FOOL'S EYE VIEW
A Fool's Eye Review

By Maynard Paton (TMFMayn)
December 20, 2000

Carburton Street, London -- It can be a thankless task being a writer for the Motley Fool. Through our regular Fool's Eye View (FEV) features, we give our opinions on a whole range of different companies each day, every day. And with so much varied comment being generated, there's obvious scope for some of our views to be more perceptive than others...

Of course, for long-term investors, the company's subsequent share price performance over a few months is hardly indicative of us making correct FEV calls. However, with some dramatic swings in sentiment and a few profit warnings over the past twelve months, there are quite a number of my own FEVs that I look back on with a certain smug satisfaction.

But it goes without saying that there are one or two articles that I reflect upon with more than a tinge of embarrassment. For this review, I've singled out the FEVs concerning companies whose share prices have moved at least 15% in either direction since venturing my own Foolish opinion. So here's my personal Fool's Eye Review of 2000, the good and the bad.

Tech stock bashing

I'll start with a FEV published a year ago tomorrow, entitled "Safety Equipment for a Stock Fallout". The basis of the feature was the book One Up On Wall Street, written by legendary US fund manager Peter Lynch.

In short, I agreed with Lynch about his distaste for "hot" tech stocks and his liking for undiscovered small company "gems". I used Latchways (LSE: LTC) as an example of a possible company that Lynch could find attractive. And although condemned for being "anti-techie", the caution I expressed to those buying into the speculative froth eventually proved well-founded. Of the tech stocks mentioned or inferred in that FEV, the best performer over the past twelve months has been ARM Holdings (LSE: ARM), losing only 30%. On the other hand, Latchways (described as a "solid investment proposition" in March), has gained 44% in value.

Further anti-speculative comment was given in February with a FEV entitled "Death, Taxes and the iii float". The following quote outlines the FEV's warning to those then jumping on the interactive investor international (LSE: IIN) flotation bandwagon:

"Visions of short-term share price gains appear to cloud any rational appraisal of the company... As opposed to the apparently risk-free flotation gains, holding expensive rubbish when sentiment turns against you leads to the only true certainty in investment. The certainty of losing money."

Interactive's chart tells the rest of the story.

More overblown tech stocks

Other overblown tech stocks have also incurred my general ongoing bearishness during 2000.

After IT hardware distributor Compel Group (LSE: CGR) did its best to hide a weak trading performance, trouble was always on the cards. I suggested Compel shareholders "really ought to be concentrating on the financial presentation [of their interim results] first and foremost, rather more than contemplating the bullish outlook statements". The shares have since lost 87% of their value.

And needless to say, there were plenty of other "new economy" companies whose valuations, to me, looked particularly stretched. In my firing line were the shares of Computacenter (LSE: CCC), ("requiring a lot of belief in the company's future"), Guardian iT (LSE: GRD) ("far too rich for my liking"), Parthus Technologies (LSE: PRH) ("warrants a 'tread with care' notice for ordinary investors"), Sage (LSE: SGE), ("the odds of continued long-term investment success look slim") and Eidos (LSE: EID) ("investors will continue to get more excitement from watching the antics of the busty brunette [Lara Croft]"). All five shares have fallen between 30% and 70% since the remarks.

Of course, a special bearish mention must go to Freeserve (LSE: FRE). Even at 373p per share in June, the writing was on the wall for the shares of Internet firm. My final quote from the Freeserve Finals FEV tells the story.

"Finally, consider the fact that continental ISP players are not prepared to purchase Dixons' (LSE: DXNS) Freeserve stake. What do we have as a result in the ISP investment sector? Involving the most knowledgeable ISP investors there are, one is wanting to sell while the rest are not wanting to buy. This current state of affairs, rather than [today's annual] figures, should inform shareholders about the real prospects of any investment in Freeserve."

Old economy

My caution wasn't just confined to the tech sector, as I expressed some wariness towards companies from traditional industries. Marks & Spencer (LSE: MKS) ("At 244p..., there's still a lot of optimism in the shares"), Manchester United (LSE: MNU) ("at the current heady valuation, the shares are for the true fans only"), Corus Group (LSE: CS.) ("Is there an investor out there who can sing the praises of Corus? I certainly can't") and SSL International (LSE: SSL) ("Some sort of safety mechanism is definitely needed when considering any purchase of SSL")  have all fallen at least 25% since the prudent opinion.

And how about this prophetic FEV summary on London Clubs International (LSE: LCI), made in June?

"The whole future of the group appears to rest on the ambitious Aladdin project... With a huge debt mountain and miniscule interest cover, the slightest operating slip could be financially disastrous for the group. Until the performance of the new Aladdin casino can be determined, the odds are firmly stacked against London Clubs."

London Clubs has since lost nearly 50% of its market value after revealing operational problems at that new casino.

Overly bearish

Of course, my general bearishness during the year was misplaced in certain circumstances. A perceived threat to the newspaper industry from the Internet caused me to misjudge the 50% subsequent surge in Southnews (LSE: SNW) shares and a 15% rise in the shares of Johnston Press (LSE: JPR).

Other shares defying my expectations were Diageo (LSE: DGE) ("the investment potential of a drinks-focused Diageo can at best be only described as very restrained"), National Express (LSE: NEX) ("better value elsewhere for slow growing, stable, unexciting and capital intensive businesses") and Enterprise Inns (LSE: ETI) ("a poor formula for growth...is amply recognised by the stock market"), whose shares have all increased by 15%-plus since my unfounded remarks.

And will I ever be proved right with Matalan (LSE: MTN)? After twice suggesting that "the very high rating, directors offloading their shares and the inevitable boom-and-bust of retailing concepts all indicate that Matalan shareholders should be heading for the checkout very quickly...", Matalan shares have gone from strength to strength. They've gained 40% since I initially cried wolf. Still on the retailing theme, this downbeat appraisal of House of Fraser (LSE: HOF) doesn't inspire either. The company's shares have subsequently increased by 39%.

Mildly Bullish

Surprising to some, perhaps, but I did express some upbeat company commentary during the year. Shares of Ottakar's (LSE: OKR) ("a short-term re-rating prospect"), Ashtead (LSE: AHT) ("an interesting recovery story") and Independent Insurance Group (LSE: IIG) ("At 339p..., a reasonable valuation given the company's record, strengths and growth potential") have all gained over 15% since the mildly bullish remarks.

Howlers

And to round off, those positive write-ups that now make very uneasy reading -- the real howlers. I couldn't replicate my earlier sound review of Manchester United with Leeds Sporting (LSE: LSE), the shares of the Yorkshire team falling 50% after I wrote "Leeds currently look far better value [than Man Utd] for those hunting around the football sector".

But the worst FEV "stock idea" of 2000 must go to Spotting Domino's. After describing Domino's Pizza (LSE: DOM) as having "the true potential to become the de facto interactive pizza delivery service" with my "investment nose beginning to smell the makings of an 'interactive television consumer franchise'", the lack of any reference to the company's valuation has come back to haunt me. Shares of Domino's have since halved.

Summary

Most companies reviewed for FEVs always look fair value and, unfortunately, can't always warrant some strong Foolish opinion. However, when the stock market became "tech-tastic" in the early part of the year, I'd like to think I did my part to douse the enthusiasm of the unwary. But concerning the companies of a more traditional nature, my record was a little more mixed. Although widely touting a "new economy" fall-out, I failed to recognise that, in this event, there would be a general switch to "old economy" stocks. This, I'm sure, has lead to some of those "unforeseen" share price gains. And reassuringly (I think!), only two FEVs during the whole year have proved really terrible. Overall, after offering numerous opinions, I don't think I did too badly in 2000. But with my quite occasional inaccurate opinion, the ultimate message is clear -- do your own research too!

Where Next?

Review 2000 in full  --  Visit the Fool's Eye View Archives