Share Sleuth: why I picked this share out of eight contenders

Richard Beddard has cash to spend after taking some profits in Games Workshop. He examines the eight highest-ranked shares and explains how he arrived at his decision to add to one of them. 

May’s trade ought to have been as simple as April’s, when a rise in the price of Games Workshop Group (LSE:GAW) meant the shares were over-represented in the Share Sleuth portfolio and I summarily cut the holding back down to size.

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Cranking up the Decision Engine

When I sat down to trade on 18 May, the Decision Engine was telling me to make a very similar trade: sell Judges Scientific (LSE:JDG), after a melt-up in the share price of the manufacturer of scientific instruments.

I did not take the notional money and run though, because the portfolio already had £8,234 spare cash, more than enough to fund additions at the minimum trade size of 2.5% of the portfolio’s total value. This money had, of course, been liberated by the sale of Games Workshop, and augmented by dividends collected in recent months.

Since my goal is to keep the portfolio fully invested, I looked instead at what my spreadsheet was telling me to add. The following table shows all the shares scoring 8 and 9, the highest-ranked shares, and the Decision Engine’s verdict rewritten in plain English:

Although shares that score 7 out of 9 are also worthy of consideration, since there were opportunities in the 8’s and 9’s I did not need to look any further.

We can quickly rule out buying more shares in Howden Joinery Group (LSE:HWDN), Latham (James) (LSE:LTHM), Churchill China (LSE:CHH) and Next (LSE:NXT). The difference between their ideal sizes and their trade sizes was less than the 2.5% minimum trade size so they are already fully represented in the portfolio (to find out more about how these sizes are calculated, please see the links at the bottom of this article).

Top-ranked Focusrite (LSE:TUNE) has fallen a lot in price since I added it to Share Sleuth in March 2022, and further since I added more in March 2023. This is one of the reasons it scores so highly.

The other, or course, is that I think Focusrite is a good business, but since I avoid trading individual shares more than once a year, we can pass over the electronic music equipment maker too.

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Third-ranked Dewhurst Group (LSE:DWHT), a lift component manufacturer, is the highest-ranked candidate. The shares are thinly traded, hence the note in the table about liquidity, and although I could have bought enough shares in the market that day, I chose not to.

That is because Dewhurst shares account for 3.2% of the portfolio. We can knock fifth-ranked Porvair (LSE:PRV) out at this stage too. It is a 3.1% holding.

By comparison, Share Sleuth’s holding in fourth-ranked RWS Holdings (LSE:RWS) is only 1.3% of the portfolio’s total value.

The scores of these three shares are separated by only the tiniest of fractions and the difference between them is meaningless, so on paper the best decision is to top up the tiddler, the most under-represented share in the top eight, and bring more balance to the portfolio.

Adding RWS

But, there is a but. RWS announced half-year results on 25 April, after I scored the company in March.

RWS reported lower profit than the same period in 2022 and it expects a full year outcome of £128 million adjusted profit before tax, a near 6% decline compared to the previous year.

Since my intention is to hold RWS in the portfolio for 10 years or more, I am not generally concerned about annual ups and downs in profit. The company is experiencing a slowdown due to specific issues like the introduction of the European Unitary patent and a bottleneck in US drug approvals, which impacts some of its more specialist work in patent translation and drug documentation. General market conditions are weak too.

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Growth in the Language and Content Technology divisions, which provides translation and content software platforms, is being held back as customers switch to paying for software as they go.

This division has been augmented by TrainAI, a service that uses the experience and capabilities RWS developed making its own AI platforms to collect and prepare data for all kinds of AI.

This development is, perhaps, more significant than the profit forecast, at least in the long term.

In one sense it is unsettling because more value is being added by technology and less by people, where RWS has traditionally been strong.

But it is also reassuring. RWS is one of the very biggest language services companies in the world. It has the customers, an established machine translation platform, and the translators to train the machines, check the work they do and do the work they cannot do.

A weak year does not invalidate the company’s strategy, and TrainAI is more evidence that artificial intelligence is an opportunity as well as a threat.

Following the money

The pace of change in the language services industry means we cannot take much for granted, though, and I felt duly conflicted about this trade.

A factor I do not consider consciously, may have subliminally pushed me over the line. Since the half-year results, the directors have between them invested over £200,000 in the company at prices above and below the 250p share price on the day I was considering the trade.

I must caution against using the apparent confidence of directors to justify trades. £100,000 to a chief executive of a reasonably large company like RWS is like £1,000 or £10,000 to many private investors, and like us they can have different motivations, or be wrong.

As usual, I slept on the decision. In theory, I could have added up to 5.7% of the portfolio’s total value in RWS shares, but I rarely go large and reflecting my caution this time I added 1,790 shares at a price of £2.51 on Friday 19 May.

The total transaction cost Share Sleuth £4,503, including £10 in lieue of fees. This was roughly equivalent to 2.5% of the portfolio’s total value, the minimum trade size.

Share Sleuth performance

At the close on 5 June, Share Sleuth was worth £182,759, 509% more than the £30,000 of pretend money we started with in September 2009.

The same amount invested in accumulation units of a FTSE All-Share index tracking fund would be worth £77,048, an increase of 157%.

Past performance is not a guide to future performance.

After dividends paid during the month from Games Workshop and Howdens, and a dividend and special dividend from 4imprint Group (LSE:FOUR), Share Sleuth’s cash pile is £4,732, more than sufficient to fund another addition in June.

The minimum trade size, 2.5% of the portfolio’s value, is £4,569.

Notes
May: Added more shares in RWS
Costs include £10 broker fee, and 0.5% stamp duty where appropriate
Cash earns no interest
Dividends and sale proceeds are credited to the cash balance
£30,000 invested on 9 September 2009 would be worth £182,759 today
£30,000 invested in FTSE All-Share index tracker accumulation units would be worth £77,048 today
Objective: To beat the index tracker handsomely over five-year periods
Source: SharePad, 5 June 2023.

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

Richard owns shares in RWS.

More information about Richard’s investment philosophy and how he implements it.

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