Going back to the stock screen I did a while ago looking for companies with high returns on investment, I’ve been through a few more on the list and found some I can cross of my list of possible investments.
LSE:HFG – Hilton Food Group
The purpose of this screen was to look for companies that would represent strong long term investments. Hilton is a food packaging company that sells to supermarkets, and earns great returns on capital but has a major weakness in that it is dependent on a limited number of customers, one of which is Tesco. Customers have a great deal of buying power and exercise a great deal of control over prices and given Hilton’s profit margins are only 2.5% that’s a risk to profits. It’s also a very capital intensive business, with only really its dividends as free cash flow.
At the right price this could be a viable investment, but it’s not the great long term investment I’m looking for.
LSE:ENRC – Eurasian Natural Resources
ENRC is a miner based in Kazakhstan. It’s been trading at low multiples for a long time and has good returns on capital like most miners. However as a company this doesn’t stand out to me as well run or one which I want to make a long term investment in. It is making investigations for corruption and has controversial dealings with assets in Congo, accused of ripping off the country.
LSE:MCRO – Microfocus International
This company develops software and earns revenue from license fees and maintenance. For me it is difficult to really get an understanding of the business and what the risks are without being familiar at all with the products they offer (I’ve look them up and don’t think I could acquire that knowledge very easily either), so I will have to rule this out as a possible investment. Would only consider this if it was absurdly cheap, which it isn’t.
LSE:XPP – XP Power
XP Power manufactures and sells power converters to Original Equipment Manufacturers. It has one of the best margins in a highly fragmented industry and competes by providing better service and speed than their larger competitors. Like with the last company, I’m not familiar with this industry and it would take me a lot of effort to learn about power converters and then the industry. So I will pass on this investment as outside my circle of competence.
LSE:CTO – T Clarke
T Clarke is a building services company. This industry is quite notorious for thin margins and susceptibility to wider economic conditions. 2012 has already shown how erratic profits can be for T Clarke with a large decline and this is not the sort of strong, cash generative company I am looking for in this search. Price isn’t interesting on a P/TBV basis either.