Richard Beddard’s focus on the long-term fundamental strengths of cheap businesses has paid off.
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Recommending six shares always gives me the heebie-jeebies, because it leaves little room for error. In Money Observer’s annual tipping extravaganza, my record is positive but patchy. But before we rush to judgement, I have no view on how the shares I select will perform in 2020.
If everybody believes a good business will do well, its shares are unlikely to be good value. My recommendations are contrarian – companies that traders are indifferent to, often because the immediate prospects for these businesses are unexciting. This stockpicking strategy focuses on the fundamental strengths of businesses, not their share prices, and involves holding shares for long enough for these strengths to shine through. I cannot predict when that will be; only that, within reason, the longer we give the shares, the more likely it is to happen.
My first annual selection was five years ago, and perhaps predictably, it has done the best, having risen in value by 40%, compared with a 14% gain in the FTSE All-Share index over the period. Subsequent portfolios have beaten the market too, albeit over smaller and even less significant durations.
I have picked short-term lemons, though. The worst performer, System1, is down by 50% since I picked it two years ago, although the limited diversification afforded by the five other picks that year has enabled the group as a whole to rise by 20% (the index fell by 2%).
Last year’s selection was a great success, for which I claim no credit. It is up 25%, while the index put on 4%. Three of the companies selected last year are in this year’s list too. Five out of 10 for originality, then, but that is the nature of long-term investments. They are not just for Christmas.
FW Thorpe (TFW)
Share price 291p; earnings yield 5%; dividend yield 1.9%
FW Thorpe makes lighting fixtures for commercial customers. It is a much more technological business than it used to be because of waves of innovation in its sector, but the case for FW Thorpe rests just as much on its direct relationships with customers. The company’s immediate prospects are turgid though, through no fault of its own. See Share Watch.
Solid State (SOLI)
Share price 476p; earnings yield 6%; dividend yield 2.6%
Solid State is a manufacturer and distributor of electronics and components. It acquires struggling smaller businesses, often ham- strung by lack of investment or operating inefficiencies, and improves them. On the distribution side, Solid State seeks to add value, for example by programming components. For nearly two decades, chief executive Gary Marsh has been an astute operator and acquirer.
Howden Joinery (HWDN)
Share price 616p; earnings yield 5%; dividend yield 2%
If a local builder fitted your kitchen, it will probably have come from Howden Joinery. The firm dominates the UK market, having innovated a unique trade-only business model that it is now seeking to duplicate in France. Despite kitchens being expensive, housing sales subdued and economic uncertainty rife, Howdens is still growing steadily.
XP Power (XPP)
Share price £27.80; earnings yield 6%; dividend yield 3.1%
Power converter manufacturer XP Power is prospering despite a slump in the market for semiconductor machinery (it also supplies manufacturers of industrial and medical equipment). The converters are designed into machines with long lives, which gives XP Power some security. Its close relationships with blue-chip customers means it should emerge strongly from the slowdown.
PZ Cussons (PZC)
Share price 198p; earnings yield 8%; dividend yield 4.2%
The manufacturer of Imperial Leather soap and St Tropez fake-tan is shedding brands to stem losses in Nigeria and raise money. It is spending the money to develop its strongest brands in the face of online competition and discounted copycats. A dividend cut is unlikely, but the firm will probably not increase payouts until its growth picks up again.
Share price £23.74; earnings yield 5%; dividend yield 2.5%
Like XP Power, Victrex, a UK-based supplier of high-performance polymer solutions, is experiencing a slowdown in two of its biggest markets, car and electronics manufacturers, that will result in a fall in revenue in the year to December 2019. It remains the biggest and only specialist supplier of PEEK, a particularly rugged and light polymer that only a handful of companies worldwide manufacture.
Notes: Prices and yields as at 25 November 2019. Performance data SharePad, as at 25 November 2019. For more on Share Sleuth’s value-based portfolio, see the latest Share Sleuth and Share Watch articles.