Here’s the great investment I’d pile into instead of the FTSE 250’s Clarkson today

Historically, this investment opportunity has delivered total returns in excess of 10% a year, and I reckon that’s set to continue.

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Investors are giving a thumbs-down to today’s full-year results from Clarkson (LSE: CKN) and the shares are down almost 9% as I write.

The FTSE 250 integrated shipping services provider revealed in the report that revenue rose 19% during 2018, but underlying profit before tax and earnings per share both slipped back almost 10%. However, the brave directors pushed up the dividend by nearly 3%, which means the company now has a 16-year unbroken record of raising its dividend. Another positive is that free cash resources rose 5% to £57.0m

Challenging trading

Chief executive Andi Case described in the narrative a “challenging” start to 2018. He said geopolitical uncertainty and natural disasters have been affecting global sentiment and exchange rates, “which in part offsets the better visibility from an improved forward order book.” Such headwinds have been affecting the firm’s financial segment, he explained.

The directors said they are “confident” about the longer-term outlook for the company. But I can’t help but focus on what hasn’t been mentioned, which is how they feel about the short- and medium-term prospects of the business. As a cautious investor, I’m inclined to read the unspoken subtext as saying the outlook is less certain for the year ahead and beyond.

Meanwhile, Clarkson sports a robust valuation that I’m struggling to justify. The current share price near to 2,370p throws up a forward-looking price-to-earnings ratio of almost 19 for 2019, and the predicted dividend yield is just over 3.4%. City analysts following the firm expect a bounce-back in earnings in 2019 followed by further advances in 2020. Yet the firm has a patchy record on earnings over the past few years.

There’s a lot of cyclicality inherent in the firm’s operations, which means there’s plenty of scope for the shares to trade on a lower valuation, in my view. The directors didn’t sound as upbeat as they did a year ago, so I’d be inclined to move on from holding the shares today based on these results.

Smoothing out single-company risk

This is another of those occasions where I see a low-cost, passive FTSE 250 index tracker fund as more attractive than buying shares in this particular company. With around 250 firms backing a tracker investment, I’d be protected from single-company risk by the diversification. If headwinds increase for Clarkson, it’s easy to imagine a valuation downrating pushing the shares to around half their current value.

Generally, I like to have a compelling reason to buy any individual company share and, as a minimum, that reason should be that I expect the stock to outperform its index. I don’t feel that confidence with Clarkson today and believe the share price could go either way from where it is now.

Meanwhile, investors following the FTSE 250 index since it started with an accumulation tracker that automatically reinvests dividends have been achieving annual returns around 10% a year. I think there’s a good case for holding some of my funds in a tracker investment alongside individual share picks.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Kevin Godbold has no position in any share mentioned. 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.

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