Expecting Value – UK Value Investing Blog
9Jan/125

Twelve for 2012

Part One

As the idea for this post came from Philip O'Sullivan, it seems apt to quote the first paragraph of his post at the start of mine by way of explanation:

In a recent email exchange with some of the leading share bloggers in the UK and Ireland I proposed that we each sit down and draft our thoughts for how the markets will behave in 2012, and what stocks we’d like to own to play some of those themes. Given resource limitations (I don’t know of any blogger who has a team of analysts working for them!), there will, I’m sure, be quite a bit of selection bias in the names we highlight – generally speaking, people invest in what they know! I illustrate that perfectly by choosing 5 Irish listed names in my core picks, although all of them are firms with a distinct international dimension (none of them could be described as plays on the Irish domestic economy). But despite the selection bias I do think that this is a worthwhile exercise, and one that will no doubt contribute to idea generation. As ever, readers are strongly advised to do their own research and consult a professional financial adviser if they want to invest their own money.

The concept, then, was to pick twelve stocks we thought would outperform in 2012. Staying true to form, I'm being a little more boring that Philip and choosing to stick precisely with what I know - my portfolio, more or less. My reasoning is that my portfolio is run by looking at the stock market and picking stocks I think are likely to make me money; if I don't think that, the stock should get dumped. If I were to pick twelve stocks different from my portfolio, the logical thing to do would be to sell my portfolio and buy the twelve stocks - more or less! Unless, of course, I think that I can pick stocks that will go up in 2012 but not necessarily the longer term. That sort of prediction is something I won't even try and dabble in, so I'll keep my faith in value. Maybe it'll outperform this year, maybe it won't - there are no certainties. Investing, for me, is just about trying to tip the odds in my favour in the long-term.

What it does neatly do, though, is give me a chance to clearly restate my picks and why I have faith in them. Just like Richard Beddard at iii, then, I'll be trying to explain concisely why I'm invested, in as simple terms as possible. Without further ado, then, my first six choices:

Morson

Morson's share price recently dived after announcing the cutting of the dividend. While it's not perfect from my point of view, I'm nowhere near as concerned as the market is - mostly because of a metric I devised a while back, the holding ratio. Mason's (chief exec) huge holdings of the shares compared with a relatively small salary mean his financial interests are forcibly tied with that of shareholders - and as such I can understand the dividend cut being a precautionary measure to improve long-term share price performance. The company is extremely cheap on an earnings basis, in an industry which is certainly out of vogue (technical recruitment).

Barratt Developments

The housebuilder Barratt is, I think, a victim of the great pessimism on the housing market in the UK. It needn't be that way, as I think they have potential to do well even in a sluggish market. Mix changes from flats to big houses, land bought cheaply in the downturn, improving margins and continued Governemnt support - not least because the majority of the voting public want house prices supported for their own personal interest - mean I think, in the long run, the picture for Barratt is pretty rosy. Earnings are still weak/negative, but Barratt has billions worth of land on its books, leaving it on a P/B of 0.31. That's my downside protection.

Communisis

Communisis are a company that look to be quickly changing and adjusting to market needs, whilst being given very little credit for doing so. They're shifting from being a generic mass mail printer to a top-end, targeted mail approach, with interesting tie ins with very 21st century technology - using Equifax's credit database, for instance, to draw up consumer profiles and understand what approaches will work best. I like it on a fundamental level, as it seems to be a far better approach to marketing, but more importantly their customers seem to like it, too. Continued contract wins and improving revenues combined with the better margins enjoyed from this new approach means I think Communisis will fly under the radar until the market realises they're fundamentally changed. On a P/E of 7, they're priced to decline, not to rise.

N Brown

With a market cap of nearly £700m, the clothing retailer N Brown are far larger than my other choices, but have fallen prey to the same bearish attitude on all forms of spending. Trading on a P/E of about 9 is cheap for such a large company - and should reflect some underlying problems. The opposite, I think, is true. N Brown have seen revenues and profits rise through the recession, as their strategy of careful targetting through niche websites and catalogues continues to pay dividends (another strong point too, with a yield above 5%!). This concept - moving away from the highstreet - looks to me to have more legs than similar firms, and trading on such a low P/E in the midst of a huge consumer squeeze can only be a good thing. Should people get just fractionally more positive on their prospects in the next few years, we're suddenly left with a growth stock on a single digit P/E.

Plastics Capital

Plastics Capital define niche. The produce incredibly specific products - such as the plastic tube that keeps hydraulic hoses a consistent diameter - and, as such, seem fairly insulated to wider swings in consumer demand. I say fairly, as they aren't immune from restocking cycles - and, one must remember, if their customers' customers are getting hit, so are PC. With that said, though, they operate market leading positions in everything they produce - customer retention is very high, relationships are long, and as such revenues are reliable. That is at odds with a P/E below 7, for me, as the company looks to be safe in other respects.

Lookers

The best explanation for Lookers is probably N Brown's story above turbocharged. It's a very simple investment case to explain; Lookers have grown revenue and profits through the recession in incredibly tough times. Going forward, unless you never see a consumer recovery, car sales should at some point recover. The market's pricing doesn't look that way - it looks to be signalling profits slumping significantly and taking a long time to recover. Analysts forecast only a small drop in profits this year then improvement as Lookers continue to gain market share; but their safe balance sheet and strong performance up to now in a bad consumer environment gives me the feeling that the business is resilient enough to be a solid performer in coming years.

So there we are - the first six of my twelve explained in hopefully fairly simple terms. Far more concise than I can usually manage!

Comments (5) Trackbacks (0)
  1. And far more concise than I’m managing!

    Interesting Communisis are so high in your estimation. Why Communisis and not St Ives I wonder? They seem to be following similar paths (he says, not really having much of a clue abt the future of marketing!). I looked at Communisis years ago, and it looks as though I mean to keep an eye on it, but forgot! http://blog.iii.co.uk/direct-mail-dinosaur-fights-extinction/

    • Hi Richard,

      You’re right in me liking Communisis! Frankly – and I hope this isn’t too much of a cop-out – I looked at St Ives and Communisis together right at the start, when I decided to include Communisis in the porfolio. At that point, I remember seeing Communisis as a company which had already turned the corner, with St Ives in slightly more of a difficult spot.

      Looking at St Ives’ recent results and management line, it does sound very similar to Communisis, and at first glance I like it too. I would say they seem a little more sketchy – Communisis seem very eager to put numbers to things (£20m of contract wins, £5m of soon-realisable cost savings) and it’s immediately obvious there’s a lot of slack in the business – ‘overall sites will be reduced from 14 to 9 by the end of 2011′.

      In the end, though, the obvious answer is that I made my decision back in June and I haven’t really analysed Communisis against its competitors since. Trading costs are so prohibitively high I haven’t really considered trading in/out of stocks to play the sectoral story, though it’s probably something I could do more with. If I had more time!

      “I looked at Communisis years ago, and it looks as though I mean to keep an eye on it, but forgot!” probably sums up exactly what I did with St Ives when I first compared it with Communisis! I compared, I decided, I moved on, and I haven’t really done a full and thorough sector analysis since.

  2. Lewis – glad to see somebody else joining in! And nothing boring about sticking to your portfolio – it’s the only approach that I’m comfortable with myself, see here:

    http://wexboy.wordpress.com/2011/12/30/happy-new-year-a-bakers-dozen-for-2012/

    I’ve added Expecting Value on my new Blogroll. Happy New Year!

    • Hi Wexboy,

      Look forward to seeing how yours do, especially given how different our selections are; yours look to often have a more clear (often asset based) discrepancy with intrinsic value. Thanks for the link – it looks like I clean forgot when you set up, so I’ve rectified it – it’s all interesting stuff!

      • Thanks, Lewis! Agreed – and for asset focused investments vs. earnings based investments, I think current (I’ve tried to pick a few…) or future catalyst(s) are even more important in realizing some/all of the inherent upside (and within a reasonable timescale).


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