David Kuo talks to Maynard Paton, the chief investment strategist from Champion Shares PRO.
You can listen to or download this podcast here.
David:
This is Money Talk, the weekly investing podcast from the Motley Fool. Now, in the 1941 movie, "The Maltese Falcon", Humphrey Bogart said, "This is the stuff that dreams are made of". So is the stock market currently the stuff that dreams are made of? Reckitt Benckiser probably thinks so, after it snapped up Durex maker SSL International for two-and-a-half billion pounds. Vedanta probably thinks so too, after it bought a majority stake in Cairn Energy, and German transportation company, Deutsche Bahn, probably thinks so also, after it paid two-and-a-half billion for the British train operator, Arriva.
I could go on, but let's hear what my guest, Maynard Paton, Chief Investment Strategist at the Motley Fool stockpicking service, Champion Shares PRO, thinks about this.
Before I let Maynard near the microphone, I need to point out that the opinions stated in this podcast are the personal opinions of Maynard Paton and may not be representative of the content of the Champion Shares PRO service. This podcast is aimed at UK investors. And for a full risk warning please see www.fool.co.uk/podcast.
So welcome to Money Talk, Maynard.
Maynard:
Thank you, David.
David:
Now, what do you make of this raft of takeover news that's going on in the market?
Maynard:
Well, it's certainly encouraging for investors to see companies that are confident in their own prospects and their balance sheets, to be able to offer money to be able to buy other companies. Certainly they presumably see value in parts of the market, and you've named quite a few different companies there: SSL, Arriva. They all seem to be different sectors as well, I mean other companies subject to bids include Sky and Dana Petroleum, Tomkins and Brit Insurance as well. So there's a spread of companies there, and it suggests that there's value perhaps throughout the market.
David:
Now the thing is, you and I know there is value in the market, because we are looking at the market all the time, but why are shares so cheap? Why don't other people recognise this?
Maynard:
Well, some shares are cheap and some are not. It may surprise you that some of the shares on my watch list for Champion Shares PRO, some of the mid caps, they're hitting all-time highs – names such as Fidessa, Hargreaves Lansdown and Dunelm - these are what I think are quality operators that have done well through the recession, and the markets recognise their potential and the prospects and the shares are hitting high.
So it's not every share that's cheap, but there are a lot of companies which are struggling in the current climate. We all look at large caps such as Vodafone, and GlaxoSmithKline – they're all trading on P/Es of about ten, and are yielding five, six percent. You look at those ratings – yeah, they look modest, but those companies have modest prospects as well. Their latest statements showed a one percent sales growth, which is not going to excite the market. So shares do look cheap, but there's a lot of economic worries out there about the double-dip recession and all the rest. Also, a lot of companies are just stagnant at the moment. So some of those modest ratings are perhaps justified.
David:
So the thing is, I mean normally, when you get takeover news in the market, it excites investors, but it's not prompting a turnaround. So what is going to prompt this turnaround in the market now?
Maynard:
Well, ultimately share prices are driven by how the company performs by earnings and dividends. So if companies continue to churn out strong earnings growth and dividend growth, then the market will eventually come to the conclusion that yes, this is a strong company, it's got good prospects and the price is going to rise. At the moment the market's thinking, well, there's all sorts of economic worries, and it's adopting a wait and see policy as such for many companies. But if the companies do well, then ultimately the market will have to re-rate the shares.
David:
But some people don't have the patience to wait and see, Maynard. So what should investors do between now and a turnaround?
Maynard:
Well, you should still invest, because the turnaround, a wider market turnaround, is not going to be flagged up in advance. It's going to happen, and by the time you've realised it's happened, it's too late, and you'll be paying a much higher price for the shares.
So my advice always is to invest now in your favourite companies. Buy when share prices are modestly valued, and you've got to have some patience, because sooner or later there will be some sort of turnaround. You'll always end up buying too late, chasing prices higher, and it's much easier just to buy when prices are low, and wait, rather than chase prices high, when it's too late.
David:
But some people might say it's better to be safe than sorry, but in terms of the sectors, which most sectors look most attractive to you at the moment?
Maynard:
Well, I'm generally a bottom up investor, so I look at individual companies mainly. Sector-wise, one of my favourite sectors, I think, is financials and fund managers in particular. I like the economics of fund managers, because they're generally high margin businesses which have low capital requirements. So your cash generation is good, and they usually have a lot of cash sitting on their balance sheets.
Many fund managers on the London market are also run by entrepreneurial boardrooms. So you've got strong balance sheets, and managers that are aligned with ordinary shareholders as well, so that's two good points. Also, if the market rebounds, their funds should improve as well, which means they get more income from those funds as well, so it's sort of like a geared play on the market. So if you think the market's going to do well over time, then fund managers could do well too.
David:
Now thing is, there is a saying in poker, Maynard, that if you think that the bet is in your favour, you're going to go all in, right? So if you believe that these particular sectors look attractive, are you going all in to these sectors? And if not, why not?
Maynard:
Well, I've got tight filters for Champion Shares PRO, so I'm only looking for respectable companies, companies with solid balance sheets and capable leaders who've proven themselves over time to deliver value for shareholders. So I'm picky with the companies I'm choosing, and some of those, as I've said earlier on, they're hitting all-time highs, some of them, and they're not offering good value at the moment for investment. So I'm not all in at the moment, but there are shares on my watch list that, I think, are very modestly valued, given the likelihood of them growing profits over time. So I'm drip feeding the money in, really. It's always good to have some sort of cash on hand.
David:
So how widely spread is your portfolio likely to be?
Maynard:
Well, we've got nine shares in PRO at the moment, and it's likely we will end up somewhere between 10 and 15 shares. We will drip feed money into different shares, so of those nine shares, we would a little bit more money into each of those nine perhaps, or buy new positions.
David:
That is quite a concentrated portfolio, because I mean, in previous podcasts I've spoken to fund managers who have 100, 200 shares in their portfolio – why not you?
Maynard:
Well, they've got a lot more money to manage. We've got £50,000, which I think, if you go beyond 15 shares, you're going to diversify away your excess returns too much. I think 15 shares is a fair number of shares for a diversified portfolio for an ordinary investor. With the old Qualiport, I only had five or six, but I've got to bear in mind that a lot of members for the PRO service are new to investing and perhaps couldn't live with the volatility of a five or six share portfolio. So 10 to 15 shares, I think that's a fair balance of diversification and also putting reasonable amounts of money into shares that you have a high conviction of them doing well.
David:
OK, now that's an interesting point. How do you allocate the money that you have to these 15 shares? Is it equal weighting?
Maynard:
Well, ideally it'd be equal weighting and then they will bob up and down, and then some will do really well and perhaps represent a large part of the portfolio, and some will do badly and decline in value. I don't really have a formal plan where I say, right, if it goes up beyond 15% in the portfolio, I will trim it down. It's play it by ear, and see how the company's doing, because if a company's share price doubles, it may still be cheap because there's some fantastic news that could send the price even higher.
So I don't want to be locked into any sort of rigid strategy. It's more gut feel, I think. I think if you set down plans about definite asset allocation, set rigid percentages, then you're not going to make the best decisions.
David:
OK. In terms of decisions, you haven't been 100% successful in your share picks. So in those that haven't done particularly well, what went wrong with those selections?
Maynard:
There's nine shares at the moment. I think it's a little unfair, David, to say what went wrong, because I think there's temporary bad news to the shares. There's two shares which are showing 25% losses at the moment, paper losses.
One of them is facing a threat of new competition, which has to jump over some regulatory hurdles, and I think those hurdles are quite high, and I think ultimately the new threat will not appear. So I think if that's the case, then this particular share should recover.
The second share is a fund manager, and I talked earlier about the upside of fund managers, but the downside is that of course, if the funds don't do well, if the clients can withdraw their money, that can have a knock-on effect with profits as well. So this particular fund manager, its funds aren't doing well, clients are leaving and profits look under pressure, the dividend looks under pressure, but I think it's a temporary bad patch it's going through, and the investments that it's made will come good over time, and there's a fair chance of a rebound there.
David:
Now the thing is, Maynard, I mean you and I have worked together for almost ten years now, and one thing that I would like to know from you, and I think the listeners would like to know also is, as somebody who picks shares all the time, how do you feel when the price of a share, the value of a share, drops? What is it that goes through your mind when that happens?
Maynard:
Well, it depends why it dropped. If there's been an awful profit warning, and all of a sudden they've discovered a black hole in the accounts, and whatnot, then I'm not going to feel too good about that. But generally, I feel you want shares to drop in value, and if you're a buyer of shares, if you've got cash on hand, you want shares to drop in value. So with PRO, I've talked about, we've got nine shares, two are down with 25% paper losses. The others have sort of drifted lower as well, no real news as such, and all their statements have been in line with what I expected, and they've just bobbed lower with the market.
So I'm happy about that, because I've got cash on hand, I think right, I can average down now, and buy a better price for a company which is actually, some of them, their profits are up, but the price is down, so I'm getting better value for my money. So as prices go down, if there's nothing changed with the business, I'm happy to buy more. So yeah, I'm welcoming higher prices. It's when prices go up, and I've got cash on hand, that's more frustrating for me.
David:
Now the thing is, you feel happy when a share that you've bought goes down. How do you feel when a share that you've bought goes up then?
Maynard:
Ah well, I'm obviously pleased.
David:
You're happy either way?
Maynard:
Yeah, happy either way, but I'm obviously pleased for the members of the service, that it goes up. If there's a general market, if the market keeps on going up, and shares in general have become fairly priced or overpriced as such, then that's frustrating, it can be frustrating for a service such as ours, where you're trying to find investments all the time. But at the moment, that's not a problem. It's always nice to have your convictions come good in the market, and the market finally comes round to your way of thinking – it's good.
David:
OK. So how can people take part in this happy portfolio called Champion Shares PRO then, Maynard?
Maynard:
Well, you can't subscribe to it at the moment, because we're not allowing new members to join PRO, but if you visit the Motley Fool website and follow all the links on the home page to Champion Shares PRO, you can add yourself to our priority waiting list, and we'll inform you at some point in the next few weeks when we can start accepting new members.
David:
OK, well that's wonderful. Now, thank you for coming in today, Maynard. I started this podcast with a quote from the movies, and I'm going to end with a quote from the movies as well. Today's quote comes from a 1976 film called "Marathon Man". In one scene, Laurence Olivier asks Dustin Hoffman, "Is it safe? Is it safe?" Now, the thing is, Maynard, is it safe at the moment to go in the market?
Maynard:
I would say so. I mean, the alternatives are cash, which is not going to give you very much in return; gilts, which are yielding less than three percent, which look very expensive to me; property, which looks expensive to me; with shares, we talked about Vodafone and Glaxo and they're yielding five to six percent – yes, they've got modest prospects, but a collection of high yield shares with a tracker in selected small caps and PRO, I think, you're going to do much better than the alternatives.
David:
OK, that's wonderful. So you heard it here – Maynard says it's safe to go in the market. This has been Money Talk, I have been David Kuo, and my guest has been Maynard Paton, Chief Investment Analyst at Champion Shares PRO. If you have a comment about today's show, you can post it on the Money Talk blog, which you can find at fool.co.uk/podcast. If you have a suggestion about future shows, please email me at moneytalk@fool.co.uk. Until next week, hasta la vista!
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Risk Warning
* The opinions stated in this podcast are the personal opinions of Maynard Paton and may not be representative of the content of the Champion Shares PRO service. This podcast is aimed at UK investors. You run an extra risk of losing money when you buy shares in certain smaller companies including "penny shares".
* There is a big difference between the buying price and the selling price of these shares. If you have to sell them immediately, you may get back much less than you paid for them. The price may change quickly, it may go down as well as up and you may not get back the full amount invested. It may be difficult to sell or realize the investment.
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