Six shares value investors should put on their radar

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This is the second year I've used my 'decision engine', a share-ranking process that identifies good long-term investments, to select three growth shares and three income shares at prices that probably undervalue them.

The decision-engine process doesn't consider dividends. It focuses on the fundamental drivers of profitability and value: the strength of a company's business, its management and share price.

To qualify as an income selection, a share must meet an additional criterion. Dividends paid out in the company's most recent financial year must yield an above-average return on the current share price - higher than the median dividend yield for UK shares, just under 3 per cent.

Three of last year's selections, Dewhurst, Science and Portmeirion, are repeated this year. Goodwin, an engineering company, manufacturing automation leader Renishaw, which saw a strong rise in its share price, and Castings all miss out this time.

VALUE-BASED GROWTH

Science (SAG)

Share price: 145p; earnings yield: 8%; dividend yield: 2.8%

Last year, Science changed its name from Sagentia to reflect the fact that acquisitions have turned it into a group of four consultancies.

It employs hundreds of scientists and technicians to do research and development for other companies and provide them with advice, serving an increasingly broad range of industries.

Having improved its own performance a decade ago by taking a more commercial focus, Science can probably do the same for the consultancies it has acquired.

Solid State (SOLI)

Share price: 420p; earnings yield: 8%; dividend yield: 2.9%

For a small company, Solid State's Steatite subsidiary makes a wide range of products. Solid State Supplies, another subsidiary, distributes even more. It's a manufacturer and distributor of electronics, specialising in rugged computers, batteries and communication systems.

It makes most of the ticket machines you see ticket inspectors lugging on railway trains. Manufacturing or customising these products is a specialised business.

The company requires accreditation to handle dangerous materials and sensitive information, which also narrows down the competition. Like Science, it's growing by acquisition too.

Dewhurst (DWHT)

Share price: 665p; earnings yield: 10%; dividend yield: 1.%

Though Dewhurst depends on construction activity, it's proved resilient in tough times, and has grown fairly steadily since the current generation of the founding family took charge in the 1980s.

Dewhurst principally manufactures lift components, most famously push-buttons, but it's moving with the times, assembling control panels that incorporate touchscreens, and hall lanterns required by modern systems that direct people to the next available lift. It also supplies keypads for ATMs.

VALUE-BASED INCOME

Next (NXT)

Share price: 4,950p; earnings yield: 9%; dividend yield: 3.2%

In common with many other fashion retailers, by its standards Next is having a tough year. Despite new store openings, it's going to struggle to increase revenue in the year to January 2017, and profit is likely to contract by a few percentage points.

That, and perhaps wider concerns about the competition, knocked the share price into value territory. Next doesn't deserve to be there. It's highly profitable with a formidable mail-order operation that it's bringing online.

XP Power (XPP)

Share price: 1,730p; earnings yield: 6%; dividend yield: 3.%

XP Power makes power converters similar to the common-or-garden converters in computers that convert alternating current to direct current, but designed especially for use in industrial and medical equipment, where reliability is essential.

Originally a distributor, XP Power took control of the product by designing and manufacturing its own converters about a decade ago, informed by its close relationship with equipment manufacturers. It has opened modern factories in China and latterly Vietnam, where costs are low.

Portmeirion (PMP)

Share price: 800p; earnings yield: 8%; dividend yield: 3.8%

Portmeirion is having a particularly difficult year in South Korea, its third biggest market, where it sells almost as much pottery as it does in the UK, its second biggest.

Even the US, where Portmeirion is prospering and earns over a third of revenue, will not save the company from a rare contraction in profit in 2016. Portmeirion has enduring brands, though.

Botanic Garden, popular in South Korea and the UK, was launched in 1972, while Spode Blue Italian celebrates its 200th anniversary this year. Strong finances and a prosperous track record imply shareholders can hold in confidence for the dividend and a subsequent return to growth.


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