Six for the future

Thanks to a summer hiatus, it's been nearly two months since my last roundup of companies tracked by the Share Sleuth decision engine.

These companies don't get as much attention as they deserve because their immediate prospects are unexciting, uncertain, or unattractive. Low demand for the shares may be depressing their share prices, which gives very patient investors the opportunity to profit.

Taking a long-term perspective enables a more relaxed attitude to news. Instead of trying to be among the first to react, and profit from changes in share prices as traders bet on their likely directions in the short-term, I'm looking for news that changes my opinion of a business. Specifically, whether it is likely to remain profitable indefinitely.

"Indefinitely" is a deliciously imprecise term. It doesn't mean forever, because nothing lasts forever. It means that, after some investigation, I am unaware of threats likely to render a business unprofitable and make it a poor investment. For a business to remain profitable, it must earn an adequate return on capital. Return on capital is difficult to measure, it requires many accounting judgements, but I focus on companies I am confident will earn more than 8% return on capital in a typical year.

One of the joys of investing in companies is they can do the reacting. Businessmen should know much more about the markets they're in than I do. Companies are groups of people striving, as a rule, to profit. Though they don't always succeed, they can at least adapt, unlike, say a commodity like gold, or a collectible, like a rare stamp. If people lose interest in collecting stamps there's nothing a stamp can do about it. Gold bars are inert.

Invest in a company managed by executives you trust, and a business that makes money in a way that should endure, and you're investing in an entity that is consciously working for you.

Six contrarian picks

Since early July, lift component manufacturer Dewhurst and research and development consultancy Science released no signficant news, which is the way I like it.

Market researcher BrainJuicer, issued a trading statement in July revealing pre-tax profits were 25% lower in the half-year to 30 June than they were for the comparable period in 2014 due to higher costs. It relocated to a larger HQ and recruited more senior managers. More detail should emerge from the half-year results later this month, but costs have increased faster than revenue as it tries to win preferred supplier status with multinationals, a step in its anticipated metamorphosis from a boutique agency to a market leader in "behavioural research", the application of behavioural science to market research. BrainJuicer has warned investors that growth may moderate, compared to a rapid early expansion, although it might also make big lumps of profit in some years from the stronger relationships its building. On a current earnings yield of 8%, I think the shares are good value.

At its AGM, car and van part manufacturer Castings reported higher sales volumes. In many ways Castings and BrainJuicer couldn't be less alike, but profit at Castings also comes in lumps as the impending introduction of new environmental regulations drives up demand for older, cheaper vehicles until they can no longer be sold. Last year the company experienced a lull in demand after the introduction of the Euro 6 standard, although the company was still comfortably profitable. This year, business appears to be normalising. The current earnings yield is 9%.

Goodwin, an engineering company, published its full-year results in July. The company has been highly profitable for decades but it faces two potential threats: persistent low oil prices and additive manufacturing.

Though I have no idea what will happen to the oil price, I buy Goodwin's line that we will still need oil for a long time. If we need oil, we need pipelines. If we need pipelines, we need valves. Judging by the company's high levels of profitability over a very long period, and, perphaps, the fact that they are patented, Goodwin's valves are good. Even if Goodwin is wrong about demand for oil, I think it will adapt - 55% of revenue is from other engineering markets, construction, defence, jewellery and tyres, although therein lies another more distant threat.

Jewellery is one of the industries being targeted by a somewhat new manufacturing technology, 3D Printing, that does not require the minerals Goodwin supplies casters. Having corresponded with John Goodwin, the company's chairman, I'm reassured that the threat to the bulk of the jewellery trade is distant, and Goodwin is already diversifying. Goodwin's earnings yield is 9%, although profit in 2015 is unlikely to be matched in the next year or two.

Rolls-Royce published half-year results in July revealing a hefty fall in profit compared to the first half of 2014. Lower defence spending, reduced investment in offshore oil and gas projects, and a period of transition as it phases out older aero engines and introduces newer ones, have spooked traders to sell the shares. While Rolls-Royce is an incredibly complex company, I take a naive view. With GE, the company is part of a duopoly manufacturing wide body aero engines. It has a terrific reputation, based on engineering excellence. The financial clout and expertise required to enter the business shuts out opponents. While diversification, particularly the marine and defence businesses, is not helping at the moment, it will in the future. Rolls-Royce's earnings yield is 9%.

Latchways: Not for the future

Latchways is likely to depart the decision engine as a US safety equipment supplier has taken the decision out of my hands by making an offer for the company. Perhaps the most signficant reason given for the acquisition is that it will enable MSA to distribute Latchways products outside Europe. Latchways had been investing heavily building its own distribution network, which was taking a toll on profitability. Doubts about whether Latchways could expand abroad as profitably as it had in the UK and Europe were one of the reasons I held back from naming Latchways as "one for the future". It may have found a way to expand profitability now, but not one an investor in UK shares can profit from.