investing etc. 0018

Simple is beautiful edition: Hill training, complexity risk, integration by design, Kainos, Greggs, Inchcape, Pets at Home, Cohort, Goodwin, Focusrite and James Cropper...

August and September are very slow periods for annual reports. It’s almost as though executives take holidays!

A month  in the life…

Since new investment ideas come to me from freshly minted reports, there has not been much action in my 5 strikes system since we last rubbed shoulders.

Finding new ideas with 5 Strikes

The lull gave me time to re-examine all the companies I have put through the 5 Strikes system over the last six months.

I deemed Kainos, Greggs, Inchcape, Pets at Home to be of most interest, but two weeks can be a long time in investing. I soon cooled on first choice Kainos and opted to investigate motor vehicle distributor Inchcape instead.

Inchcape has completed an eight year divestment programme. 

It’s sold off most of its motor dealerships. Retailing was once Inchcape’s main business, but it is now mostly represents manufacturers in smallish markets around the world. In these countries it imports cars, and sells them to retailers.

Deciding what not to do, simplifying and focusing, is the essence of strategy and the reason Inchcape caught my attention.

Scoring shares in the Decision Engine

Often it is the other way around. Companies get more complicated as they grow. 

This has been preying on my mind recently. In fact the issue of complexity reared its ugly head every time I scored a company.

The first was Cohort, which listed in 2006 to acquire defence technology companies.

This is a roll-up strategy and roll-ups can grow really big. Bunzl has revenues of £11 billion compared to Cohort’s £203 million for example.

Each Bunzl subsidiary distributes similar essential products, like toilet paper and plastic packaging, to businesses and other organisations using the same systems and suppliers. Because the subsidiaries have so much in common they are easy to integrate.

Each Cohort business occupies its own technological niche. Integrating the businesses without quashing what made them special in the first place is, to my mind, more difficult.

Cohort is a good business, but I wonder if it’s getting better as it grows.

Goodwin is just as complex, but in a more reassuring way. 

Most of Goodwin’s businesses were incubated within Goodwin itself. 

Goodwin casts steel and also machines it into components. It quarries, processes and manufactures minerals into products used in the production of jewellery and tyres.

Instead of acquiring businesses and trying to make them more than the sum of their parts, Goodwin starts them up, often using capabilities it already has. This is integration by design.

Normally I score companies once a year when they publish annual reports, but I re-scored Focusrite mid-term, believing I got it wrong last December.

It was an unusual and humbling turn of events because I think I should have recognised the risks earlier.

You may not be surprised to read, complexity is one of them.

Until this year, I steadfastly refused to re-score companies until they published annual reports. I changed my mind because shortages, inflation and war have exposed weaknesses in companies I previously considered to be strong.

Admitting you were wrong is painful, but it is also cathartic. I hope the shame of re-scoring means I try harder to get things right the first time.

The final share I scored was James Cropper. The venerable paper-maker turned enabler of the hydrogen economy.

Complexity may be a problem there too. I’ll let you read about that.

Theory into practice: Share Sleuth portfolio

Thank goodness, I can finish on a positive note. This month’s trade was a new addition for the Share Sleuth portfolio: Oxford Instruments. 

The company manufactures scientific instruments. My layman’s comprehension of the science is limited, but the company’s new chief executive has a coherent strategy that simplifies the business.

Thanks for reading

Here’s a gratuitous picture of a huge gathering of hay bales. I am hill training for Marathon Eryri (aka Snowdonia), and we only have one hill nearby (well, it’s a kind of ridge). 

I run up it, and down to the convention of bales where I glug some water from a bottle I leave there. Then I turn and run back up and down the other side to where I started, repeating until exhaustion. 

It’s my tenth Marathon Eryri next month, and I hope to finally run a good one!

The mountains of South Cambridgeshire, and a reminder of what it was like before the flood.

The next scheduled investing etc. should be with you on Saturday 9 November. Brrr.