Shares for the future: reassessing two of my top 10 stocks

After a recent profit warning, two readers emailed about Churchill China (LSE:CHH), which is the top-ranked share in my Decision Engine. A sell-off prompted them to wonder whether they had made the right decision to buy shares in the not-so-distant past.

I cannot comment on other people’s decisions, we are all different, but in my world, a profit warning can be a reason to change my mind about a share. But I must be confident that I am changing my mind for the right reason.

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Since I expect to hold shares for 10 years or more, short-term fluctuations in profit and declining share prices are an occupational hazard. On its own, traders losing confidence in a share is not a good reason to change my mind.

Other things being equal, a sell-off makes a share more attractive. This is how Decision Engine works. The highest-scoring shares are good companies with low share prices. The lower the share price, the better.

What matters is whether the warning and subsequent sell-off belies a weakness in the business that I had not previously fully understood. If it does, I change my mind, by changing its score.

Business conditions are particularly unstable at the moment, which is exposing weaknesses in businesses. Churchill China is not the only company to have warned. In fact, as I gathered my thoughts for this article, it was not even top of my mind.

Although nobody has emailed me about it, Solid State (LSE:SOLI) was.

Rescoring Solid State: concentration risk

Early this month, Solid State expressed confidence that it would win enough orders for communications equipment from the defence sector to achieve revenue and profit forecasts for the year to March 2025.

Less than two weeks later, the company revealed its performance would fall “materially” short because a major defence programme had been put on hold pending the UK government’s strategic defence review, which should conclude by next summer.

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Solid State is confident that orders will resume, but not in this financial year, or, probably, the first part of the year starting in April 2025, hence it has reduced its expectations for both years.

It did not put a number on its new profit forecast, but the company will have talked to brokers who have adjusted their forecasts. This is how their expectations have changed.

The dates correspond to the two trading updates:

Source: SharePad.

Solid State is a fairly diversified business. It supplies electronic components, systems and products to a wide range of businesses.

It surprised me that delays in one defence programme could have such a big impact.

Perhaps it should not have surprised me, because Solid State is a small company and defence programmes can be big. On top of that, there were plenty of signs Solid State was increasingly dependent on large and potentially lumpy defence orders:

• Expectations for revenue and profit were already lower than the high watermark achieved in 2025, because large defence orders had resulted in exceptional profits in 2024.
• That year revenue from the defence sector had risen to 44% of total revenue.
• In 2024’s annual report Solid State said it is focusing on growing its medical business as a counterweight to defence, implying it recognises the need to diversify risk.
• Military radios are part of Solid State’s manufacturing division (which it calls Systems). Solid State has been investing in its capability to manufacture more complex systems. Because of the value it adds, Systems is usually more profitable than the other division, Components (distribution), but it has higher fixed costs. That means if orders fall short, the gap between revenue and costs (profit) can shrink alarmingly.

These points were known to me when I scored Solid State in August, but I did not join the dots as I have here.

Solid State’s dependence on selling communications equipment to large military customers is exacerbated by the large investment and high fixed costs that result.

The instinct to diversify is good, but it will take time and probably involve acquisitions. The company’s ‘strategy horizon’ is 2030.

The Future (directed) [2]

• Addressing challenges: Lumpy defence orders, complexity [0.5]
• With coherent actions: Diversification (through acquisition), focus on Medical business, own brands [0.5]
• That reward all stakeholders fairly: Employee focus, Sensible executive pay [1]

In August I gave Solid State’s “Future” a score of 2. A 0.5-point reduction does not undermine my overall view that it is a good long-term investment, it just moderates it a bit.

Solid State’s total score is 8.4 out of 10. It is ranked 7 out of 40 shares in the Decision Engine.

Churchill China: difficult market

Next to adorn a profit warning with the words “materially below” was Churchill China.

Churchill China makes tableware for restaurants.

In its annual report for the year to December 2023, the company looked forward with muted optimism to 2024. While the hospitality sector was evidently still spluttering, the company was operating efficiently and, it anticipated, profitability would improve as demand did.

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Demand has not improved, though. We can, perhaps, understand why. The hospitality industry has had a torrid five years with pandemic, followed by food, energy, and labour cost inflation, the latter exacerbated most recently by the UK Budget.

The company says it has not experienced the uplift it normally experiences at this time of year, and brokers have reduced their forecasts. Compared to 2023, they predict a 5% reduction in revenue and a 26% reduction in profit.

Churchill China is definitely not alone. Major UK rival Steelite recently announced it is switching to a four-day week, and European rivals are unlikely to be faring any better.

Source: SharePad (forecasts last updated on 21 Nov)

Churchill China says its fundamental advantages have not changed, and I would be surprised if they had. It still makes a great product (due largely to its unique manufacturing processes) and has good growth prospects in markets where it has low share (in Europe).

Like Solid State, potters have high fixed costs, which reduces profitability when volumes fall. Another probable reason for the sharp decline in profit from a relatively modest decline in revenue, is that perennially cash rich Churchill China has been investing in its range.

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I wonder how many of its rivals have had the resources to do that.

While I feel my correspondents’ pain, I think the decline in Churchill China’s share price really does make the shares more attractive to long-term investors.

I have not fiddled with its score, and it remains the highest-ranked Decision Engine share.

22 Shares for the future

Here is the ranked list of Decision Engine shares. I review the scores at least once a year, soon after each company has published its annual report. The price scores are calculated using the share price prior to publication.

Generally, I consider shares that score 7 or more out of 10 to be good value. Shares that score 5 or 6 out of 10 are probably fairly priced.

YouGov (LSE:YOU) and Tristel (LSE:TSTL) have published annual reports and are due to be re-scored.

Scores and stats: Richard Beddard. Data: SharePad and annual reports
Click on a share's name to see a breakdown of the score (scores may have changed due to movements in share price)
Shares marked with an asterisk (*) have been re-scored, click the asterisk to find out why.

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

Richard owns Solid State, Churchill China and many shares in the Decision Engine. He weights his portfolio so it owns bigger holdings in the higher-scoring shares.

See our guide to the Decision Engine and the Share Sleuth Portfolio for more information.

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