10 long-term holds for an Isa portfolio: part two

After a meeting with a company I once followed, an executive remarked how much better informed I was than a typical fund manager. I say this knowing it bigs me up, but there's a better reason for resurrecting the anecdote, and that's to make a point about long-term investing.

The executive didn't feel the majority of fund managers took advantage of the access afforded them. It irked him* that he often had to start by giving the most basic explanation of what his company did.

If I go seeking answers from executives, I generally do it after I have read a number of annual reports (at least the latest, and one from a year in which the company did relatively badly), run the numbers through my Decision Engine (a souped-up spreadsheet), and familiarised myself with the company's website. If it's a shop, I might visit it. That's what it takes to be above average in the information stakes.

If it served most fund managers to be better informed, I think they would be. But figuring out what makes a company tick, why it's been so profitable, and whether that's likely to continue for many years, takes effort and can often be fruitless. Why would you do it if you only expect to hold the shares for a year or two like the typical fund manager?**

If your time horizon is that short, you're putting your effort into trading hundreds of stocks and probably watching hundreds more, not understanding 20 or so as well as you can and keeping an eye on a few more. With a short horizon, all you want to know is whether a company will surprise the market next time it reports. There isn't time for much more than that.

I couldn't care less about how a company is likely to perform in six months or a year's time unless it's a sign the business is changing fundamentally. Since I hope these companies will support me when I retire, which means holding them for a long time, I need to know them very well.

Like the first five, my final five Isa selections have highly profitable pasts and they are run by directors that made or continued their success. I believe these businesses are special, so prosperity should continue, and they're probably good value. My job is to point out potential flaws as best I can, to help you decide if you too could live with them through thick and thin.

- 10 long-term holds for an Isa portfolio: part one

Solid State 

Solid State (SOLI) manufactures rugged computer and radio systems, batteries, aerials and other niche electronic products. It also distributes electronic components. Originally solely a distributor, Solid State survived the flight of mass-produced electronics production to the Far East by acquiring Steatite, its main manufacturing subsidiary, 15 years ago and making products that still need to be manufactured in the UK.

These are high in value, sometimes requiring Solid State to handle sensitive data for the military or dangerous materials like lithium. The pool of companies with the technical skills and accreditations to do this work is limited, which makes Solid State's capabilities more valuable.

Its strength may also become a weakness. Solid State is a collection of niche businesses, acquired mostly on the cheap and subsequently improved. The potential for each niche to grow may be limited, requiring the company to make bigger acquisitions in future to grow.

Although I wonder how big the company can grow before it becomes a complex, ungovernable mess, the measured acquisition programme to date, a very experienced and financially disciplined board, and the company's still relatively small size gives me confidence.


Cambridge-based research and development consultancy Science (SAG) employs UK-based scientists to work on projects for companies in a growing range of non-military sectors, like healthcare, consumer products, food, and oil and gas.

The company, which often made losses until it switched business model from venture consultancy towards the end of the last decade to charging on a time and materials basis, is now highly profitable. It has developed a taste for acquisitions, which can be a cheap way to recruit scientists, and it's expanding, particularly in its main market, the USA, where it's transplanted some managers.

The strategy makes sense to me. UK scientists are probably cheaper to employ than US scientists, yet UK science has a very good reputation. Due to its university, Cambridge has a large pool of talent and is an attractive place to work, which explains why it's home to a hatful of consultancies, each with its own specialisms.

With offices close to customers, in Boston, Houston and now in San Francisco, Science can better market its services. And in acquiring scientists working in one field it can sometimes put them to work in others.

Since Science has oodles of cash, and has just mortgaged its two laboratories at historic low rates, it has the resources to continue growing at relatively low risk.

Project work comes and goes though, so Science may not grow every year, and shareholders need to be comfortable with power concentrated in the hands of Martyn Ratcliffe. The chairman and chief executive took over during Science's transition, when he bought a significant shareholding that now stands at 34 per cent.


My main worry about Vp (VP.), is its shareholders! Plant hire firms have a reputation for being cyclical, partly because they supply cyclical sectors like construction, and partly because they borrow to buy equipment, so interest payments weigh on profit during hard times.

Operationally, Vp's business held up during the credit crunch but its share price took a fearful beating. Whatever fears investors had proved short-lived, but I wonder how many panicked, and then regretted it, and what I would do in the same circumstances.

Vp may gain its resilience from the specialist sectors it works in, each conforming to its own cycles. The infrastructure sector, for example, follows a regulatory cycle, while construction and housebuilding follow the economic cycle, and low oil and gas prices, while bad for Airpac Bukom, Vp's oil and gas business, can be good news for the economy.

Within these sectors, Vp mostly hires out specialist equipment and provides related services making the company more of a long-term partner than a stop-gap, which has enabled it to earn impressive profit margins through thick and thin (for a primarily UK focused hire firm).

Howden Joinery

You'll probably have come across Howdens (HWDN) if you have had a kitchen fitted by a local tradesman. The fitted kitchen supplier has grown strongly ever since chief executive Matthew Ingle set it up in 1995. For many of those years though, Howdens was hidden inside its parent, MFI, which also owned a furniture store chain of the same name that went into administration during the credit crunch.

Howdens has an attractive low-cost business model, stocking the full range of kitchen components in out of town warehouses that are cheap to build and fit out. Local fitters supply and install the kitchens, often before they have to pay Howdens. It's a symbiotic relationship that has allowed Howdens to dominate its corner of the market.

The big question is how long the Howdens roll-out can last. Howdens has a well-publicised target of 800 UK stores, which it could meet in six years at the current rate of expansion. The apparent cliff-edge doesn't bother me too much. At any one time 25 per cent of Howdens stores are immature, they have yet to reach their full profit potential, so growth should continue for some time after it runs over the cliff-edge. The figure is Howdens' current target, but it is an upward revision of an earlier target and it could be revised upwards again moving the cliff edge forwards.

In addtion, Howdens has been running a decade long experiment in France, where it has 20 stores. While European stores may not be as profitable as UK stores, France gives workers more rights and benefits for example, Howdens could probably develop a business abroad and if it did, given the duration of its gestation it would probably be as finely tuned to local circumstances as Howdens UK.


I'm afraid I'm not profiling BrainJuicer (BJU) here, as I profiled it a few weeks ago (please find below what I wrote on 3 March).

Rather than dwell on BrainJuicer's (BJU) results for the year to December 2016, which included a return to double-digit revenue and profit, strong cash flows as usual, and record returns on capital, my attention is on what's driving profitability and growth, and what might get in the way.

That's because BrainJuicer's share price has grown even faster than the company in the last year. Its enterprise value now stands at £90 million, about 17 times adjusted profit in 2017. The earnings yield is 6 per cent.

These are not bargain levels, and unless BrainJuicer continues growing and the return on an investment at the current price improves over time, there are probably better investments out there.
This chart from a presentation on BrainJuicer's website shows how the market researcher has changed over the last five years:

Nestling at the bottom of the series of bars is Advertisement Testing and Brand Tracking, BrainJuicer's fastest growing products, which grew by 81 per cent to generate a combined 39 per cent of revenue.

Next is Predictive Markets, BrainJuicer's single biggest product, which grew by 12 per cent and brought in 32 per cent of revenue in 2016, and Concept Testing.

Perched on top is the rapidly shrinking 'other' category, once the largest, which encompasses more traditional market research services. Until 2016, this contraction was masking the rapid growth in BrainJuicer's products, but it's shrunk so much now, the rest of the business can shine.

While Predictive Markets remain BrainJuicer's biggest product, Ad Testing and Brand Tracking are growing much faster. New products and new concepts only need testing when there are new products and concepts to test, and companies typically test them using a number of techniques from a variety of agencies.

Once a brand has decided on an agency to test its advertisements on the other hand, it usually gives a mandate for a year, and more often than not renews it subsequently. The business is less ad-hoc, which perhaps explains the emphasis BrainJuicer puts on its fastest growing segment.


*His comments were off the record, so though I'm using the pronoun 'he', he might actually have been a woman. Off-hand I can't actually think of a company in either of my portfolios currently with a female chief executive, though... Yikes!

**This article shows on average fund managers turn over 65 per cent of their portfolios every year. There are of course exceptions who trade less frequently. They're the good guys (and girls) in my book.

Contact Richard Beddard by email or on Twitter.

interactive-investor-logo-small-sizeThis article was originally published on our sister website Interactive Investor.

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