The Family Firms Portfolio -- Our First Investment

Published in Investing Strategy on 15 July 2010

We buy an out-of-favour oil services company.

Last month I wrote about why I believe 'Fantastic Family Firms' are an attractive proposition for investors seeking to follow a long-term-buy-and-hold (LTBH) strategy.

I introduced my teenage son, Sim, who is just starting out investing, and told you that over the coming year we'll be constructing a portfolio of family firms -- and reporting progress here on The Fool.

Last week we made our first investment.

The Plan

We will be investing £150 in a different family firm each month, using the The Motley Fool ShareBuilder regular investment service. In this account you can only invest on four fixed dates in the month; but the commission is a mere £1.50 per trade.

Over the course of the year I'll be teaching Sim about Investing Basics, which should enable him to make an increasing input into our family-firm selections and generally stand him in good stead for his investing future.

Searching for value

Discussing our strategy ahead of the first investment, I suggested that we should aim to buy whichever family firm happened to appear reasonably 'cheap' at the time. Sim was a bit dubious about the idea of companies being under-, fairly- or over-valued, so I sent him off to read a few Foolish articles debunking the Efficient Market Hypothesis (EMH).

I didn't want to get into the finer points of valuation metrics with him this early on, so suggested that for his first investment he try coming at value from a different angle; namely, by looking for a family firm in an area of the market where fear was ruling the roost. I quoted Warren Buffett: 'be fearful when others are greedy, and greedy when others are fearful.'

It didn't take Sim long to think of BP's (LSE: BP) calamity in the Gulf of Mexico -- and oil as a sector where share prices might be suffering unduly from an excess of fear.

Hunting a family firm

Looking down our watchlist of family firms, oil services company Hunting (LSE: HTG) caught Sim's eye and we decided it merited further research.

The company has a history stretching back to the nineteenth century. Charles Hunting set up a ship-owning firm in 1874, which his son, Charles Samuel Hunting, expanded into the oil business in the 1890s. Ever since, the company seems to have been adept at re-positioning itself by acquisition and divestment to exploit the best opportunities prevailing at the time.

After five generations, the family retains a significant shareholding and is represented on the Board of Directors by Richard Hunting who has been Chairman since 1991.

The Gulf of Mexico factor

In the wake of BP's oil spill, Hunting's share price was initially buoyant, supported by an AGM statement on 21 April, which reported in-line trading and a fairly upbeat outlook. The share price closed that day at 610p but thereafter began to fall.

Poor market sentiment was not assuaged by Hunting's 30 June trading update, which reported 'very positive' overall trading in the first half and reassured shareholders that, despite adverse events in the Gulf of Mexico, management remained 'confident' for the full-year.

Market sentiment further deteriorated the following day when sector peer Wellstream (LSE: WSM) issued a third profit warning in less than a year.

By 6 July, Hunting's share price had fallen 26% to 453p (since April), against a drop in the FTSE All-Share index of 13%. It certainly looked like Hunting was being haunted by the prevailing market fear of all things oil.

Hunting value

Despite the dramatic fall in the share price, analysts' forecasts put Hunting on a price-earnings ratio (PER) of 25 for 2010; and 20 for 2011.

However, that ignores Hunting's cash position: the 30 June trading update had reported net cash of £310m (or 234p per share). Cash-adjusted PERs for 2010 and 2011 were a far more appealing 12 and 9, respectively.

Hunting's cash pile had resulted from it shifting its focus more directly on the upstream energy services market by disposing of its large midstream business, Gibson Energy, at the end of 2008.

The flexibility afforded by the cash and Hunting's historical adroitness at taking advantage of areas of its markets where there are good opportunities for growth can be viewed as attractive qualities in the present environment.

Sim buys

Sim liked the look of Hunting, and if you think back to your own first trade you can no doubt imagine his excitement when the transaction was confirmed.

Transaction Date:07 July 2010
Transaction Time:10:10
Sale/Purchase:Purchase
Stock Name:HUNTING ORD GBP0.25
Quantity:32.424414
Unit Price (GBP):4.55706
Consideration(GBP):147.76
Commission Charged(GBP):1.50
Stamp Duty(GBP):0.74
PTM Levy(GBP):0.00
Net Total Due(GBP):150.00
Settlement Date:12 July 2010

Now, a week after making the investment, with Hunting up over 10% against a 5% rise in the market, Sim is already looking forward to our next scheduled investment on 5 August.

He knows short-term share price movements don't mean anything, but says it's still nice to have got off to a positive start.

More from G A Chester:

> G A Chester & Son hold shares in Hunting.

> Set up a regular investment plan with The Motley Fool ShareBuilder and pay just £1.50 for each purchase. Open an account today.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

rtmortimer 15 Jul 2010 , 9:44pm

I am surprised that the transaction worked out at exactly £150. How amazing that you can now purchase 0.424414 of a share! Things have clearly moved on - i wonder wo owns the other 0.575586 of that share??? Nevertheless, well done Sim.

secraser 17 Jul 2010 , 3:11pm

I'll be watching you.

LedZepTT 17 Oct 2010 , 1:29pm

Buying fractions of a share is odd, but upon investigation, is correct: from http://www.halifax.co.uk/sharedealing/products/halifax_sharebuilder.asp

"Purchases within Halifax ShareBuilder allow you to buy fraction of shares. This means every penny you invest goes directly into the shares you want!" Presumably this is because the Halifax (on behalf of ) Motley Fool are bulk dealing.

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