UK Edition
The most successful investors accept their limitations. For example, while some spend countless hours trying to work out how the economy will perform in future, their more pragmatic peers accept that it is wholly unpredictable.
Similarly, overconfidence leads some investors to build a concentrated portfolio that ultimately fails because one holding slumps in price. Their more realistic counterparts appreciate that unforeseen events happen and therefore seek to diversify.
Indeed, there is only so much any investor can do to influence the performance of their portfolio. Some events are simply random in nature. Therefore, in Questor’s view, it is far more logical to focus on buying a diverse range of fundamentally sound companies at reasonable prices rather than seeking to second-guess unpredictable events.
For instance, the wallpaper and fabrics company Sanderson Design has had a challenging time because of a weak consumer environment in Britain alongside its exit from Russia. These factors lay behind flat revenues in its latest full-year results and a subsequent 3pc decline in sales in the first half of the current financial year.
Over the past two years its share price has more than halved. This means it now trades just 24pc higher than when it was added to our Inheritance Tax Portfolio in January 2019.
Crucially, the company’s financial position remains sound. It has net cash of £16m, which suggests it is well placed to overcome a tough operating environment. The company also enjoyed strong growth in its high-margin licensing division in the latest financial year and in the first half of the current year, with sales growth of 25pc and 82pc respectively.
This suggests that while revenue growth may continue to disappoint, profits could still rise thanks to an increasingly favourable product mix.
Profits are likely to be further boosted by the recent streamlining of the company’s support function in Britain and the associated cost savings. As a result, dividends are likely to remain well covered; they amounted to just 25pc of earnings in the most recent financial year. With a yield of 3.3pc, the stock maintains its appeal for income investors.
Growth opportunities remain in licensing and in North America, where brand product sales increased by 6pc in the first half of the year. While the prospects for the economy remain unpredictable, Sanderson Design’s price-to-earnings ratio of 7.5 suggests a wide margin of safety and that investors have fully factored in its ongoing difficulties.
It therefore remains a worthwhile member of our IHT portfolio.
Questor says: hold
Ticker: SDG
Share price at close: 103p
Update: Nichols
Soft drinks company Nichols is also experiencing a challenging period thanks in part to a weak consumer environment. This has contributed to a 34pc fall in its shares since mid-2021 and a 31pc decline since they were added to our IHT portfolio in 2018.
While Nichols’ latest half-year results reported a 7pc rise in sales, they were held back by relatively slow growth in Britain.
Indeed, UK packaged revenue rose by less than 5pc, compared with growth of 25pc in international markets, as the company sought to protect profit margins amid rampant inflation. Encouragingly, though, it has been able to counter the impact of rising costs on profitability by raising prices. Pre-tax profit margins, therefore, increased by 0.4 percentage points to 13pc in the first half of the current financial year.
Importantly, the company has a solid balance sheet, with no debt and £56m of cash. This should allow it to overcome current market difficulties to benefit from any improvement in operating conditions over the long run.
When that will occur is impossible to forecast. In the meantime, further share price weakness cannot be ruled out, not least in view of a lofty valuation of 19.3 times earnings.
In Questor’s view, though, Nichols’ solid financial position and long-term growth potential make it a fundamentally sound business. It therefore continues to merit its place in our IHT portfolio.
Questor says: hold
Ticker: NICL
Share price at close: £10.55
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