7 great stocks you can trust – Investor column

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  • The Big Reliables stock screen has produced a cumulative total return of 156 percent over the past decade, compared to 86 percent for the FTSE 350
  • Screen almost kept pace with the market over 12 months despite the reversal against large cap, quality and growth stocks
  • Seven new actions selected for the coming year

My Big Reliables screen is 10 years old this month. It is a simple beast. It focuses on identifying large companies (at least by UK standards), whose profits are growing and which are generating sufficient returns on equity and converting to cash to suggest that the growth may be worth it.

As simple as the screen is, over the decade it has beaten the FTSE 350 by a decent, if not spectacular, margin. The FTSE 350 is the index on which the screen is performed.

The cumulative return since I started monitoring it in 2011 is 156% versus 86% for the index. While the main idea behind the screen is to generate ideas rather than standard portfolios, if I factor in a 1 percent annual charge to account for notional trading costs, the return drops to 132 percent.

The display actually ended its first decade with a slightly damp performance. It has returned slightly less than the index over the past 12 months. The result was also significantly supported by the outsized returns of online gaming company 888.

12 month performance
Last name ITLOS Total return (Jul 14, 2020 – Jun 30, 2021)
888 tracks 888 115%
B&M European Val.Ret. BME 47%
Halma HLMA 24%
Flutter Entertainment FLTR 19%
Cranswick CWK 11%
Hilton Food Group HFG -7.7%
Fresnillo FRES -22%
Home service VHS -26%
Great Reliable 20%
FTSE 350 21%
Source: Thomson Datastream

Maybe the dull period shouldn’t be too surprisingly. The kind of tilt the screen has towards quality and growth large caps has been rather out of favor since the vaccine breakthroughs in November, which triggered a strong outperformance by value games and small caps.

One remarkable aspect of last year’s screen results was that they were the product of some needed tinkering on my part. The impact of the foreclosure on brokerage estimates meant that very few companies could pass the screen’s test for forecast growth with all other criteria.

While the main issues with the display last year were the view on the road, now the issue is what’s in the rearview mirror. Namely, fewer companies than usual have an unbroken record of consistent five-year EPS growth, which is one of the tests of the screen. This can be attributed to an event that seems one-off, so it seems reasonable to make some adjustments to allow the screen to get a decent number of positive results.

So I cobbled together the criteria to accommodate stocks that have seen peak growth from Covid but appear to be making a strong recovery based on recent forecast updates.

The complete criteria are:

â–  EPS growth in each of the past five years… or a Covid hit, but also a 10% improvement to forecast next year’s EPS * over the past three months.

* the revaluations in the attached table relate to the next 12 months rather than the next financial year.

â–  Return on equity of 12% or more in each of the past five years.

â–  Forecast of profit growth for the current year and the following year.

â–  Gearing less than 50%, or net debt less than twice the cash profit.

â–  Cash conversion (operating cash as a proportion of operating profit) of 90 percent or more.

In total, seven titles stood out. Full details can be found in the table below and I took a closer look at one of the choices.

Hilton Food

Hilton Food Group (HFG) appeared as one of Big Reliables Screen’s stock picks last year. Although I liked the characteristics of the company at the time, I was more reluctant about what investors were asked to pay for the shares. The broader market has also struggled with price ever since and stocks have performed underperformance against the market. That said, the company has continued to make progress on several fronts, which makes me think it’s worth returning to.

The main activity of the company is to build and operate state-of-the-art meat packaging facilities. It has 18 such facilities, including 3 in Australia, 4 in the UK and 7 in other European countries. Most of its operations are 100% owned, although a few are joint ventures, and the facilities tend to serve large retailers on a dedicated basis.

Hilton’s appeal to large business partners is that its expertise and purchasing power provide security of supply and a scale advantage, all of which are shared with customers. Hilton is also focusing on supply chain transparency and more sustainable products, which has other benefits for customers.

Its customers are in a strong position, however, with more than half of sales coming from just three supermarket groups: Tesco in the UK; Ahold in Europe; and Woolworths in Australia. As a result, Hilton has a business model based on low margins but high volumes.

The relatively defensive nature of food retailing, coupled with long-term contracts operated on a cost-plus or volume basis, gives Hilton assurances of profitability. This is a good thing, as Hilton’s business is very capital intensive, which could make any significant drop in trade particularly painful.

The high investment requirements of the company have been highlighted by shareholders in recent years as the company has sought growth opportunities both geographically and by moving to new products, such as fruits of sea ​​and vegetarian food. Indeed, capital expenditure over the last three years of £ 294million is around a quarter more than the total amount spent by the company between 2004 and 2017 of £ 238million. It also eclipses the depreciation charge over these three years of £ 81.6 million. The company has also grown from net cash of £ 34.6million to net debt of £ 122.2million over the past five years. The company also does not currently hedge against currency fluctuations or interest rate fluctuations on its variable rate debt, which is a risk to be considered in light of the company’s low margins and high capital intensity.

Sales and profits are lower than Hilton’s investment in new facilities. This means that the increase in expenses in recent years has resulted in a sharp decline in the company’s return on capital employed (ROCE), which reflects a company’s operating income as a percentage of the average capital employed by its business. activity during an exercise. But as spending slows down, profits should catch up. The graph below shows the trajectory of ROCE relative to the rapid increase in the amount invested in the operations of the company. There was a big accounting change in the period covered by the chart that saw companies start reporting leases on their balance sheets. For ease of comparison, the chart ignores leases to provide a clearer picture of the trend, however, based on FactSet data, including leases, the company’s ROCE is currently 10.8%.

A 10.8% ROCE wouldn’t normally be considered very impressive. However, in the case of Hilton, there is reason to believe that there is now a lot of gasoline in the tank thanks to the mega-spending of the past three years and an acquisition of £ 81million in 2017. In assuming the group to reduce its investments in the coming years, consensus forecasts are for ROCE (including leases) to lowest at 10.2 percent this year before climbing to 11.3 percent year-on-year next and 12.3 percent in 2023.

Recent stock performance may suggest some caution about the pace of the company’s recent expansion. Although trading has been very strong, stocks have been downgraded from a high of 25.3 times expected earnings for the next 12 months last May to the current valuation of 18.8 times. This rating is compared to an intermediate rating over the past five years of 20.8 and a minimum of 16.1. However, the rating moderation is also likely to reflect a temporary boon as people ate more at home during the lockdown, which is now expected to reverse.

If the company pauses in expansion, as brokers predict, shareholders should see free cash flow rebound to healthy levels as earnings continue to rise from past investments. Based on FCF’s forecast for 2023 and the company’s current enterprise value (market capitalization plus net debt), the FCF’s expected return is 7%. For a company with such a dominant position in its market, this sounds attractive.

There are risks associated with times of heavy investment and contractual disappointments could be devastating for a company like Hilton, but its market leadership also offers guarantees.

7 MAJOR RELIABLE ACTIONS (and downloadable version of the table with additional data)

Last name ITLOS Mkt cap Net cash / debt (-) * Price Before PE (+ 12 months) Before DY (+ 12 months) FCF Yld (+ 12months) Net debt / Ebitda Operating cash flow / Ebitda EBIT margin ROCE TCAC EPS 5 years Fwd EPS grth FY + 1 FWd EPS grth FY + 2 3 month old mom % change in EPS before 3 months
Halma HLMA 10,220 million pounds sterling – £ 256 million 2.692p 43 0.7% 2.2% 0.7 x 91% 19.1% 15.9% 13.3% 4% ten% 14.2% 2.3%
IMI IMI £ 4,620m – £ 313 million 1720p 19 1.7% 4.2% 0.8 x 94% 14.5% 20.6% 6.6% 9% 11% 29.4% 14.4%
JD Sports Fashion JD £ 9,481 million -1 £ 134 million 919p 23 0.2% 4.4% 1.2 x 94% 7.4% 13.8% 18.1% 12% 23% 10.1% 7.7%
Hilton food HFG £ 897 million – £ 367 million 1.094p 18 2.6% 6.0% 2.9 x 77% 2.3% 10.0% 12.0% 7% 6% 1.3% 2.7%
CDC CDC £ 5,836 million -302 million pounds sterling 5.918p 14 2.9% 6.5% 0.4 x 121% 3.2% 9.0% 7.9% 6% 4% -6.2% 5.1%
HomeServe VHS £ 3,211 million – £ 514 million 956p 19 3.1% 4.7% 1.7 times 80% 13.0% 13.5% -13.9% 14% 14% -20.4% 3.3%
Morgan sindall MGNS 999 million pounds sterling £ 282 million 2 155p 11 3.3% 203% 2.1% 12.8% 77% 1% 21.8% 13.5%
Source: FactSet. * FX converted to £


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