Qualiport

More About Selling
Friday, 23 October 1998

Why the EMAP surge?

Qualiport followers will be aware of our sell announcement of this past Monday. A few Fools expressed surprise at this decision, thinking that we'd deserted our buy and hold strategy.

This is most certainly not the case. We are selling half of our holdings in order to finance intended purchases of new companies. We want to have a portfolio that ideally has between 8 and 12 companies in it, but we couldn't physically afford to invest £4,000 in another 4 shares.

Instead of attempting a bit of active portfolio management, we decided to split our existing holdings exactly in half. As far as we are concerned, none of the Qualiport Quartet has done anything to deserve to be sold since the day we bought them. Our philosophy says that we will sell when the story adversely changes or we can put our money to better use. On this occasion, strictly speaking, we think we've found or can find, a mix of companies that will give us a better long-term return than the Qualiport Quartet. We hope to achieve this by having a diversified portfolio of between 8 and 12 companies.

The £16,000 plus charges that we originally invested in the share market was money that we didn't envisage needing for at least 5 years. Nothing we have done in the last 5 days has changed that. As far as we are concerned, the money is still invested in the market, although temporarily some of it is now sitting in cash.

Some Fools were also querying our decision to sell shares at a loss. Many people can never face selling shares at a loss. They say that even if the current share price is below your cost price, you are only sitting on a paper loss and haven't actually lost any physical money. In their eyes, though, if you sell the shares, then you've lost that money.

Any share is worth the price at which it is currently quoted, absolutely regardless of the buying price. The market doesn't know at what price you bought the shares, and it doesn't care, either. Nor should you. If you got your homework right in the first place, you should have purchased shares in a good company that was attractively valued. If the market subsequently decides to mark the shares down, providing that nothing about the underlying company has changed, as a shareholder you shouldn't be worried. In fact, you should even consider adding to your current holding, although averaging down is something we can debate at a later date.

Many investors make the mistake of selling their winners and hanging onto their losers. These same people will come out with the saying "no-one ever went broke taking a profit." Whilst this is true, the chances are that these same people will be sitting on substantial losses that they will be happy to call mere "paper" losses, and therefore pretend that they are not real money losses.

Most people will find that their portfolios have a relatively small number of big winners interspersed with some losers. This trend is already apparent in the Qualiport, where our one big winner almost covers the losses we are making on the other 3 holdings. If we decided to sell our Rentokil Initial holding when it reached some arbitrary percentage gain of, say, 15%, the chances are that we'd be looking at a portfolio performing far worse than it is now. We say run your winners and cut your losers. A share that has fallen from your purchase price of 100p down to 50p needs to double just for you to get back to breakeven. Look at how many of the shares you currently hold have achieved that feat.

The market has decided that EMAP, Marks & Spencer and Unilever are all worth less than we paid for them. We can't change or influence that fact. If we want to sell, which we do, we have to accept the going market price. I happen to think that none of those companies happens to be particularly undervalued at the moment. By inference, I'm also therefore saying that they may have been overvalued when we first bought them. Since the earlier part of this year, the outlook for equities has changed. What started out as an Asian currency crisis has turned into a global economic downturn. Still, we weren't to know that at the time. We don't try and time the market, instead trying to evaluate the individual merits of each company. We thought each of them was worth buying, and we're sticking to that decision.

Fool Sells

In accordance with the Fool's trading policy, in the 2 days following our sell announcement we made these trades:

Tuesday 20th October 1998. Sell -- 782 Rentokil Initial @ 363.75p. Proceeds £2,844.53, less brokerage of £21.33 equals £2,823.20

Tuesday 20th October 1998. Sell -- 297 Unilever @ 575.5p. Proceeds £1,709.24, less brokerage of £15.00 equals £1,694.24

Wednesday 21st October 1998. Sell -- 168 EMAP @ 1036.75p. Proceeds £1,741.74, less brokerage of £15.00 equals £1,726.74

Wednesday 21st October 1998. Sell -- 368 Marks & Spencer @ 435p. Proceeds £1,600.80, less brokerage of £15.00 equals £1,585.80

We managed to get quite good prices for our holdings, which is always nice. I enjoy getting those extra few pence, as I see it as covering the brokerage costs. For example, when I saw Rentokil was up 10p on Tuesday, I thought that would do us and sold then and there. As it turns out, the shares have now fallen back to a mid price of around 345p, meaning we've "gained" about £150. Of course, this is a only a small victory, and will be totally irrelevant come 2008. In fact, the shares could stand at 400p by next Friday, and we will have "lost" money by selling when we did. But it is a nice feeling to think you've made a little extra dosh out of a piece of good market timing (don't try this at home!).

EMAP have been the dark horse recently, and I didn't time their sale particularly well. They hit a mid price high of 1094p yesterday, making my sell price of 1037p look a little sad. Oh well, you win some and you lose some. I don't know if other Fools have noticed, but the EMAP share price has been on a real roll recently. Having hit a low point of 840p on October 5th, they now stand at about 1060p, a rise of 26% in just 3 weeks. The only piece of news in that period concerned a minor corporate restructuring, as the company prepared to expand its international operations. One can only assume that as a profit warning didn't accompany the announcement, that trading is continuing largely as expected.

Media companies are often seen as among the first to suffer during an economic downturn. Companies cut back on their discretionary advertising spending, and consumers are a little more reluctant to buy nice to have but non essential magazines. EMAP own the biggest selling monthly magazine in the country, FHM. It's a nice to have, and some of the fellas probably think it's a nice to look at, too, but it is far from essential reading.

Current earnings forecasts for the year ending March 1999 have been edged down, with earnings per share (EPS) estimates of about 50p looking to be the consensus. At 1060p, the shares trade on a forward price to earnings ratio (P/E) of 21, having been forecast to grow by about 12% in the 1999 fiscal year. In this current environment, that doesn't look particularly cheap, but the company has hardly put a foot wrong in the last 5 years. Whilst a forward P/E doesn't tell the full valuation story, we're happy to hang on to EMAP.

Coming Next

Our total cash balances are now almost £7,900, meaning we can allocate almost £2,000 to each of our next four companies. On Wednesday, we announced our fifth buy, Independent Insurance. This is somewhat of a departure from our original Qualiport companies. The insurance industry is very competitive, and companies can have quite lumpy earnings. The floods that some parts of the country are now experiencing could impact on Independent Insurance's underwriting profits. It is not a matter of if these losses occur, but when. However, we happen to think this is a well managed company available at an attractive valuation. Time will tell whether we're right.

We will look to invest the rest of our cash into the market over the next few weeks. I expect to be able to announce the next buy on Wednesday. After that, we will quickly look to add two new companies to the Qualiport.

As to whether we are beating the market, I offer my usual table for your assessment. The numbers at the bottom of this page show we are still in a loss situation, but we're edging ever closer to breakeven.

                            Buy   Now  Change
Rentokil Initial    FTSE   5020  5217    4%
Purchased 19/12/97 Shares   255   343   35%

EMAP                FTSE   5922  5217  -12%
Purchased 17/04/98 Shares  1185  1058  -11%

Marks & Spencer     FTSE   5969  5217  -13%
Purchased 11/05/98 Shares  554    440  -21%

Unilever            FTSE  6116   5217  -15%
Purchased 17/07/98 Shares  672    563  -16%

Who'd have thought good old Marks & Spencer would have been such a laggard?

Have a great weekend, Fools. See you next Wednesday, if not on the message boards.

Bruce Jackson (TMF Googly)

Qualiport Numbers

                    23/10/98 Close

                 Company   Change    Bid
                  EMA     -0.31    10.58
                  MKS      0.03     4.40
                  RTO     -0.11     3.43
                  ULVR    -0.08     5.63 

Qualiport Stocks

Last Rec'd Total # Company  In At  Current  Change
 19/12/97   783      RTO     2.55    3.43    34.5% 
 17/04/98   169      EMA    11.85   10.58   (10.7%)
 17/07/98   298      ULVR    6.72    5.63   (16.2%)
 11/05/98   368      MKS     5.54    4.40   (20.5%)


Last Rec'd Total # Company  In At    Value    Change
 19/12/97   783      RTO   2046.53  2685.69   639.16 
 17/04/98   169      EMA   2052.57  1788.02  (264.55)
 17/07/98   298      ULVR  2052.54  1677.74  (374.80)
 11/05/98   368      MKS   2054.11  1619.20  (434.91)


Cash:                                    £7,897.80
Current Total :                         £15,668.45

Total Invested:                         £16,250.95
Profit/(Loss) :                           (£582.50)

Value Per Share

                  Day    Month   Year    History
Qualiport       -1.89%   4.53%  27.43%   30.30% 
FTSE 100        -0.24%   3.02%   1.59%    3.92%
FTSE All Share  -0.20%   2.65%  (0.17%)   1.93%

For an explanation of Value Per Share accounting, please click here.