Shares for the future: why I think these 24 shares are good value

Fresh from a marathon run in sunny Spain, our columnist finds there are comparisons with running a company. He also explains why he likes this list of high-quality businesses.

I have just returned from 10 days in and around Seville, where the temperature rises above 20 degrees in the mid afternoon even in February, oranges litter the pavements, and the grocery stores are full of enormous fruits and vegetables.

The supermarket shelves back in the UK seem incongruous, but it is good to be home refreshed by the winter sun.

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A letter, almost from Sevilla

In the same way we often experience our most lucid thoughts first thing in the morning, insights loosely related to investment struck me while released from deadlines and accounting conundrums, challenged instead by an unfamiliar language, eating dinner after 8pm, and travelling long distances on foot.

We had not gone specifically in search of the winter sun, in fact it was a double-edged sword because it made the end of our objective, the Seville marathon, more challenging. I witnessed a runner being carried over the finish line by two paramedics, one lifting each armpit while his legs flailed wearily above the tarmac.

My performance was only slightly better. I had a target, 4 hours 20 minutes, and an easy pace to remember to achieve it: 6 minutes per kilometre, 10 kilometres per hour, 42 kilometres in total. For the first 21 kilometres, I was cranking out the splits like a metronome, almost effortlessly, but from that point on I had to push a little harder to achieve each kilometre.

At first, I barely noticed, but in kilometre 29 I cracked. That one took seven minutes and from then on I only ran one leg faster, the final one.

The low point was the 40th, which I walked in 10 minutes 19 seconds. I finished all 42 and-a-bit kilometres about 20 minutes behind schedule.

Testing my running covenants

Hitting the infamous wall is, perhaps, the running equivalent of a company testing its bank covenants. The walking allowed me to recover somewhat, which is like the bank agreeing to let a business continue trading until it can find its feet again. Insolvency was the guy I passed on the entry to the home straight lying in the gutter receiving medical attention.

If this had been my first marathon, you could forgive me, but I have pretty much run a marathon a year for the last 20 years, and I think I have hit the wall every single time.

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If you apply the standard formulae to my times over shorter distances, I should be running much faster. My Garmin running watch reckons I could run a marathon in a spuriously precise time of 3h 34m 55s.

The probable reason for this discrepancy between predicted and actual times is the assumption embedded in the prediction that the runner is at peak fitness for the distance. Achieving peak fitness for a marathon is much more time consuming than for a half marathon, or a 10k race. Being busy, ill-disciplined and easily distracted I have never properly committed to the distance one must run in training.

I know this, but still I hurl myself at unreachable targets.

On targets and investing

If you have read previous editions of this monthly ‘Shares for the future’ article, you may have spotted that I try to be very disciplined about investing.

I score each share, and rank them in my Decision Engine, which is presented below. That is because there is a lot at stake. These articles inform my own investments and other peoples’, and I do not want to make ill-considered decisions.

You may also have noticed that when I set targets, they are soft. There are no target prices for shares, and the performance target for my Share Sleuth portfolio, which is to beat the equivalent investment in an index tracking fund handsomely over periods of five years or more, is simply recognition of the fact that to justify the effort of researching and running a portfolio, it must do substantially better than buying a ready made one.

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So-called stretch targets are, to my mind, dangerous. They encourage reckless behaviour, like running too fast at the beginning of a marathon. This is fine in the odd vainglorious running race, but not when it comes to our financial futures.

I think of this, not only when considering what I want to achieve, but also when I read the targets companies set themselves. Stretch targets used to justify executive pay should be treated with a double dose of scepticism. Often they are actually soft targets, with the word stretch added to justify the enormous payouts they will trigger. But if they are genuinely vainglorious, I worry about the risks executives will go to in order to achieve those payouts.

A target is not a substitute for strategy, and when a company declares a plan to double revenue in five years while glossing over what it does well, how it plans to do better, and what could stop it, I feel very queasy.

That precise target, to double revenue in five years, has stuck with me because I attended the AGM of Xaar, a digital printing technology company, in 2015 after the company had announced it planned to double revenue by 2020.

I was doubtful at the time, and rightly so. Xaar’s revenue almost halved over the period.

Anpario growth conundrum

A confounding aspect of highly ranked Anpario (LSE:ANP) is its relatively modest rate of revenue growth.

Anpario manufactures natural animal feed additives for farmers, which promote animal health and make farms more productive. One of the key selling points is that the additives do not incorporate antibiotics, which are cheaper but outlawed as growth promoters in Europe and many other parts of the world because persistent use encourages antimicrobial resistance.

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The bans are easily circumvented though, for example by farmers that feed medicinal antibiotics to healthy animals. In February, Nature reported an analysis that predicted antibiotic use will rise by 8% between 2020 and 2030, so the regulations may only be having a limited impact.

Hopefully I will learn the company’s perspective later this month when I meet the chief executive soon after Anpario publishes its results for the year.

24 Shares for the future

I re-score each share in the Decision Engine once a year, after the publication of the annual report.

Since the last update a month ago, Hollywood Bowl (LSE:BOWL), Tracsis (LSE:TRCS), and Victrex (LSE:VCT) have gone through the process. RWS Holdings (LSE:RWS) and Quartix Technologies (LSE:QTX) have published annual reports and are next up in the queue.

Hotel Chocolat (LSE:HOTC) published its annual report in December, but the company was in the process of withdrawing from most of its international operations and I did not feel confident that my analysis would be meaningful. Instead, I put the share on an “emergency” score, which is why it languishes at the bottom of the Decision Engine table. I will review the business properly in December 2023, once we have experienced a year of the new UK focused strategy, and I will probably catch up on events without scoring the company after the half-year results, which are imminent.

Experience tells me shares that score 7 or more out of 9 are probably good value, this month there are 24 (last month there were 22), and shares that score 5 to 6 are probably fairly priced.

Shares marked with an asterisk score less than 5 out of 6 for Risks, Strategy and Fairness, the three forward looking categories of the five I score. These shares are more speculative.

Click on a share’s name in the table to read how I scored it, and please note scores may have changed due to movements in share prices.

Scores and stats: Richard Beddard. Data: SharePad and annual reports

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

Richard owns shares in Anpario, and most of the shares in the Decision Engine.

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

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