17 shares for the future

The market has moved and analyst Richard Beddard has updated his opinion on four companies to reveal 17 shares to buy and hold.

Since I last shared the Decision Engine rankings in June, I've re-evaluated Games Workshop Group, System1 Group, MS International, and Castings. As always the shares have shifted position as their prices have changed. The better the business and the cheaper the shares, the higher the rank, and the closer a company is to the top of the list.

Scores on the doors

This is the state of play today:

Source: interactive investor            Past performance is not a guide to future performance

The Decision Engine tracks businesses that should prosper for decades. I re-evaluate them once a year, a ritual that takes place as soon as possible after each company has published its annual report. If you read my reviews (see below), published weekly here on interactive investor, you will be familiar with the routine.

My investigations focus on things we can decide about a business now, that will have a strong bearing on its prosperity in the future. I seek to determine businesses are:

1. Profitable. The numbers tell us whether a firm has been profitable in the past, but to be confident in its prospects we must also understand how it makes money, and why it has been successful.

2. Adaptable. Companies should tell us how they plan to make more money in their strategic reports. A successful strategy builds unique capabilities based on what companies do well.

3. Resilient. To be confident a businesses is resilient, its strategy must address all the risks we know about, starting with those it ‘fesses up to in its annual report.

4. Equitable. A far sighted business will treat customers, staff, suppliers and shareholders fairly. We we can judge fairness by assessing, for example, customer service, pay, and returns to shareholders.

I score each criterion from zero to two. Companies that score seven or eight out of eight are, in my view, most likely to prosper. Their names are highlighted in bold in the table, although they will not necessarily be the most highly ranked shares because of the fifth factor: price.

Treatt, Renishaw, and Tristel are very good businesses, but they nestle near the bottom of the table because their valuations stretch credibility.

It may look like a neat framework for analysing businesses, but my annual reviews are rarely the end. They often throw up more questions. This is certainly true of System1 and Castings, two businesses I found it particularly difficult to evaluate.

These two companies couldn’t be more different, but they are beset by similar problems: the potential for massive disruption and recent and uncharacteristic managerial cock-ups.

New perspectives

In my review of System1 I reported how major customers, big consumer goods brands, have reduced their advertising budgets to bolster profitability. The company is responding by cutting the cost of market research, principally through automation.

That should be a good sign, the strategy addresses the risk, but I'm concerned automation might better be achieved by technology companies than market researchers. I also wonder if the strategy address a greater risk: that brands are becoming much less important as a means of encouraging people to buy things.

I observed how the Internet has vastly increased choice and the way we choose things, through ubiquitous ratings and targeted advertising. Another factor, kindly suggested by a reader who sent me some industry research to back his view, is retailers are selling more of their own brands. On Wednesday night I returned home to find my family watching a TV programme ("Shop Well for Less") devoted to persuading people to ditch brands.

Surely brands will continue to be a factor in marketing, and companies will prosper servicing them, but the industry is going through a massive shake up that will test the viability of some firms.

Freezing in the face of adversity

In the face of extreme uncertainty some investors capitulate. I freeze. A reader responded to my review of System 1 with a comment on Twitter that made me laugh out loud (honestly, it did). He said:

“you make some very downbeat (justifiably imho) observations about what looks to be a company in a tough place with uncertainty as to the best route forward...and then blindsided me by declaring you are a holder. I salute your contrarian ability to go against @RichardBeddard”

I get it, my stance appears dissonant, but I think there is a greater harmony. I do not think System1 is a bad investment, but I accept it could be. It is more risky than I previously thought and I am not confident its strategy fully addresses the risks. While it scores zero for resilience, its middling scores prevents me from buying or selling the shares.

System1 has created tremendous value for shareholders in the past. It is managed by directors that have distinguished themselves. It treats people fairly. The ingredients are there for it to find a way to prosper in the new advertising order, I just don’t know if they will combine to deliver prosperity.

I felt the same way about Castings until the AGM earlier this month. Despite its historical strength, I had scored the company zero out of two for resilience in my review. I had lost confidence in its strategy to focus on supplying parts to European heavy truck manufacturers. The strategy didn’t seem to address Brexit, or offer the prospect of much growth.

Having attended the AGM, I've raised my resilience rating to one. The board reassured shareholders that manufactures would find it hard to switch suppliers having tested and accredited them, and said its customers routinely trade with other non EU suppliers. Furthermore, there may be opportunities to grow within the heavy truck niche as manufacturers continue to outsource more manufacturing to companies like Castings.

We never know what is going to happen in the future, and when the uncertainty is great we feel most uncomfortable. Then, it is tempting to remove the source of the discomfort and get shot of the share. The Decision Engine stops me doing that, at least until my confidence in other aspects of the business erodes as well. That gives me time to consider whether my pessimism is justified, and that is what makes me a long-term investor.

I may be getting near the end of the line with MS International, which is on the threshold of expulsion from the Decision Engine. It does not score highly according to any of my criteria except that it trades on a low valuation.

This year's review of Games Workshop Group reaffirmed my confidence in the business (it scores eight out of eight), although I am less confident in the share price. It's a busy time of year for annual reports, and I am working through a backlog. Expect reviews of Cohort, Colefax Group, Dart Group, Goodwin and Renishaw, shortly. Here are some of Richard's recent articles:

• Games Workshop: Verdict on this stunning performer
• System1: Testing its powers of recovery
• MS International: Can the rebound last?
• Castings: Between a rock and a hard place
• Trifast: Continuous improvement adds up
• Vp: An acquisition too far
• Air Partner: Talks a good business
• Sprue Aegis: Do this and they'll be 'dirt cheap'
• 16 conviction shares to consider
• Walker Greenbank: Cheap but fearful
• Hollywood Bowl close to joining exclusive club
• Anpario: Gearing up for growth
• Are Next shares a buy for the long term?
• 16 shares for the future
• Is Portmeirion in the 'buy' zone?
• XP Power shares: They're electrifying!

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard

Richard owns shares in Castings, Games Workshop, MS International and System1.

Richard Beddard is a freelance contributor and not a direct employee of interactive investor.