Top 10 stock picks for 2012 - part two
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 second part of my top 10 share picks.
War gaming hobby store Games Workshop is the most unusual company in my selection. It invented the fantasy world customers inhabit whenever they play Warhammer and its derivatives using Games Workshop rules, scenarios and, most importantly, model soldiers. Its share is unusual in being both a reliable and a recovery share. Games Workshop has recovered from an expensive expansion that undermined its profitability. A return to its war gaming roots has restored profitability.
I think its share has the most earning power and would countenance a price of 2.6 times book value, making it by far my most expensive selection on this measure.
If you think of a motor manual propped on the cylinder block of an old Cortina when you think of Haynes, you’ve probably missed the publisher’s diversification into a wide range of lifestyle and leisure titles. The catalogue of forthcoming releases is crammed with distinctive titles and Haynes is still conservatively managed – it has cranked out profit without incurring debt.
Digital technology is revolutionising publishing, which makes the future unpredictable and investors wary of publishers’ shares. However, Haynes operates in a niche and its acquisition of a European electronic publisher of workshop manuals in 2008 will allow it to grow beyond its traditional English speaking markets and develop online manuals and ebooks.
For two years now, greetings card, gift wrap and Christmas cracker producer International Greetings’ mantra has been about increasing profit and paying back debt, exactly what I want to hear from companies that have erred. Its new chief executive is concentrating on the basics: reducing production costs, targeting major retailers and focusing on profitable products.
Since 1936, FW Thorpe has been designing and manufacturing lights under the Thorlux brand – and the Thorlux division remains by far its biggest. Thorpe is a truly reliable company.
Despite the fact that its light fittings and control systems are installed in public and commercial buildings, such as hospitals, shops, laboratories and prisons, the company has remained highly profitable through the recession. Refurbishment programmes have continued during a drive to reduce energy costs.
Quality like this comes at a price, but it’s an affordable one – 1.6 times book value.
Profitable carpet maker Victoria is the newest addition to the Thrifty 30 portfolio. Its business is in recession in the UK. However, more of its sales come from Australia, which gives it some diversification.
With property prices falling in Australia and the economic outlook in the UK looking grim, Victoria is planning to build its brand, rather than grow, in the year ahead.
For patient investors, the shares are surely good value. They trade at only half book value.
This feature was written for our sister publication Money Observer