Step forward… The real Thrifty 30

In practice:

I name this portfolio…

Regular readers will be familiar with my Thrifty 30 portfolios. They are portfolios of thirty shares in financially strong companies at cheap prices. I first tried it on this blog, then I had a go for Money Observer [pdf]. Up to now, though, I have not maintained a Thrifty 30 portfolio.

Today, I’m starting a new experiment. I’m going to choose the first companies for a Thrifty 30 portfolio to be updated on this blog. If a share ceases to be thrifty I’ll “sell” it and replace it with a new thriftier company, if I can find one. I’ll track the performance of the portfolio too, but not obsessively.

Although It’s not a real portfolio of shares, these are my best ideas so it’s likely I’ll own many of them. I don’t, however, buy or sell shares for myself when I’m writing about them, or have just written about them, and I do inform Interactive Investor’s editor-in-chief when I file an article about a company I already own, in line with the Press Complaints Commission’s code of practice.

In short, I won’t profit from short-term price movements that might result from something I’ve written.

In my opinion the share prices of all the companies in the Thrifty 30 are temporarily depressed. Judging by their past records of profitability, their financial strength, and their reasonable prospects, shares in these companies should be worth more than their current stockmarket valuation.

If you’ve been reading this blog, you’ll know I identify these companies using simple quantitative measures, the long-term price earnings ratio and Piotroski’s F_Score primarily. The rest, the bit I’m least confident about, is common sense! For the sake of space and readability I won’t include the figures in these short profiles, but you can look most of them up in this table compiled from the Sharelockholmes database:

You’ll also know that I’d never buy shares in a company without checking the facts and the reasoning, so please don’t invest in the Thrifty 30 blindly. Use it as a source of ideas for your own, equally nattily named portfolio.

Value investors focus on what could go wrong. If nothing goes wrong, then very likely the share will make money. Looking at the companies I’ve selected, the biggest risk in the T30 is also a strength, size.

Cheap companies, tend to be small, and easily overlooked by the stockmarket. Often they have controlling shareholders who may not always act in the interests of smaller investors.

In the recent bear market, founders and majority owners took advantage of low share prices to take companies private. They said, with justification, that there was very little interest in their companies. Loyal shareholders, though, were fleeced.

Since few investors want to own shares in an unlisted company, a delisting is tantamount to compulsory purchase and if the share price is only temporarily low, smaller shareholders are deprived of the recovery that would give them their return.

I take some comfort from the fact that companies I’ve selected, like Dewhurst and Haynes, have been listed for decades, and more from the fact that in a portfolio of thirty companies the actions of one group of managers can’t make too much of an impact.

However, the holy grail, is not just a financially sound company at a cheap price. It’s a liquid, financially sound company at a cheap price.

Dewhurst (DWHT)

Dewhurst, which makes pushbuttons for lifts and ATMs, is a consistently profitable UK manufacturer. Although it appears to be growing through the recession, it could yet suffer a lag as we pull out of it because its components are required late-on in new construction projects.

Holders Technology (HDT)

On the face of it, Holders is probably the least attractive stock of these six. It produces materials for printed circuit boards, an industry in severe recession. It’s very cheap, though, and management has seen out previous semiconductor cycles.

Games Workshop (GAW)

Games Workshop experienced a stockmarket bubble of its own making after it launched a war gaming format based on the Lord of the Rings novels. Investors got over-excited, and so did management, but now they have all learned a hard lesson the shares seem reasonably cheap again.

Haynes Publishing (HYNS)

Although Haynes is selling fewer manuals because cars are more reliable these days, and we’re less inclined to fix them ourselves, it took a big step into garage workshops when it bought Vivid, a digital supplier of motor data and schematics.

OPD (OPD)

I shied away from head-hunter OPD in May. Management showed all the signs of overconfidence, flashy acquisitions and pay packets to match, and few signs of having learned the lesson of subsequent write-offs and a crash in the share price. Added to the recession, which affects recruiters disproportionately, it was just too risky. It looks more interesting now two directors have stepped down from the main board, Peter Hearn, the chairman, has failed to take the company private, and fund manager Schroders owns enough shares to act as a counterbalance to his majority stake.

Printing.com (PDC)

Although printing business cards, stationery and flyers, is a competitive business suffering a bad recession, Printing.com appears to have a low cost business model (all the printing is done in a centralised factory) and strong finances.

These are the first six members of the Thrifty 30. I shall invest an imaginary £1,000 in each, at Tuesday’s closing price, assuming fees and tax of £15. I’ll keep the remaining £24,000 for purchases in the months ahead. From the Thrifty 30 I expect at least a positive real return (i.e. taking inflation into account) over any five year period.

Of course, that wouldn’t be adequate reward for all my hard work. Over five years or more, I hope to achieve an average annual return of 15%. Benjamin Graham, the father of value investing, thought 15% was achievable when he outlined a system that inspired the Thrifty 30, and Warren Buffet, frequently hailed as the world’s greatest investor, says that’s what he aims for.

If it’s good enough for them, it’s more than good enough for me.

Over the next few weeks I’ll add more thrifty stocks and reveal the not-so thrifty. Companies that seemed to fit the template but, for one reason or another, I haven’t included in the portfolio.

You might not agree…

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Compared to the average annual corporate profits, the stockmarket is still ‘cheap, but not that cheap’:

In theory:

Greenspan – right

On the BBC today Alan Greenspan, former (and discredited) chairman of US Federal Reserve, says: "You cannot have free global trade with highly regulated domestic markets." He’s right isn’t he?

Anthony Bolton says a logical appraisal of the economy won’t get you very far predicting the market, understanding its value, and sentiment might get you further though.

James Montier is an investment great, says the Motley Fool.

Edmond Jackson tips Northgate, one of the cheapest six stocks in August.

Dick Bezemer adds to our list of economists who saw the banking crisis coming.