D-Day for Dart, Anite, Games Workshop

Confidence

Three companies in the Thrifty 30 have risen more than 50% since I added them to the portfolio, so it’s decision day. Should they stay, or should they go?

There’s nothing magical about 50% except it’s the minimum return I expect for holding a share for up to three years. Obviously these investments have ‘matured’ early, as the Thrifty 30 is little more than a year old.  If I am to keep them, I must believe they’re likely to rise another 50% in the next three years or so. In other words, they’re still undervalued by the market.

Otherwise I’d be better off finding new companies with the level of potential I’m seeking.

Games Workshop (GAW) manufactures and sells toy soldiers, models and rulebooks for its fantasy Warhammer and Lord of the Rings universes. When they breached my target price, the shares cost a titanic 18 times earnings averaged over the last ten years, though they’ve fallen very slightly since. I wouldn’t normally add a company at that kind of valuation. Expressed as a yield, it’s less than 6%.

But Games Workshop is a peculiar company, and it’s had a peculiar decade. Its Lord of the Rings game was a runaway success as the films were released, which encouraged the company to expand recklessly. If you buy management’s line, this was a serious misjudgement, which cost it almost all its profit between 2006 and 2009.

Tom Kirby, the architect of a decade of prosperity in the 90’s, and a decade of boom and bust in 2000’s, is now chairman. His replacement as chief executive, Mark Wells is even more hair-shirted in his evangelism for “The Hobby”. And this is the attraction of Games Workshop: if only it had stuck to meeting the needs of its war-gaming acolytes instead of chasing the mass market, it could have saved shareholders a lot of pain and remained consistently profitable throughout the last decade. That could be the story of the next ten years, it will be if Wells has his way, so average earnings over the last ten years may undervalue the company. Assuming this year’s earnings are more typical, the shares are still in bargain territory. Its PE is nine.

The justification for taking such an optimistic view is that Games Workshop doesn’t have much competition. In a broad sense it’s competing against computer games, and particularly online multiplayer war games. But if you accept, that there will always be people who enjoy battling each other in person, using models they’ve painted, then Games Workshop owns the market, at least for Warhammer and Lord of the Rings.

I’m sticking with it, which means I’ll next review it when it publishes its annual report next summer, or when the price reaches 655p, whichever happens first.

Dart (DTG) is another company I’ve grown to admire. Its market, air passengers and road freight, is more competitive, but under chairman, chief executive and majority shareholder Philip Meeson, it’s made fewer mistakes.

There can be few industries with profits more sensitive to changes in the rate of economic growth or contraction so I reckon Dart’s long-term average earnings are more pertinent than Games Workshop’s. Despite the fact it’s well run, its future profits are likely to be more variable. Dart shares cost 12 times average earnings, which is just outside bargain territory and though its a wrench to consider dropping the company from the team, I fear that time is coming. Although I said Dart was cheap less than two months ago, the price then was just 66p and the shares cost ten times earnings. Now it’s breached 84p, I’m not so confident.

It feels premature to bow out, though, so I’m going to hang on for around 125p.

You only need to read my last profile of Anite (AIE) to recognise that I’d added the share without realising how speculative its mobile ‘phone testing business is. To an insider, the coming of 4G LTE standard might be inevitable, and Anite’s role in testing the network and handsets secure, but technological change is normal in the industry, which adds risk, and now the company’s shares are not obviously cheap, they cost about twelve times average earnings over the last 10 years,  it’s a good time to get the Thrifty 30 out. I ejected them from the portfolio on Friday at a price of 52.5p.

Sometimes companies emerge from bargain territory in a nether region where they are not obviously cheap, but not expensive. That’s been the Thrifty 30’s experience with all three of these shares. The only companies worth owning at such a ‘fair’ price, are really good ones so that’s the subtle judgement I must make. Based on what I’ve read, mostly in the annual reports, I just don’t have the confidence in Anite that I have in Games Workshop and Dart.

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