Long Term Fundamental Plays

[Jack o'Clubs]

I guess the nature of this site is that most of the threads and contributions are aimed at intra-day trading, but I wondered if it might be interesting to highlight some stocks that might be suitable for a longer term portfolio. Not buy and hold, a bit more sophisticated than that, but with fundamentals and valuation playing the major part rather than TA.

I've put aside one pot of money for good quality, growing businesses with decent cash flow and a p/e that hasn't yet factored all of those positives in. I enter these positions with a view to holding them long term, ie 6-months plus. I sell either when I think the market has caught up with the story and so the valuation is no longer attractive or if something happens to change the fundamental story. From a TA perspective I might avoid a stock which passed all these tests but had a horrible chart, but generally it's used for timing only. I hedge the portfolio with an index short when I'm worried about the market, rather than sell positions. Generally looking to hold 10-12 stocks in this pot, so when the portfolio is 'full' would look to sell something that's run its course to reinvest in an interesting new story.

So anyone interested in contributing to a thread with ideas for stocks that meet these criteria? When I get 5-mins I'll put something up to start the ball rolling...

 

[the blades]

I guess the nature of this site is that most of the threads and contributions are aimed at intra-day trading, but I wondered if it might be interesting to highlight some stocks that might be suitable for a longer term portfolio. Not buy and hold, a bit more sophisticated than that, but with fundamentals and valuation playing the major part rather than TA.

I've put aside one pot of money for good quality, growing businesses with decent cash flow and a p/e that hasn't yet factored all of those positives in. I enter these positions with a view to holding them long term, ie 6-months plus. I sell either when I think the market has caught up with the story and so the valuation is no longer attractive or if something happens to change the fundamental story. From a TA perspective I might avoid a stock which passed all these tests but had a horrible chart, but generally it's used for timing only. I hedge the portfolio with an index short when I'm worried about the market, rather than sell positions. Generally looking to hold 10-12 stocks in this pot, so when the portfolio is 'full' would look to sell something that's run its course to reinvest in an interesting new story.

So anyone interested in contributing to a thread with ideas for stocks that meet these criteria? When I get 5-mins I'll put something up to start the ball rolling...

Eyup JOC,

I "trade" in a similar way to this. Half my pot is used for US stock traded through IB. I use several fundamental screens to narrow down a list of candidates. From here, I kick out any with erratic charts or near resitance levels. Basically, they need to be going up in price on a relatively smooth path. I then look ay the price range over the previous few weeks and project the lower band forward in my mind (is this in any TA books? ) and set a limit buy order.

I review the screens weekly and if they no longer meet the fundamental screen from which they were selected, I set a limit sell order based on the upper band projected forward.

The total portfolio is then hedged against an equal value of the NDX, SPX and Russell - so outperformance is the key for me.

I hold around 70 stocks this way, so tracking them here would be time consuming. But I might try and select the best ones. The nature ofyour post just made me want to "say hello"

Cheers,
UTB

 

[Jack o'Clubs]

Hi Blades,

Thanks for the interesting reply. Sounds a very solid approach. Do you check the fundamentals first hand by going through company reports etc, or do you trust your screen?

The hedging is interesting - I've ummed and aahed about permanently hedging my portfolio, but narrowly came down on the side of 'not'. Mainly because very long term the market tends to deliver and why ex- out the 6-7% you get from the market? But what I have done is develop a relative strength indicator that seems to pick up major changes in market direction reasonably well and then use its short signals to indicate when a hedge is due (suggested lightening to 50% short cover in May 2003 and off completely by July - and those were the last signals!).

Appreciate your posting - a portfolio of 70 stocks - a real fund manager!

 

[Jack o'Clubs]

First up - NCC Group (NCC.L)

What do they do? AIM listed IT-company specialising in security solutions (escrow).

Why do I like them? At first sight the valuation is nothing special, FY07 p/e at about 20x, but earnings growth will be about 20% range this year and should accelerate further when they integrate a recent acquisition. The valuation story is dependent on this growth coming through, but given the small size of the company and what I understand of its product should be deliverable. It's generating decent cash flow with little requirement for capex and already paying a small but growing dividend. Gearing neglible. Plan to move from AIM to main market in the summer which should put them on more institutional radars.

Clouds on the horizon? Competition. Company is already market-leader, capital requirements look low and as a consequence returns on capital seem enormous which will surely attract competitors. While I understand what they do, I'm not sure how easy it is for another company to replicate. Also recent trading statement a little double-edged. Confirmed guidance, but commented that recent trading had been tougher than anticipated and a small company with outsourced IR could spring nasty surprises. There's also been some fairly heavy selling recently by the CEO. He sold a big chunk as soon as he came out of lock-up a year after the IPO in '04, and as the shares have continued to perform well I'm assuming he's just after the cash to maintain a CEO lifestyle rather than anything more suspicious.

Technical picture - Has tested 358p several times and failed, this looks like an important resistance level to clear.

Would I buy them? Already have half a position and will buy the other half if/when it clears 358p.

Next key date - In absence of other newsflow guidance issued at time of annual results at a date tbc in July will be critical.


Hopefully that gives an idea of the sort of thing I'm doing - other ideas welcome.

 

[the blades]

JOC,

I just trust the screen. Obviously with such a number of stocks, I can only use a mechanical approach - which prevents me from falling in love with anything. Buy / Sell decisions take about 1 minute per stock. The portfolio turns over about every 30 days (hence about 15 trades per week).

WRT the hedge, I use a different mechanical system for reducing the hedge at set times. Similar to you, but I'm "in the market" more (whichever way around you look at that). On paper, this syStem should negate the effects of the long term market growth.

Cheers.
UTB

 

[Jack o'Clubs]

Just to make it clear that I'm not just looking at obscure small caps, here's another I like:

Tesco (TSCO.L)

Why do I like them? I think that a bit like UK shoppers who treat Tesco as the retailer we love to hate, professional investors rather take Tesco for granted and underestimate its growth potential. The p/e is about 19x so not cheap, but the company looks set to continue to grow earnings at double-digit pace, driven by organic revenue growth and the US project seems to be a free option rather than in the price in any meaningful way. International ops are approaching 25% of the business and are growing twice as fast as the UK which despite its maturity is still growing at more than 10% (split 50/50 between expansion and like-for-like growth). Gearing is reasonable, there's a progressive policy of cash returns to shareholders through divis and buybacks, and CEO Leahy has been buying stock in size.

Clouds on the horizon? In the UK, Competition Commission enquiry. UK retailers' expansions into the US have a poor history. Not much else really, it's a steamroller, but there are few obvious catalysts. It will just grind onwards and upwards I think.

Technical Picture - Marching up a fairly steep channel, but plenty of room for it to come down and test the lower support which at the moment would be about 435p, about 8% down from where it is now.

Would I Buy Them? Yes, bought a few weeks back at 465p. At some point it will test support, but the support line is rising at about 10p/month so not too concerned.

Next Key Date: Nothing on the horizon as have only just reported '07 prelims. Competition Commission not likely to pipe up again until findings and remedies are reported in September.

Anybody got any others to throw into the mix?

 

[Atilla]

Hi JOC,

I subscribe to Investors Chronicle and usually I mark and follow their company tips. However, I never buy when they tip them but watch it for a month or so and then buy if they have crept up or maintained value - coupled with TA setup for a buy.

IC are more right than wrong for what it's worth and a good way to filter 000s of companies.

One I put aside was / is BIFFA (BIFF) - Waste Management Services - Tipped on 20th April 07, issue.

The daily charts also show it moving side ways holding it's value. With all the interest in waste management and regulation coming from the EC as well general public support topped with Local Authority requirements and incentives it has good fundamentals going for it. It's likely to be a good cyclical proof stock too similar to Tescos defensive qualities coupled with it's growth prospects.

CMC also have an instrument for it too so good for SBs out there.

 

[Jack o'Clubs]

Good call Atilla - that looks like exactly the sort of thing...

I'll do a bit of due dilligence on it next week (primarily to check whether it benefitted from any accounting 'funnies' on its demerger from Severn Trent) and could well be one to add to my pot - as you say solid core business and the potential of someone buying it.

I used to buy IC too but cancelled my sub about a year ago as I found the articles were becoming rather repetitive once you'd read it for a while. I never really looked at their share tips, but your experience seems to suggest they're not bad.

 

[Splitlink]

I must say that I wish I was as successful at trading as I am at portfolio investment. I've had some good shares over the years and still have some. My question now, though, is whether it is getting to the time when we should be unloading some. What is your opinion of the future? Should we take the opportunity of increasing our investments over the coming months? Sell in May, sort of thing? That said, there are not many of the type of stock that I buy around, right now.

What started me on my present method of investment is no secret--- Jim Slater's "The Zulu Principle" He introduced me to the principles of PEG. I bought NXT for under £2 and I recommend his book to anyone who is considering growth investment.

Split

 

[Atilla]

Good call Atilla - that looks like exactly the sort of thing...

I'll do a bit of due dilligence on it next week (primarily to check whether it benefitted from any accounting 'funnies' on its demerger from Severn Trent) and could well be one to add to my pot - as you say solid core business and the potential of someone buying it.

I used to buy IC too but cancelled my sub about a year ago as I found the articles were becoming rather repetitive once you'd read it for a while. I never really looked at their share tips, but your experience seems to suggest they're not bad.

I'm not too clued up on the creative accounting side of things so I didn't pick up on the demerger. I do like consistent grow and profits usually a minimum of three years worth. I noted 07/08 are only forecasts and took it at face value given environmental developments.

I know what you mean about IC. It's more of a scan to see what's out there and pickup on interesting bits. Also, I have to emphasise not to buy the shares when tipped but watch them for continued performance for a few months at least. They have a habit of going up and coming down as it is the nature of markets to talk up flavour of the month shares. Let the buyer beware and do your own checks and all that applies.

Finally, looking at the past couple of years these shares tend to rise towards the second half of the year and it's current price 327 seems like good value - especially if a potential bid may value it above £5+.

 

[Jack o'Clubs]

I must say that I wish I was as successful at trading as I am at portfolio investment. I've had some good shares over the years and still have some. My question now, though, is whether it is getting to the time when we should be unloading some. What is your opinion of the future? Should we take the opportunity of increasing our investments over the coming months? Sell in May, sort of thing? That said, there are not many of the type of stock that I buy around, right now.

What started me on my present method of investment is no secret--- Jim Slater's "The Zulu Principle" He introduced me to the principles of PEG. I bought NXT for under £2 and I recommend his book to anyone who is considering growth investment.

Split

I do feel a little nervous buying at the moment in the face of the 'sell in May' adage but then I do every year . And the longer the bull market goes on, the more nervous I feel... So I'm wary, but then bull markets always climb a wall of worry so at least I don't feel complacent about the risks. As you say the issue is mitigated by a relative lack of decent companies to invest in at the moment - I've only got six in my portfolio at the moment.

I'm with you on the Jim Slater book - required reading for this type of investing I think. Most of it is common-sense but useful to have it written down in one place. Investors Chronicle were certainly fans, his name cropped up a lot in articles I remember.

 

[Jack o'Clubs]

Here's another one:

Cookson Group (CKSN.L)

What do they do? FTSE 250 diversified engineering firm, but at the value-added end rather than metal-bashing.

Why do I like them? Growing fast, which is impressive for a UK engineering company in itself, although they're UK in name only since operations are in various locations across the world. On current year eps, they're trading on 20x earnings, but this falls to 15x looking a year out and 13x on two year forecasts. So the market is not really paying a significant premium for the likely growth. Growing dividend and decent cash-flow which more than adequately covers capex requirements. Operates in three well diversified product segments. Directors' deals have all been buying, some in size. Good management - have a very public and specific strategic plan which they measure progress against. Have beaten targets and reset more challenging ones.

Clouds on the horizon? Maybe too much of a punt on the health of the global economy? A lot of their business is making the bits that let metal-bashers bash metal, or electronics manufacturers to do their stuff, so would be pretty much in the firing line if global demand slows. Valuation is only cheap if growth comes through. Somewhat exposed to $ falls.

Technical Picture? Starting to form a bit of resistance at current levels and maybe overbought after last month or so's performance.

Would I buy them? Not sure. 'Trade what you see' would say yes, because it's a well-managed business, delivering on its promises and growing strongly. It's natural to be worried about their reliance on the strength of the global economy though. On balance, yes, but would want to get out though at a sniff of the economy significantly weakening and putting 1-2 year forecasts at risk.

Next key date? ex-div on the 23rd, AGM on the 24th.

By the way, have looked at Biffa, just a bit concerned that revenue growth isn't particularly strong, so the growth in earnings seems to be mainly driven by reduced financing costs, which are all distorted because of the recent demerger, similarly cash-flow improvements through working capital gains. Margins actually fell at their last results in their key waste collection operation. Given a recent warning on guidance, I'll keep this one on the long-term radar, but won't buy now. Might look again after the annual results on 12 June.

 

[Atilla]

Here's another one:

Cookson Group (CKSN.L)

What do they do? FTSE 250 diversified engineering firm, but at the value-added end rather than metal-bashing.

Why do I like them? Growing fast, which is impressive for a UK engineering company in itself, although they're UK in name only since operations are in various locations across the world. On current year eps, they're trading on 20x earnings, but this falls to 15x looking a year out and 13x on two year forecasts. So the market is not really paying a significant premium for the likely growth. Growing dividend and decent cash-flow which more than adequately covers capex requirements. Operates in three well diversified product segments. Directors' deals have all been buying, some in size. Good management - have a very public and specific strategic plan which they measure progress against. Have beaten targets and reset more challenging ones.

Clouds on the horizon? Maybe too much of a punt on the health of the global economy? A lot of their business is making the bits that let metal-bashers bash metal, or electronics manufacturers to do their stuff, so would be pretty much in the firing line if global demand slows. Valuation is only cheap if growth comes through. Somewhat exposed to $ falls.

Technical Picture? Starting to form a bit of resistance at current levels and maybe overbought after last month or so's performance.

Would I buy them? Not sure. 'Trade what you see' would say yes, because it's a well-managed business, delivering on its promises and growing strongly. It's natural to be worried about their reliance on the strength of the global economy though. On balance, yes, but would want to get out though at a sniff of the economy significantly weakening and putting 1-2 year forecasts at risk.

Next key date? ex-div on the 23rd, AGM on the 24th.

By the way, have looked at Biffa, just a bit concerned that revenue growth isn't particularly strong, so the growth in earnings seems to be mainly driven by reduced financing costs, which are all distorted because of the recent demerger, similarly cash-flow improvements through working capital gains. Margins actually fell at their last results in their key waste collection operation. Given a recent warning on guidance, I'll keep this one on the long-term radar, but won't buy now. Might look again after the annual results on 12 June.

I also found this piece of news on Biffa and still watching and waiting for entry if at all.

Recently demerged waste firm Biffa tumbled after it indicated profits for the year will be near the bottom of market expectations. The industrial and commercial collection sector had seen profits hit by pricing arrangements and revenue from the division would lower than last year, it said. That was news in April. One on radar. It depends largely on commercial and local authority developments. Will have another look around start of August for this one.

Looked at Cookson on ICs web site and Broker recs look very strong. See posts below. All buys. Cazenove the most recent news has them on outperform. Cazenove are very good imo. At one time they had 75% of FTSE companies in their books. More recently 55% and have teamed up with JPMorgan.

Director deals were in March all around 630 but they look pretty good too.

I think any pull back on Cookson to 650-680 would be a buy. Never like buying at tops when companies have just been tipped. Some pretty large trades going through this morning too.


More Cookson Group latest trades
Largest Trades
Time Price Volume Value Buy/Sell Type (key)
10:10 715.00p 50,472 £360,875 Buy N
12:34 709.00p 25,000 £177,250 Unknown O
10:05 715.50p 23,524 £168,314 Buy VW
08:10 720.50p 20,000 £144,100 Buy O
09:55 716.50p 15,925 £114,103 Sell O

 

[Jack o'Clubs]

Looked at Cookson on ICs web site and Broker recs look very strong. See posts below. All buys. Cazenove the most recent news has them on outperform. Cazenove are very good imo. At one time they had 75% of FTSE companies in their books. More recently 55% and have teamed up with JPMorgan.

Good info Atilla. JPM-Caz are the house broker (along with ML), so I'd discount their recommendation but their forecasts should be pretty solid for the same reason. I agree that generally JPMC are a high-quality outfit on the equity research /fundamentals side.