Companies, Screens
Sep 5, 2011
Richard Beddard
4 Comments

Get your good companies at cheap prices here

Thrifty 30 members Colefax, Castings and Haynes Publishing grace the tables

It’s reassuring to see seasoned Thrifty 30 members Castings and Haynes Publishing gracing the Thrifty and Nifty screens this month. Both shares have risen in price since I added to them to the portfolio but their continued presence in the tables suggests I should consider adding more. Colefax, I’ve just added:

NB: Here’s the Thrifty screen spreadsheet, you can find a short description of the screen on the shortlists page, and here’s a description of how to value a company using ROE and PB, and an explanation of Piotroski’s F_Score.


NB: Here’s the Nifty screen spreadsheet, you can find a short description of the screen on the shortlists page, and here’s a description of how to value a company using ROE and PB, and an explanation of Piotroski’s F_Score.

The two screens are very similar, targeting companies with profitable operations at cheap prices, but the Nifty screen puts the emphasis on consistent profitability. To construct it I instruct Sharelockholmes to exclude any company from the table that has failed to earn a Return on Equity of 10% or more averaged over every period it measures (1, 3, 5 and 10 years).

All that is required of a Thrifty company is that average profitability over the last ten years has been positive.

Otherwise, the screens are identical.

The Nifty screen seeks companies that perform in all economic conditions, hence profitability does not vary so much, they’re so-called defensive businesses. By allowing more variability, The Thrifty screen admits cyclical businesses that fluctuate depending on the economic circumstances.

If a Nifty company is also in the Thrifty table it’s particularly exciting as it implies the market may not be recognising the defensive qualities of the company (or there is something bad about it that is not captured in the statistics), which explains my enthusiasm for Castings, Haynes and Colefax.

Of the remaining Nifty companies, Latchways, which also features in both tables, looks most interesting. It makes fall protection systems for people working at height.

Although it’s hardly cheap by the conventional price to book measure, its supersonic record of profitability, albeit derived partly from leverage, is hard to ignore. Potentially Latchways is a niche business with hidden champion credentials.

4 Comments

  • The Money Grower September 5, 2011 at 6:19 pm

    Hi Richard

    It’s great to see where your figures come from and what criteria you input into sharelockholmes.

    Is this article aimed at beginners? If so, perhaps you could elaborate on the following:

    1) ‘hence profitability does not vary so much, they’re so-called defensive businesses.’ (profitability may remain constant but shareprice tends to do well in bear markets but lag in bull markets).

    2) ‘its supersonic record of profitability, albeit derived partly from leverage, is hard to ignore’ (I think this is a very important point to understand)

    If it is not aimed at beginners, then fair play.

    Cheers
    TMG

    2)

    Reply
    • Richard Beddard September 5, 2011 at 10:46 pm

      Hi Money Grower.

      Thanks for giving me the excuse to talk about the blog :-)

      It’s aimed at investors generally, and I hope it’s written clearly enough for absolute beginners to benefit from. However, with a few exceptions like the posts on beginning investing that are archived together at http://blog.iii.co.uk/category/beginning-investing/ , it’s primarily a journal and not a series of lessons so I don’t explain every term, every time, or the posts would get repetitive and I would never get any investing done! I link to old posts defining and explaining terms wherever I can, and I’m very pleased to answer queries and discuss issues in the comments.

      Regarding defensive and cyclical shares, the terms are often used as you describe in brackets: as though they determine price performance (and I guess they do more often than not). I don’t do that as it shifts the focus to price, and temps investors to judge the economic climate and pick defensive or cyclical shares accordingly, which I think is risky.

      I prefer to apply the terms to the business, effectively deeming defensive businesses as higher quality, they’re less risky than cyclical businesses as they can be relied upon to profit under most circumstances. At any given price point, a defensive businesses is preferable, or better value, than a cyclical one.

      Regarding the relationship between value, profitability and leverage, well that’s the theme of the blog, and especially the company profiles. Generally speaking profitability is desirable, leverage is undesirable (although it increases profitability it also has the effect of magnifying the cyclicality or sensitivity of a business to the economy) so the former tends to enhance value and the latter detract from it.

      I’ll expand on Latchway’s ‘supersonic’ profitability etc. when I’ve researched the company, if, as I expect, I do it next.

      Reply
  • Matthew September 6, 2011 at 3:06 pm

    I quite like BHP Billiton looks pretty cheap at the moment.

    Reply

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