Qualiport

Learning the Hard Way
Wednesday, 18 November 1998

A Gut Feel Update

The Qualiport is a learning tool -- not only for you the readers, but also for us. We've made quite a few mistakes along the way, and we've learnt from them the hard way. This portfolio is using real money, so the loss you see on this page is a real money loss. At the moment, we'd have been far better leaving our money in the building society.

But that wouldn't be much fun. It also would go against our premise that it is impossible to time the market. When we bought our holding in Unilever (ULVR) back in mid July, how were we to know that the market was days away from making its descent from 6179 all the way down to as low as 4649? Of course we weren't, but neither was anyone else. No-one rings a bell when the market reaches its peak, telling you to sell out and wait for the market to bottom. Likewise, when do we know the bottom of any particular market cycle has been reached? It's an impossible call.

We are looking to buy individual shares, not the market. So although no-one can time the market, investors can set a share price at which they feel they can make a return commensurate with the risk they are taking. This is all part of the valuation process, and we shall soon be re-hashing and updating our Qualiport How To Value Shares series and archiving it in the Fool's School for posterity.

In hindsight, for a company like Unilever that can't physically grow very quickly because of its enormous size, we should have set ourselves a buying price that was closer to 450p than the 672p we bought them at. At that price, we would have had a much better chance of achieving our aim of 15% compounding growth per annum. Let me reiterate that the underlying company remains largely unchanged since we purchased our shares, and that is the most important thing. We still intend to hold Unilever for a long long time, and as we know, time is the friend of the long-term investor.

Again in hindsight, we should have conducted a similar exercise for all our Qualiport holdings. That is, once deciding that we are looking at a quality company, we should be setting a price at which we are prepared to buy the company. The only ones we would have bought at the prices we did are Rentokil Initial (RTO) and Independent Insurance (IIG). PizzaExpress (PIZ) was a touch and go valuation decision. Interestingly, we would have had the opportunity to pick up our holdings in EMAP (EMA) and Marks & Spencer (MKS) at our preferred prices, which would have been much lower than our actual entry point.

The fact that we didn't is far from the end of the world. Of our holdings, this is my current gut feeling of where the companies stand.

Rentokil Initial -- our big winner. I can't see a lot of upside in the share price from here. I'm a little concerned about their lack of sales growth. They are still stretching the profit margins from the BET takeover, but there's probably not a lot of room left to manoeuvre. I'm happy to hold on to the shares, but don't expect an awful lot of appreciation in the next few months.

Marks & Spencer -- the High Street bellwether is on double secret probation. The recent interim results were dire, and all this boardroom wrangling we are hearing about can't be doing the company much good. They obviously still have a huge brand name, but I get the feeling they've been complacent. I've also got concerns over their cash generation.

EMAP -- a solid set of market beating results on Monday. Operating margins continue to rise nicely, heading towards 20% by 2000. Not only is that pleasing because it increases their profitability per pound of sales, but it also gives an indication of a competitive advantage. Find a company that has a significant competitive advantage, and the chances are that you've found yourself a good investment.

Unilever -- still executing their business plan well. They look to be fully valued, especially as above average sales growth is difficult given their size.

Independent Insurance -- after a solid start to its Qualiport career, last Friday's flood claims and the decision to write off £5m of financial services costs saw the shares head towards the river floor. Of all the companies we've bought, in my opinion this one had the greatest margin of error in terms of its valuation. Whilst the company has had a setback, it is far from sunk. The management is still very well respected, and as someone said on the Independent Insurance message board, it shows a lot of courage to pull out of the financial services field, knowing the share price was going to be hit. In the short term, it would have almost been easier to carry on. Tough and painful decisions are often the best decisions.

PizzaExpress -- the share price is now lower than our buying price. This in itself doesn't worry me, but is goes grate on me. Veteran Fools may remember that the PizzaExpress share price was as low as 630p when we were evaluating the company. It would have been much nicer to have bought our holding at that level. But nothing at all about the company has changed since we made our purchase, and that is the most important thing.

Companies that are experiencing hyper growth are a completely different kettle of fish. Valuation is often less of a consideration, although still important. Followers of the US Internet shares we covered in our Qualiport special on Monday will have seen the share prices of Amazon.com and Yahoo! rocket in the past couple of days. Why, Amazon went up $22, or 17%, yesterday -- in one trading day! Setting a buying price for these types of companies will in all likelihood mean never buying the shares.

Qualiwatch will definitely continue on Friday, where we will look at the telecommunications sector. Is Colt Telecom our equivalent of an Internet share?

Please feel free to comment about any and all aspects of the Qualiport on the message boards.

Bruce Jackson (TMF Googly)

Qualiport Numbers

                    18/11/98 Close

              Company   Change    Bid
                EMA     -0.05    10.75
                IIG      0.00     2.25 
                MKS     -0.14     4.33
                PIZ     -0.13     7.67 
                RTO     -0.14     3.53
                ULVR     0.03     6.31 

Qualiport Stocks

Last Rec'd Total # Company   In At   Current   Change
 19/12/97   783      RTO      2.55     3.53     38.4%
 04/11/98   245      PIZ      7.93     7.67     (3.2%)
 17/07/98   298      ULVR     6.72     6.31     (6.1%)
 17/04/98   169      EMA     11.85    10.75     (9.3%)
 27/10/98   755      IIG      2.58     2.25    (12.8%)
 11/05/98   368      MKS      5.54     4.33    (21.8%)


Last Rec'd Total # Company   In At     Value    Change
 19/12/97   783      RTO    2046.53   2763.99   717.46
 04/11/98   245      PIZ    1966.34   1879.15   (87.18)
 17/07/98   298      ULVR   2052.54   1880.38  (172.16)
 17/04/98   169      EMA    2052.57   1816.75  (235.82)
 27/10/98   755      IIG    1972.64   1698.75  (273.89)
 11/05/98   368      MKS    2054.11   1593.44  (460.67)


Cash:                                       £3,975.57
Current Total :                            £15,608.03

Total Invested:                            £16,184.62
Profit/(Loss) :                             (£ 576.59)

Value Per Share

                    Day      Month      Year       History
Qualiport         -1.62%    -2.44%     28.18%      31.07% 
FTSE 100          -0.52%     0.65%      6.59%       9.04%
FTSE All Share    -0.53%     0.51%      4.43%       6.62%

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