Share Sleuth: the 'value' share I have been buying

This month I’ve reduced the Share Sleuth portfolio’s holding in Trifast for a second time in order to add shares in Portmeirion.

Trifast’s performance has been excellent, while Portmeirion’s has been unconvincing recently, and its immediate prospects have been more cloudy. As I read back these words, I understand how crazy they sound. The allure of performance is such that part of me doubts my decision. But that goes with the territory for the mildly contrarian investor.

Trifast’s share price doubled over the past year. Since I added the shares to the portfolio in October 2010 they have risen in value by 500 per cent. The gains are rooted in the performance of the business, which was mired in debt during the credit crunch when two former chief executives returned to revive the company.

Trifast manufactures fasteners, nuts, bolts, screws and rivets. The company has ridden a cyclical recovery, acquired businesses supplying the car and domestic appliance industries to reduce its dependence on electronics, and focused on its biggest customers: global equipment manufacturers with increasingly technical demands who are themselves reducing the number of suppliers they use.

Customers want to deal with companies that can supply and support them around the world – companies such as Trifast. It’s a good story, and Trifast promises record-breaking results for the year to March 2017 when it publishes them this month.

Promising prospect

I profiled Portmeirion recently in Share Watch. The company manufactures tableware in famous designs, and since its acquisition of Wax Lyrical in 2016 it also makes scented candles and reed diff users – those bottles of perfume with sticks protruding.

Despite the substantial profit contribution from Wax Lyrical, profits for the group fell in the year to December 2016, for the first time since the credit crunch. The weak economy in South Korea – a country that two years ago competed with the UK to be Portmeirion’s second biggest market after the US – and the firm’s failure to sustain a large profit in India last year did the damage. Portmeirion’s results were disappointing, and in India the company seems to have mismanaged its distributor.

The easiest way to understand the potential in businesses such as Trifast and Portmeirion is to look back in order to see forwards. I’m inclined to forgive Portmeirion because economies recover and companies make mistakes when they enter new markets. A year of misfortune and mishap doesn’t erase years of profitable growth.

I have little doubt that Trifast has strengthened its business and that the future is rosier than it has looked in the past. But I doubt that current performance is entirely indicative of the long-term future. Trifast still serves cyclical markets, and if demand for cars, washing machines and electronic devices falls in a downturn, manufacturers will order fewer fasteners.

The same is true of Portmeirion, of course; we’ll buy fewer plates and teapots if we are strapped for cash. But Portmeirion has both a stronger record of profitability over the long term and a lower valuation now. That contrast becomes more apparent if we link the statistics by using average profitability over many years to normalise the valuation. This is a calculation I will explain next month. Normalised, Trifast looks much pricier than Portmeirion.

Adding Portmeirion will also diversify the portfolio more, as it increases the number of holdings to 28. I’m not waving goodbye to Trifast. The portfolio had more Trifast shares than I needed to fund the Portmeirion purchase and some spare cash, so I offloaded less than half the holding.

On 4 May I reduced the portfolio’s holding in Trifast by 745 shares, at a price quoted by a broker of just over 223p. This raised £1,654, after deducting a £10 broker fee. I added 349 Portmeirion shares at the broker’s price of 918p. The cost after adding in a £10 broker fee was £3,212, leaving the portfolio with £19 in cash, just over 3 per cent of its total value invested in Portmeirion and 2 per cent in Trifast.

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