in the UK - due to reductions in public spending - dented profits, as will rising costs as the company spends money on a new factory and integrates three small acquisitions.
However, it has proven management, and still-strong finances. I expect any damage to be limited and share price weakness to be an opportunityfor investors.
Earlier this year, fashion brand French Connection returned to profitability after two years of losses forced it to close many of its foreign stores and dispose of designer brand Nicole Farhi.
Its wholesale division, which supplies international joint ventures, franchises and other retailers, is growing. But retail stores in the UK, Europe and North America are still losing money. This situation is looking intractable while customers remain frugal because French Connection is tied into long-term leases it cannot easily shed.
While a very low share price makes this iconic brand attractive to value investors, the payoff could be years away and depends on founder and majority shareholder Stephen Marks' ability to wring profit from his stores or get rid of some of them.
This article was written for our sister website www.moneyobserver.com