Richard Beddard eyes quality companies for tough times ahead.
If you believe quality will out, read on. I've investigated three high-quality shares that should survive and ultimately prosper for you this month. While all these companies promise to be good investments for patient investors, perhaps XP Power is the most compelling at current share prices.
Score: 6/10, Rank: 28/31
Trading at 4Imprint is probably improving now businesses are reopening in the US, where the company earns most of its revenue. In early April, though, 4Imprint reported new orders running at about 20% of the level achieved a year earlier.
The UK-headquartered company sells promotional goods: T-shirts, pens, bags, mugs and gizmos emblazoned with the logos of companies and organisations, or messages they want to promote. On its website it lists countless products sourced from other companies, which buy blank products mostly from China, customise them and ship them to 4Imprint’s customers.
4Imprint’s role in this chain is little more than recruiting customers and placing orders for them, but it has grown into a valuable business by focusing on this activity. In particular, it has developed efficient IT systems and has a reputation for excellent customer service.
Highly profitable under normal circumstances, and in possession of a substantial cash surplus going into the crisis, traders must believe 4Imprint will weather the storm. While the share price has fallen, the shares are far from obviously cheap.
Score: 7/10, Rank: 19/31
As a provider of vehicle-tracking services to small businesses, Quartix knows exactly how much less traffic is on our roads, and from this privileged position it’s bracing for recession. So far, relatively few fleet-owners have handed their devices back, but that is partly because Quartix has suspended or deferred the monthly rental fees for about 6% of customers who have taken vehicles off the road. Although builders and manufacturers are coming out of hibernation, other parts of the economy are not, and the company says things could get much worse as the government winds down support for businesses.
Over many years, Quartix has developed a generic low-cost system, so the burden of consuming it is modest. The business model was forged in the crucible of the financial crisis, and the customers Quartix supported then remembered it as the economy recovered, sticking with the company as they grew their fleets.
Once again, Quartix, which in recent years has only lost between 10 and 12% of its customers every year, is hunkering down. Once again it should emerge stronger. Quartix estimates that even if customer attrition rates rise to 30%, it will be able to maintain its cash surplus at or above recent levels (£8.5 million). Meanwhile, it is continuing to invest heavily in smaller-scale but rapidly growing operations in Europe and the US.
Score: 9/10, Rank 3/31
XP Power endured a downturn in the semiconductor machinery market in 2019 and continuing trade friction between the US and China, where it has a factory. While profit was dented, the company – which makes power converters fitted into machinery produced by many of the world’s biggest industrial and healthcare equipment manufacturers – still earned a high return on capital.
Power converters are a vital component in vital equipment, since failure could shut down a production line, or halt a medical procedure. While demand may fall in a recession, particularly from industrial customers, this is likely only to be temporary as the converters are not easily substituted – they are part of the machine’s design.
The company is adapting to the geopolitical shenanigans between China and the US by keeping production for Chinese customers in China and shifting production for customers who do not want Chinese-made components to its factories in Vietnam. It is also focusing on the most efficient, high-powered converters, which few rivals have the technical ability to design, manufacture and sell.
Top five ranked shares
|Score||Name||Description||Interactive Investor link|
|9||Dewhurst||Manufactures pushbuttons and other components for lifts and ATMs||http://bit.ly/swDWHT2020|
|9||Victrex||Manufactures PEEK, a tough, light and easy-to-manipulate polymer||http://bit.ly/swVCT2020|
|9||XP Power||Manufactures power adapters for industrial and healthcare equipment||http://bit.ly/swXPP2019|
|8||Anpario||Manufactures natural animal feed additives||http://bit.ly/swANP2020|
|8||RM||Supplies schools with equipment and IT, and exam boards with e-marking||http://bit.ly/swRM2020|
Note: Ranked on 1 June 2020. Shares are scored out of 10, according to five criteria: profitability, risks, strategy, fairness and value. A ranked list of all 31 shares is available at https://bit.ly/sw-XFF0620