Twelve for 2012

Part Two

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

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 Group

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.

Dart Group

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.

5 Replies to “Twelve for 2012”

  1. Wexboy

    Lewis – might have mentioned it before:

    While our 2012 Picks may not overlap, we have a lot of overlap on stocks we buy, or that are on my Potential Buy list, like: Cranswick, Dart, Character, Quarto, Begbies, ISG, Molins (and Tesco). These are all stocks I’ve bought, sold, or almost bought..!

    The issue I’ve had however with a lot of small/neglected stocks is the lack of a clear catalyst. This is something I’ve been trying to focus on a lot more – I try to prioritize stocks with a clear catalyst (even if they have lower relative upside) to improve my IRR, to be more aggressive/defensive (which?) and to be more stock selective.

    I’m a rabid value investor, but catalyst(s) hopefully offer or help me avoid the following: i) realizing a potential 75% upside is not that exciting if it takes 7 years to do it, or ii) I want to add an extra edge to my (hoped for) value edge, or iii) being taken out by a takeover bid if it is only prompted by a further slide in the share price, etc.

    What are your thoughts?

    • Lewis

      Hi Wexboy,

      I do remember the first bit!

      I agree with the lack of a catalyst, though I’m certainly of two minds on that front. More recently – i.e, since I made these picks – I’ve been favouring dividends as a ‘catalyst’. High dividend yields are unsustainable in the long run; either the share price will rise or the dividend will be cut. If I can identify no reason for a dividend cut, then I can assume the share price will appreciate! In that sense, it’s not just the P/E, but the level of earnings returned to shareholders that makes a difference. Character falls into this group, as did Morson pre-dividend cut. That was a shame.

      I suppose the biggest problem I have is identifying obvious catalysts that aren’t priced in, as it’s not something I’ve particularly looked at. I tend to assume obvious catalysts are priced in, and that if the company is fundamentally undervalued it’ll find a catalyst somewhere along the way – the market realising its performance is more solid than it is giving it credit for.

      My thoughts on the matter are quite hard to articulate.. can you give me some examples of catalysts you see for share price appreciation in the near term?

  2. Wexboy

    I set myself up for that..! Actually started to reply with a comment, and it kept getting bigger and running off in other directions. I’ve been thinking about this quite a bit in the past year – give me a day or two, and I’ll post a blog about this?

    btw On the same page about dividends though (with a twist or two) – yes, Interior Services (ISG:LN) has no catalyst, but I own it and am v happy with its 9.7% div yield!

    • Lewis

      I often have the problem with neverending comments. Have to trim them down and usually end up not bothering to post them.. conciseness is not my forte!

      Look forward to the blog post; and ISG is definitely one I should look at again. I think I dismissed it as I found the balance sheet rather unusual (though I now know it’s completely normal for the type of business) and investor expectations rather bullish. I see the price has come down and forecasts for next year continue to be strong, so it strikes me as a good time to consider it!

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