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Smart Investor: 5 shares you need to hold

Over the past quarter only a handful of companies have earned a place on Smart Investor's 'buy' list. Here's his pick of five of the best.

 
Smart Investor: 5 shares you need to hold

Homebuilders, an insurer and an oil giant feature in Smart Investor's pick of five of the best shares for your long-term portfolio.

Fools rush in

As a die-hard supporter of cost-averaging, I feel I must offer a word of caution before providing a summary of this quarter’s Smart Investor 'buy' recommendations during ISA season.

Every April witnesses great hordes of private investors feeling a tremendous pressure to invest their 11 or so grand in something as soon as the money clears in their ISA. Moreover, with inflation still above the Bank of England’s 3% upper boundary and many ISA providers offering little or no interest, this pressure is further exacerbated.

As regular readers know, I follow a method of cost averaging where I buy slowly and sell slowly, which means I place no pressure on myself to find the bottom or the top of the market. I simply invest in quality companies at reasonable prices. Furthermore, many sharedealing providers offer aggregated orders to keep commission costs at a minimum.

My top picks

Over the past quarter I have recommended you purchase five companies for the long term. Here's a quick summary of my picks – for more details click on the names of the companies, which will take you to my original articles.

Persimmon (PSN.L) was recommended as a 'buy' on 13 January, with the company having had a mixed past five years. The company made a substantial loss in 2008, which meant that average return on equity over the past five years was lacklustre, and a yield of just 1.5% is insubstantial. However, the company’s low debt levels, attractive price-to-book ratio and considerable land bank make it one for your long-term portfolio.

On 6 February I tipped Aviva (AV.L) as a 'buy'. As with Persimmon, it has experienced mixed performance over the past five years, although its average return on equity figure remains acceptable in spite of a loss in 2008. Meanwhile, a mighty yield, coupled with an attractive price, mean that Aviva is a good long-term buy. Of course, debt levels are a tad high and Aviva is, to an extent, a ‘play’ on the stock market. However, as the article stated, Aviva is essentially £1 for less than £1.

Balfour Beatty (BALF.L) was tipped on 22 February. Unlike the previous two companies, Balfour Beatty has delivered a healthy profit in each of the past five years, delivering an impressive average return on equity during that period. In addition, low debt levels, a yield of 4.5% and reasonable free cash flow are all plus points, while the current price is acceptable. As mentioned in the original article, it is no ‘bargain basement stock’, but is reasonably priced and of sufficient quality to merit investment.

Another housebuilder featured in my article of 5 March. This time it was Bellway (BWY.L) in the limelight and, as with Persimmon, it has a very light debt load, substantial amounts of cash, encouraging free cash flow and a low price-to-book ratio. It too has had a challenging past five years, also making a loss in 2008 and having mid-single-digit return on equity over the period. Perhaps the drawback with Bellway is a high price-to-earnings ratio, although this is hardly surprising when the state of its trading environment is taken into consideration. As mentioned in the original article, cost average and be prepared to wait.

My final buy tip of the quarter was a review of a company I first recommended as a buy in February 2011: Royal Dutch Shell (RDSb.L). It ticks all three boxes in terms of viability, performance and value and, as pointed out in the original article, is actually more viable, performing better and offers better value than when I tipped it in February 2011 – in spite of its shares being around 8% higher. As highlighted at the outset of this article, there is no pressure to ‘pile in’ to any of these; moving slowly can sometimes be worthwhile – especially when you are a long-term investor like me.

22 comments so far. Why not have your say?

Maverick

Mar 27, 2012 at 08:40

OK, Smart Investor, now please let us have an update on your five picks of (say) 5 years ago.

My portfolio of shares of 5 years ago bears no resemblance at all to today's portfolio.

I have to live off the capital gains and income of my portfolio. I can't afford to wait while a company recovers from "a challenging past five years" or makes "a substantial loss in 2008".

Apart from the two housebuilders (and I would have preferred Galliford Try) these are the same old boring dinosaurs. I feel the world is moving on a bit quicker nowadays.

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clarkkent

Mar 27, 2012 at 09:20

Well said Maverick. But where do you get decent worthwhile tips from?

I have been investing in shares for three years and the only decent tips I have ever got were from Tom Bulford's ISA tips (IMG and AFC) and Robbie Burns (Naked Trader). The rest I have either discovered myself or by trawling through the various bulletin boards trying to spot the odd gem, of which there are few.

AIM investing has been reasonably successful although I have a graveyard of dead ducks awaiting that "explosion" which will probably never happen.

I have now set up a virtual portfolio of some of the biggies, ie Rio Tinto, Tullow Oil and the like, because they go up and down like yoyos and by large amounts but the spreads are very small, and of course they are also expensive so gains will be moderate.

My AIM tip for this year would have to be Avacta(AVCT). Very good company that has taken forever to get to commercialization but I believe is on the verge, with interims coming out 29th April.

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JEL G

Mar 27, 2012 at 09:46

If you want a good tip guys I suggest that you buy:

Clarkson................

Interior Services Group..................

Halma.............

All are excellently managed companies who put their shareholders first.

I have held all these three companies for many years and am constantly topping up my holdings.

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Maverick

Mar 27, 2012 at 10:04

Clarkkent - I don't pay any attention to tips on bulletin boards. What I do is read Investors Chronicle and The Times, and if they recommend a company I will do a bit more research on it (there is an amazing amount of free information on the web) and if I like what I see I will include it in my virtual portfolio - I use Moneyextra.

There are very few "biggies" in my watch list, firstly because they're mainly dinosaurs, and dinosaurs don't dance, and secondly because the "biggies" have their performance hamstrung by the big fund managers, who have to buy them, and by politics in general, e.g. RBS and BP. Most of my watch list are from the FTSE250.

I then monitor the performance of the watch list reguiarly. Yes, it's a lot of work, but that's the only way you'll find out which shares are performing. Buy the shares which are performing, but also keep them in your watch list.

If a share stops performing - my criterion is not rising over a period of 4 months - sell it and buy something that is performing. You won't get it right all the time, and there is a danger that you're buying shares at the top, which is why you have to keep monitoring.

But it works a whole lot better than buy-and-hold.

You should sell your graveyard of dead ducks!

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Hotrod

Mar 27, 2012 at 10:24

I'm with Maverick, I'm too old to think long term. I simply can't afford to risk capital. Time is not on my side to give share prices time to recover. But who am I to criticise, no doubt Smart Investor has aimed his synopsis of recommendations at a segment of investors whose lives can carry on, regardless of stockmarket plunges.

My investment strategy couldn't be more diametrically apposed. Take cost averaging for example: There is an old addage that says; don't throw good money after bad, or as Jim Slater put it in his book "The Zulu Principle" "If someone threw a safe full of money out of the window of a high rise office block, would you try and catch it"

Personally, I study market criteria as a precursor to making any investment. I have always sold losers and run winners, selling them also, when they no longer met my criteria. Remember, you have not made a profit until you have sold at a profit.

I sold all my shareholdings in early 2008 before the crash really took hold, which enabled me to realise a substantial capital gain and settle my liability with HMRC. Since then I have reinvested a small proportion in oil, mining, and gold, but sold again in August last year. I maintain a watch list of companies for potential future investmestment. The two sectors I find interesting are: High tech engineering, and brand named luxury goods, but unresolved problems in the real world are still holding me back.

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Muggle

Mar 27, 2012 at 10:28

If you have to rely on tips you should not be in the stockmarket. Look at all the rubbish Winnifrith has tipped over the years.

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Jeremy Bosk

Mar 27, 2012 at 10:30

My best ideas over the last couple of years have been:

Greenwich Loan Income fund, up 50 per cent in 16 months;

Hargreaves Services, up a third in 13 months;

Private Equity Investor, up a third in 18 months;

Petra Diamonds, 20 per cent in 13 months;

Noble Investments, up 18 per cent in 13 months.

Since I normally cut my losses and eventually sell winners there is only one holding down over 10 per cent which is:

Alpha Pyrenees, down 50 per cent but with a stonking yield that means means I shortly expect to break even on an average holding period of three years. I probably would have done better to cut my losses but find the yield irresistible.

Most of my < 10% "losers" pay high dividends so the total return is positive.

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Keith Cobby

Mar 27, 2012 at 11:04

My suggestions would be:

City of London IT

Foreign & Colonial IT

Bankers IT

Alliance IT

Caledonia IT

All have paid increasing dividends over 40 years

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clarkkent

Mar 27, 2012 at 11:10

There are some good points here and it's always good to see other people's views, so thanks for that.

The problem I have, is that when I started in 2009 it was dead easy to make money and the AIM market was doing well and so were my ISA shares, so I haven't any experience in this present type of financial climate, so back to the drawing board methinks.

Thanks again.

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raymond cave

Mar 27, 2012 at 11:44

I think the only safe way to invest is to buy companies paying high dividends and reinvest.

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Keith Cobby

Mar 27, 2012 at 11:46

It's called the 'snowball' principle, reinvest your dividends rather than relying on capital gains.

My next 5 :

Edinburgh IT

Perpetual Income & Growth IT

Murray International IT

Aberdeen Asian Smaller Companies IT

Henderson Far East Income Ltd

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Mystery X

Mar 27, 2012 at 13:04

JEL.G, Jeremy, Keith and Others

Do you guys ever invest in Funds ie Oiecs or investment trusts ?

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Cassandra

Mar 27, 2012 at 13:28

"Long Term" is a Broker/F/Adviser's Cop Out

They can be wrong for a couple of years and still

talk about "Long Term"

In 5 years time who is going to remember who tipped what?

I'm with Maverick on this - I want "Short Term" advice

Say 6 months maximum. That will sort out who is worth following

.

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Keith Cobby

Mar 27, 2012 at 13:50

The problem with investing in individual stocks is their volatility so you have to trade them.

I am not a trader/speculator but a long term investor. I like investment trusts/investment companies particularly for their ability to reserve some income. This enables steady dividend increases over time.

My advice (for what it's worth!) is to choose wisely and have extraordinary patience, rolling up the dividends until you need to take an income.

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Jeremy Bosk

Mar 27, 2012 at 15:38

Mystery X

I buy Investment Trusts where they cover difficult to access or specialised markets including overseas, property, high tech. I also buy REITs which are a form of IT and equity investment instruments (a stock market classification for companies that act like ITs without their legal status). Also other companies that invest in other companies which may be classified as Specialty Finance or pretty much anything else. Currently these are:

Raven Russia - logistics parks in Russia;

Alpha Pyrenees Trust - mostly French industrial and commercial property;

Private Equity Investor PLC - buys VCTs which invest in mainly Silicon Valley;

Redefine International - direct property and equity in other property companies in UK, Europe and Australia;

Schroder Real Estate Investment Trust - UK commercial property;

Greenwich Loan Income Fund - invests in loans to US companies directly and collectively;

Real Estate Credit Investments - what it says on the tin. Has a cell structure so loans or investments in one company or security can go bad without affecting the others.

Most of these are high yield and are held to counterbalance more growth oriented plays in mining and other sectors. As far as possible I use the dividends to re-invest, not necessarily in the same company as I use dividends to rebalance, aiming to generally avoid very small or very large holdings.

Currently a third of my holdings are real estate related but diversified by type of asset and country.

I have only two holdings in the FTSE 250 - Intermediate Capital Group, a specialised commercial lender and Petra Diamonds. The rest are small companies or AIM. Elephants don't gallop is a saying that chimes with my experience over 40 years.

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Mystery X

Mar 27, 2012 at 17:40

Many thanks indeed Jeremy. I have picked up some good points and will pursue some of your thoughts. Good Luck !

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Hotrod

Mar 27, 2012 at 18:15

Some very iluminating comments: Two companies have been mentioned which I know a little bit about and have invested in successfully in the past.

Clarkson Plc. A ship broking company based in London with offices worldwide. The people who run this show really do play the game. They pay their employees well which results in the company retaining the most experienced and professional. They also pay very generous dividends which had led to a bouyant share price.

Hargreaves Services Plc. In common with Clarkson their head office premises are unpretentious, and are situated in a small village in County Durham. Not what you would expect from a pan-european trading company. However my research revealed that the directors have lifetime experience in transport logistics and coal mining which is their core businesses.

Unfortunately the company is highly geared which prohibits me from investing at the moment, but if UK Coal cannot avert being put in the crusher, then Hargreaves are poised to pick up the pieces.

I am attracted to smaller companies. The most off-putting aspect of large companies is the fact that their directors seem to be riding some sort of boardroom "merry-go-round" Often they have no specific training or experience in the actual business they are in control of. Their main claim to fame seems to be that they are well connected and knowledgeable about boardroom etiquette

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Jeremy Bosk

Mar 27, 2012 at 19:55

I have had Clarkson on my radar for years but whenever I had the cash, the shares looked pricey.

Hargreaves Services has gearing of 60 per cent but interest cover is 6.86 times and cash flow is nearly double eps. The only thing not to like is the dividend although it has tripled in five years. Yet since I bought in February 2011 it has merely moved in line with the support services sector.

Of the two, Clarkson has the better yield (though slower rising) and the better long term share price.

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richjohn

Mar 28, 2012 at 00:30

Some fantastic reading on the site for my good self as a total newbie to the area of investing... Thank you all for sharing your comments and views for all to see. Recently have had an inheritance and now working my way through the world of shares saving and general finance. I feel that there is more an air of mystery that surrounds this so confusing the average man on the street.

Keep up the good work Citywire

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stormdog

Dec 23, 2012 at 12:17

Over the years I have had little luck when investing in the UK, it always seems to go very wrong for me.

On the basis of 'horses for courses' most of my 'quoted' holdings are in overseas 'good' jurisdictions and one or two special situations stocks, such Jardine Matheson, that are quoted in Singapore and registered in places like Bermuda, Whether Bermuda is considered a good jurisdiction or not I have no idea.

What I do find is that for inexplicable reasons the majority of my major overseas holdings have continued to outperform all the way through the long downturn.

I don't know why this should be so, I have no particular talent, as compared to many of the people who post on this site. I think that it is to do with offshore business attitudes, management confidence and an ability to get out there and just do it.

Here in the UK we are in a period where there appears to a great lack of oomph.

Business is overly trammelled by European legislation, compliance officers run every decent sized business in the land and the banks will not lend.

With this as a backdrop many of the young are leaving in order to seek their fortunes elsewhere, they are totally correct doing so.

Of course there are some very really well run British businesses the difficulty with many of these is that they are mature and as such are often ex-growth.

It is into this miasma that everyone invests, why?

Recently I have been having some seriously dark thoughts.

Is Cameron really the right person to lead the Conservatives and to be Prime Minister?

What if UKIP is actually right and there really is no future for Britain on the present course.

If I actually voted UKIP in an election would it not just split the Conservative vote and let Milliband/ Balls in?

Dark thoughts indeed, time for a glass of Bollinger, which continues to be on 'special' at Majestic, in better times it might have been Grande Dame!

Good luck to all investors for 2013.

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tatonka

Dec 30, 2012 at 20:04

Re snowballing. Can this be automated or do you physically cash the dividend cheque and re-invest?

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Jeremy Bosk

Dec 30, 2012 at 22:06

tatonka

The rest of us call it compounding. Look up compound interest calculators. Many companies have "drips" dividend reinvestment programmes. Some brokers will automatically reinvest your dividends if requested. Selftrade charge £1.50 per dividend which is very little on a £100 dividend but rather high on a £2 dividend. Sales are at the normal rate £12.50 on line, £17.50 by telephone. The service is available for the FTSE 1oo, certain ex FTSE 100 shares, investment trusts, ETFs, ETCs and ETNs. You can "drip" some or all of your holdings by your choice. The details are available on their web site.

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