Billionaire investor Warren Buffett believes that you should stick to your circle of competence when buying stocks. By avoiding companies whose activities or finances you don't understand, you can often avoid big losses.
The two companies I'm looking at today both have quite simple businesses. Both have also attracted the eye of fund manager Neil Woodford. Should we follow his lead?
Adding value for shareholders
Property group Sirius Real Estate (LSE: SRE) owns and operates branded business parks in Germany. These contain a mix of conventional office space -- for larger companies -- and shared office space, of the kind that's popular with small firms and start-ups.
In my view, the company's main appeal is its ability to add value to the properties it buys. Sirius doesn't just buy buildings and then sit back and collect the rent. It finds properties that are under-occupied and improves them, hoping to increase their occupancy, rental yield and market value.
Today's half-year results show how this can work. During the six months to 30 September, Sirius sold sites worth EUR103m. These had an average occupancy of 90%. During the same period, the group purchased or committed to buy EUR166.7m of new property, with an average occupancy of just 58%.
Pre-tax profit for the period rose by 44.5% to EUR54.7m. The book value of the group's property portfolio rose by 4.1% to EUR857.4m, while the interim dividend will be lifted by 12.2% to 1.56 euro cents per share.
Sirius stock has risen by 23% so far this year. It now trades at around 1.1 times its book value of c.57p per share. However, the stock still offers a forecast dividend yield of 4.3% and remains a buy, in my view.
Put the kettle on
Strix Group (LSE: KETL) claims to be the world's largest manufacturer of kettle safety controls, with a global market share of around 40%. According to the firm, around 70% of kettles in the UK have Strix safety controls.
This company only listed on the AIM market in August, so it doesn't have much of a track record as a public company. But I think it might be worth considering.
My first thought about Strix was that its business could be vulnerable to low-cost competition. But its products are safety critical and are regulated in many western markets. I'd expect this to provide some kind of defensive moat. Switching to a cheaper alternative might not be worth the risk, for manufacturers.
Too soon to buy?
Strix shares currently trade on a 2017 forecast P/E of 12.5. Earnings per share are expected to increase by about 10% to 12.4p in 2018, giving a P/E of 11.4. Analysts expect the group to pay out 7p per share in dividends next year, giving a prospective yield of 4.9%.
The firm's historic accounts suggest to me that cash generation should be strong, providing solid backing for the planned dividend policy.
My only concern is that the group's finances were heavily reorganised as part of its flotation. These changes appear to have left the group with £60m of debt and a weaker balance sheet. I'd want to see a post-IPO set of accounts before considering an investment, so I'm going to keep this stock on my watch list for now.
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Roland Head owns shares of Sirius Real Estate. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.