Interactive Investor

Six shares for the future

9th October 2015 10:51

Richard Beddard from interactive investor

Please remember, the decision engine presents a contrarian view of the market. Shares it favours will often be unappealing to stockmarket traders who move share prices in the short term. The future mentioned in the headline of this article is the long-term future. Over many years, these investments should come good. They are profitable companies that should remain so because their profitability depends on factors that should endure. Now there may be an opportunity to buy these shares cheaply, because their prices are weighed down by factors that won't endure.

This month, I don't have any companies to add to the top six contrarian pics identified last month.

BrainJuicer

Of the six, BrainJuicer [Earnings Yield: 8%], the quirky market research company with a unique, and, it says, superior testing methodology based on behavioural science, has caused most head scratching.

The company had warned first-half profit would fall 25% in a trading statement in July, and it duly reported a 24% fall in profit in September. But for one-off costs, operating profit would have fallen much less, about 3%. The one-off costs were incurred negotiating a takeover that didn't happen (the price was too high), and moving BrainJuicer to a new HQ.

While profit fell, revenue rose 4% overall and 7% in BrainJuicer's core business, quantitative research, which was responsible for 85% of revenue in the year ending December 2014 and is the focus of the company's strategy. Costs, though, rose faster as BrainJuicer took on 10% more staff and revenues fell sharply at BrainJuicer's smaller qualitative business, which uses behavioural insights to advise companies on developing their brands.

The company is experiencing growing pains, as it tries to become a regular tester of concepts and advertisements for major consumer brands instead of working on occasional projects. In refocusing its consultancy work on 'Brand Strategy', advising companies using a framework that leads into its innovative quantitative techniques, it has shrunk the qualitative side of the business, which has also impacted profit, although BrainJuicer expects revenue to pick up.

In the meantime, investors accustomed to rapid growth have lost a bit of confidence, which is why the valuation is enticing. If the company's normative database of behavioural metrics and testing techniques are difficult to replicate, as I suspect, and are better at predicting which adverts and concepts will work than traditional market testing, as I also suspect, BrainJuicer should prevail.

Sagentia

Maybe Sagentia [Earnings Yield: 8%] has given away what it's going to do with its cash pile. The research and development consultancy that benefits from the “Cambridge effect” has acquired Leatherhead Food International, a technical consultancy for the food and drink industry, out of administration. The cost, £1.62m, gains Sagentia an unspecified number of consultants in a sector it already serves (out of 150 staff in total) and will barely dent its bank balance.

Goodwin

Meanwhile, stalwart engineer Goodwin [Earnings Yield: 12%] reported first quarter sales down 16% and first quarter operating profit down 46%, the result of lower orders earlier in the previous financial year, particularly for valves and other equipment bound for the moribund oil industry. Orders have increased to levels the company achieved before low oil prices stymied investment, but it's important to keep the rise in orders in perspective. This financial year ending in July 2016 is going to be one in which the company may earn significantly reduced revenue and profit. A sustained recovery in orders will lead to a recovery in revenue in 2017, but since Goodwin's competing harder for those orders, it will be less profitable than it was in the go-go years for longer.

Rolls-Royce

Rolls-Royce [Earnings Yield: 12%], a company with even deeper roots in science and engineering, is continuing to adjust to lower spending on defence, and offshore vessels and equipment for the oil and gas industry, as well as disruption in its most signficant business, aero engines, as it introduces a new version of one of its most important turbines. On Monday it announced further job cuts and a sharper focus on the marine technologies of tomorrow.

Castings and Dewhurst

There's been no news from Castings [Earnings Yield: 9%], which manufactures motor vehicle parts, or lift button manufacturer Dewhurst [Earnings Yield: 11%].

Two additional companies may merit attention, if not now, then soon.

A sell-off in Renishaw [Earnings Yield 9%] shares sees the manufacturer of instruments to calibrate, test and control machine tools entering value territory. As I reported in August, adjusted profit in 2015 was exceptional though, so some caution is required. Using profitability in an average year instead of the most recent year, Renishaw's earnings yield is 7%.

Trade Show organiser ITE [Earnings Yield 12%] is also enticing. Rather like Goodwin, the full impact of low oil prices is only just beginning to show itself in the company's results. For a while Goodwin earned money from contracts agreed before the slump in the oil price, and for a while ITE was earning money from trade shows it had already sold. Some of ITE's events are oil and gas shows, but the real problem is sixty per-cent of revenue comes from Russia and Central Asia, where most economic activity is highly dependent on oil and gas and currencies are under pressure. The case for ITE is not straightforward. To reduce its exposure to Russia's turbulent economy, ITE's acquiring shows in other parts of the world, but in doing so it's also accumulating debt. Nevertheless costs are mostly flexible, if shows shrink it employs fewer people and pays less for space, and under very experienced management it's survived previous Russian crises, and subsequently prospered.

Meanwhile, previous contrarian additions to the decision engine are coming good, and so they less interesting, for now.

FW Thorpe [Earnings Yield 4%], a manufacturer of industrial and commercial lighting systems is a true stalwart and shows every sign of remaining so. But an earnings yield of 4%, is equivalent to a price for the whole business, equity minus excess cash, of 23 times adjusted profit.

Defence technology specialist Cohort [Earnings Yield: 6%], engine and drive train specialist Ricardo [Earnings Yield: 5%] and eco-bulding products manufacturer Alumasc [Earnings Yield: 7%] also appear to be executing winning strategies well, but investors have rewarded them by bidding the share prices up.

High-flying Dart [Earnings Yield: 5%] shares may still be good value. The company and its brokers expect profit in 2016 to be far higher than it was in 2015, but I worry about the sustainability of profitability and growth. Dart's entrepreneurial management have grown the Jet2 airline fast, but now the company's taking on debt to renew and expand its fleet and the cost of fuel will probably rise again in future.

Haynes Publishing has left the decision engine. I love the Owner's Workshop Manuals, not the auto manuals but the general interest ones that share the same design. But cars are Haynes' core business, and I've very belatedly lost confidence that manuals are relevant, digital or print, in the age YouTube and more complex, reliable cars.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.

Related Categories

    Commodities