I understand there’s been a little turmoil in the markets. Thanks to rolling news and other investors, it’s impossible to escape the fact that share prices have fallen. I do, however, feel calm about it.
That’s because my view of the stockmarket is not the one presented in the headlines, or in the red arrows indicating the prices of shares in my brokerage accounts are lower than they were yesterday.
My view of the stockmarket is quite blinkered. It’s focused on the shares I follow, and I see only the information I deem meaningful. That view is my Decision Engine, which gathers a score for each share I follow from a large collection of spreadsheets and ranks them. The best companies at the most reasonable valuations are ranked highest.
When I use the Decision Engine I’m in a calm place, a metaphorical cabin in the woods, and appropriately it’s a shade greener this month because shares are cheaper, dragging more companies into my ‘buy zone’, the lower bound of which is a score of 7. On balance, the fall in share prices we’ve experienced has had a positive effect. It’s widened the pool of shares available for me to invest in now.
I’ve not been frantically selling shares or “filling my boots”, while others are emptying them, though. My trading guidelines warn against selling a share unless it scores less than five, or I want to replace it with a company that scores at least two points more. I also try not to trade more than once a month.
The Decision Engine informs my trades, gradually repositioning the portfolios I run to prevent them owning large holdings in shares on very high market valuations or any shares in dubious businesses, speculative shares you really don’t want to be caught with in a full-blown crash. It should protect me from companies that go bust, or panic-selling in a crisis, so I can profit in the long-term.
Instead of watching market prices, I’ve been plodding along, doing what I always do, in bull markets and bear markets, during spikes and corrections, and that is stoking the engine. I’ve been reading annual reports, going to AGMs, and trying to verify what I learn by finding out more about the companies, and their customers, suppliers, competitors, products and services.
This activity informs the Decision Engine’s criteria, whether each company is profitable, resilient, adaptable, managed equitably, and valued reasonably.
Avon Rubber joins the Decision Engine
Apart from the market sell-off, the biggest change in the Decision Engine this month is the addition of Avon Rubber (AVON), which I profiled last week. Avon has two very profitable businesses, connected by the company’s long heritage as a manufacturer of rubber products. It makes gas masks and milking equipment.
– Only one thing stops me buying Avon Rubber
Avon scores 6, losing points for a reasonably full valuation and because I don’t know enough about its relationship with the US Department of Defence to feel confident paying that valuation. A 10-year contract to supply general purpose respirators is coming to an end, and I don’t know if it will be replaced by another contract. Even without one, the company believes sales of other products to the DoD and the UK MoD will make good any losses, so it is possible I’m being too cautious. Especially as sales of protective equipment to police forces and fire brigades are growing, and so is the milk business.
I think I was in a gloomy mood when I profiled Dewhurst (DWHT), just before its AGM, a case of the jitters brought on by fears of obsolescence.
Dewhurst has a fine reputation for manufacturing high quality vandal resistant pushbuttons and keypads, but it’s warned that declining use of cash, and therefore ATMs may reduce demand for the keypads.
– Follow the money to cash-rich Dewhurst
That warning triggered half-repressed fears about technological obsolescence in Dewhurst’s much more significant lift component business, where touchscreens are increasingly common. It also triggered an even more deeply repressed fear that because Dewhurst doesn’t spell its strategy out in its annual reports, it may not actually have a good one.
These are, however, overreactions.
I sought reassurance from Jared Sinclair, Dewhurst’s finance director, and no longer fear Dewhurst is over dependent on pushbuttons. A very small proportion of revenue comes from selling loose pushbuttons, perhaps 5%. For decades Dewhurst has been diversifying. It’s been moving ‘upstream’, assembling lift car operating panels that house the pushbuttons and bought-in components, like LCD displays, and emergency telephones. It owns Thames Valley Controls, which manufactures lift controllers, the brains of a lift.
Dewhurst recently acquired the second of two Australian lift interiors business, that essentially fit out lift cars. And it’s broadened its range to include destination control, increasingly found in buildings where lots of people are on the move. These are the systems that send you to a lift going to your floor from a central console.
LCD displays probably won’t replace pushbuttons en-masse in the near feature either. They have attractions: they can display corporate logos, and welcome messages for example, which go down well at big companies and plush hotel chains. But LCDs can’t yet communicate in Braille. Pushbuttons can, and regulations require a standard configuration of pushbuttons so blind people can operate lifts. Neither are LCDs as durable or reliable as pushbuttons in more mundane settings like blocks of flats, which is probably the majority of Dewhurst’s trade.
The trend to incorporate LCD displays in some lifts, is actually something of a win-win situation. Dewhurst has to supply an extra component in the operating panels, albeit sourced from a third party, usually Avire, a division of Halma (HLMA).
Dewhurst is watching developments in technology and adapting. Sinclair told me it doesn’t want to “be a Nokia”, referring to the once-dominant mobile manufacturer that missed the smartphone revolution when a rival came along with a touchscreen LCD. When it comes to making a differentiated product, the software, he says, is more important than the hardware and though it’s developed by a third party, Dewhurst owns the intellectual property rights to its software and controls its development.
Dewhurst’s strategy is clearer to me now. You have to sell a lot more pushbuttons to grow, so it’s grown the range of components it supplies and also the territories it supplies them in. As it’s moved upstream, Dewhurst’s required a bigger local presence to meet regulations and preferences, and the easiest way to do that has been to buy what it knows, its customers. It’s focused on Australia principally, and the US, because it was already quite big in the UK, and businesses are cheaper to buy in Australia.
While it’s made the odd misstep, I can see the outline of what is probably a long established strategy.
Put what I have learned into my favourite strategist Richard Rumelt’s framework and you get:
Diagnosis: To grow we must sell more than just pushbuttons, in more places than Britain
Guiding policy: Diversify cautiously
Coherent actions: Move from pushbuttons to assemblies that include pushbuttons
Develop ancillary products like hall lanterns
Keep up with new technologies
Buy in components we can’t make
Acquire customers we know well, when the price is favourable.
Maybe it’s not the whole story, but it’s a big part of it.
I should heed the cover of the Hitchhiker’s Guide to the Galaxy, and the dashboard of a Tesla now in orbit. There was no need to panic.
We all need to remember that sometimes.
Contact Richard Beddard by email: [email protected] or on Twitter: @RichardBeddard
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