With six of my stock choices briefly explained here, I conclude my twelve for 2012 in this post. The format for my last picks is exactly the same as for my first – I want to explain them briefly, simply, and without too much jargon. If you want a more detailed analysis, of course, I did do full posts on all these companies – just use the search bar above right or tags at the bottom to find them!
Howden Joinery, makers of predominantly kitchens and fittings, have a very low cost business model and growth which is both deceptively recession-proof and surprisingly strong. Due to Howden’s approach to selling to the trade instead of consumers, stores tend to ‘mature’ over time as they increase in account holders – something which is still driving growth even before store expansion. On top of that, though, Howden is continuing to pursue growth in the vein of its existing model – cutting out the expensive high street stores customer-facing sellers need, and allowing themselves to focus on margins, which continue to be very strong. French expansion is on hold at the minute due to the uncertainty, but the business seems solidly run and consistently profitable since their troubled beginning.
Cranswick make sausages and meat products, and were memorably described in one of my very early blog posts thus:“This seems like a Buffettesque company. I think the company will slowly accrete value.” That’s a description I probably agree with as, through various cycles of pork selling prices, Cranswick has continuously grown and remained profitable. In fact, they’ve grown revenue year on year for the last 10 years, and almost grown profit consistently for that same period. The balance sheet is extremely conservative, the management seem the same, and so the question always came down to valuation; and at a P/E of below 11 an extremely safe, consistent grower whose margins had been slightly squeezed seemed a solid bet.
Sticking with my foodie theme, Zetar occupy a different spectrum – Cranswick with a £350m market cap, Zetar with £25m, I still see some similarities. Zetar too has grown revenue year-on-year since its birth, and while its balance sheet isn’t quite as safe in hard asset terms, its difficult not to ascribe a value to its profitable brands of chocolate and healthier snacks. Notably, Zetar licenses bigger names – Reggae Reggae and Bailey’s, for instance, for use in nuts and chocolate, giving the company a degree of product differentiation. Since me buying, Zetar have continued their upward trend and announced a (very small) inaugural dividend. The case remains for me, then, as Zetar was always a quality/price story. It is very small and therefore a little more risky than bigger stocks, but it is still growing and a P/E of 6 seems harsh.
Character offer a similar sort of attraction to Zetar in the sense of price vs. quality, then – a P/E of 7 for a company doing well in a very bad time for the toys they produce. It’s also a company that’s gobbling itself up, by buying back shares and paying out dividends from its strong profits, a process its directors are involved in. The company has both some proprietary brands and some licensed ones – like the top 10 Christmas toy Fireman Sam set. Cash flow seems very strong, bankrolling this sharebuying spree, though the company does continue to invest in future products and so hopefully is just exploiting the share price weakness. I do still have a few lingering doubts, but as ever it’s a risk/reward calculation; and as the company reckons they can maintain 2011’s performance through a tough 2012, if they manage it, I think the worst will be behind them.
At the face of it, Dart Group offered the dream in terms of metrics – the airline trades a discount to its tangible book value due to the high value of its aircraft and relatively low debt, has a very low P/E and seems to be fine in terms of liquidity. It was like that when I purchased it, however, and since then it’s shed another 33% of its value. Bearishness on airlines is overpowering at the moment (though I should note at this point the group also owns a distribution wing, Fowler Welch) and I suspect this is to blame for most of the share price falls; but up until now, Dart have stayed ahead of the game. Margins are under great strain given the supply/demand relationship – a notorious problem for the sector – but Dart have continued to grow revenues. Given their sound financial and liquidity position, I think they’re placed to get through the rough times and into the smoother, where they’ll benefit from their recessionary growth.
Creston are a company that’s de-risked significantly as they’ve paid down their debtpile through the recession. That’s always satisfying, as everyone know a recession is the most difficult time to pay down your debtpile – but Creston managed it and then went back on the acquisition trail, snapping up a US healthcare marketing firm to complement their other PR and marketing agencies. Much like other firms in the sector, they have a large number of longstanding blue chip clients, giving the company some degree of safety in its revenues – but in an environment of shrinking marketing budgets, companies are always more likely to shift allocations away from weaker providers. Luckily, that doesn’t seem to be happening – Creston have continued growing revenues as they’ve shifted through disposals to online and multi-channel marketing and away from old-fashioned print and TV, for instance. As with Zetar and Character, the size makes a choice like Creston inherently more speculative – but given that I hardly overpaid (Creston trade on a P/E of 7, analysts forecast growth in 2012) I’m not too worried. Small-cap shares tend to outperform on average, and value shares even more. I feel I’m more than compensated for the risk.
And there’s my 12 for 2012! Good luck to all the other participants, and I look forward to learning from all the different styles of sharepicking.