When markets become more volatile and uncertain, sticking strictly to a rules-based approach such as SIF can become more difficult. But I also find that it’s something of a relief, as it removes the need for speculative decision making.
We don’t know whether the recent shakeout represents the start of a more prolonged bear market, or simply a long-overdue correction. What we can be sure of are the historic quality and value metrics associated with individual stocks.
For example, a defensive business that generated a return on capital employed of 20% last year will probably be more attractive at a lower price, not less so. There’s plenty of historical evidence to suggest that this kind of financial ratio is more likely to influence future portfolio returns than short-term stock market conditions.
So while market momentum may be turning against us, my view is that by focusing on quality, value and company-specific momentum -- the three elements of the StockRank -- we should still be able to find profitable opportunities in which to invest.
NWF could be a super stock
This week’s stock in focus is AIM-listed fuel and feed and grocery distributor NWF Group. This group has three divisions, all of which appear to have attractive scale.
NWF Agricultural supplies feed for one in six of the UK’s dairy cows. NWF Fuels is the third-largest supplier of fuel oils in the UK, with more than 58,000 customers. And the group’s transport business, Boughey Distribution, operates more than 100 trucks and 900,000 square feet of warehousing in north west England, where it consolidates grocery goods for distribution to major retailers such as supermarkets.
You might be thinking that these are all generally low-margin, low-growth businesses with limited appeal. Paul Scott came to a similar conclusion recently, but he also reprinted an interesting comment from one of the company’s advisers. This highlighted much higher returns on capital in this business than its low margins might suggest. It’s worth a read.
This week I’m going to look at the numbers behind NWF’s StockRank, and explain why I believe they support the view that this business is more profitable than it might seem.
Interestingly, NWF’s StockRank of 94 makes it one of the top three stocks in the energy sector, placing it ahead of cyclical oil producers…
