Qualiport

The great race for 1999

By Bruce Jackson (TMFGoogly)

Kilburn, London -- It was with great interest I read in today's Investors Chronicle about the woes of their share selections of 1998. Here in the Qualiport we can hardly gloat, with 5 of our 6 companies currently trading below their buy price thanks to the recent fall in the PizzaExpress (PIZ) share price. But it at least gives us some consolation that the combined forces of the IC managed to choose 9 out of 9 BIG losers. The whole episode goes to show just how difficult stock picking really is.

The Qualiport aims to identify great companies. Then, providing the valuation of the companies leaves a margin of error, we buy them and hang onto them for the long term. The Investors Chronicle, in its tips for the 1998 year, took a very different approach. They looked for companies that firstly appeared to be bargains, then they looked at the company itself. That way, they chose laggards such as Danka Business Systems (DNK) and Dialog (DLG), both big losers for the year. Their thinking was that they traded on low valuations and things couldn't really get much worse. Unfortunately for shareholders in those 9 companies, they found out the hard way that shares can go down as well as up. The Qualiport could never choose these dogs, as they would fail just about every one of our ideal company criteria.

Why didn't the Qualiport select Colt Telecom (CTM), or London Bridge Software (LNB), or Vodafone (VOD)? Just one of those 3, which have all been discussed in length at various times on the message boards throughout the year, and we'd be blowing away the market. Sounds so easy in hindsight. Compare the quality of these companies with that of Danka and Dialog. Despite potentially being overvalued at the beginning of this year, all three of them have had another stellar year.

The Qualiport will not change its valuation criteria, so it is hard to imagine companies such as Colt ever being constituents of this portfolio. In the new year, we will be starting up a new portfolio on the site, which will throw valuation out the window. Its theory is that the best companies are continually overvalued, and if they are growing fast enough, their share prices will keep zooming up. It should be an interesting and volatile ride.

As an interesting exercise, I am going to challenge the five FTSE 100 companies with both the highest and lowest relative share price strength over the past 12 months to a race. Before glancing down at the runners and riders below, place your bets about which category you'd fall into -- Top Dog or Contraire.

In the blue corner, we have the favourite, Top Dog. Unbeaten in all bouts last year, these companies have KO'd the opposition, usually in round one. Although a year older now, these thoroughbreds have all the credentials to repeat their thrilling and volatile performance of 1998.

Colt Telecom - 870p
Orange (ORA) - 687p
Vodafone - 939p
Telewest Communications (TWT) - 154p
British Telecommunications (BT.A) - 895p

And in the red corner, the rank outsider, Contraire. Coming off a year in which they were beaten to a pulp, surely these former high flyers can pull something out of the bag for 1999.

BTR (BTR) - 119p
ICI (ICI) - 547p
Marks & Spencer (MKS) - 399p
Reed International (REED) - 464p
British Airways (BAY) - 368p

Let the race begin. For the records, the FTSE 100 Index stands at 5742. I'm not suggesting for one moment that either Top Dog or Contraire will be a winning mechanical selection model. What I'd like to test is whether the winners keep on winning and the losers keep on losing. All five Top Dog companies are in the high flying Telecommunications sector. Surely that can't outperform again. Can it?

Most portfolios will have a relatively small number of big winning companies. The Qualiport is a firm believer in the adage that you should let your winners run. We also think you should cut your losers. Our selling policy is quite well defined. We don't drop a loser just because its share price has fallen. Although that is hardly the best thing that can happen, it isn't always an indication that things are disastrously wrong with the company. We will dump a company if something material about it has changed for the worse since we purchased it. We will also sell a company if we think we can invest the money better elsewhere. At the moment, we can't even find a home for our £3975 sitting in the bank, so the second option is not a starter.

Following the theory that winners will keep on winning, there must be a reasonable chance that Top Dog will win the 1999 race. But the Contraire companies are not all complete mugs. Followers of the similarly contraire Beating the Footsie strategy will recognise dog of dogs BTR. Over the past 14 months, this woofer has gone from bad to worse. Just because a company's share price is low and its dividend yield is high doesn't necessarily mean it is due for a re-rating.

We'll follow the great race with interest. Place your bets on the Qualiport message board.

Qualiwatch

On Wednesday we narrowed down our chosen technology companies to just two -- Microsoft (Nasdaq: MSFT) and Dell Computer Corporation (Nasdaq: DELL). On the Qualiport message board we had a few posts questioning the decision to jettison Intel (Nasdaq: INTC) from contention. As I said, this was a difficult choice, as undoubtedly Intel are an excellent company. We are trying to find six of the best companies in the world, though, so some tough choices have to be made.

Love them or hate them, Microsoft has to be the most successful company ever. Going from nowhere just 15 years ago, it has the highest capitalisation of all companies in the biggest and most successful stock market in the world, that of the USA. The only threat to Microsoft's world dominance of computer operating systems appears to come from the government. It is hard to see it losing the monopoly any other way.

If Microsoft is a given, and Cisco (Nasdaq: CSCO) is out because I don't understand its business, it came down to a straight fight between Dell and Intel. I plumped for Dell for a couple of reasons. Over the past few years, Dell have re-engineered themselves into an incredibly lean PC manufacturer. By lean, I mean that their return on invested capital is absolutely astronomical. Because of their direct order business model, they are in the envious position of receiving cash for sales but getting credit for their purchases. This means they throw off huge amounts of free cash, which can then be used to fund further expansion and to systematically buy back their own shares. The result has been a share price graph that looks like this.

Dell has grown faster than the whole PC market because it has been taking market share off the main competitors, Gateway 2000 (NYSE: GTW) and Compaq (NYSE: CPQ). Whereas Intel, because of its virtual monopoly position on the PC market, can only grow as fast as the PC market, Dell can better that. Because it's such a low cost operator, Dell can offer the consumer great value for money. Couple that with excellent customer service and a very focussed management, and you can see why Dell is skipping away from Gateway 2000 and closing the gap on market leader Compaq.

Naturally, when it comes to shares, quality doesn't come cheap, and Dell is currently trading at a January 1999 price to earnings ratio of about 61. At this stage of the Qualiwatch, however, we're not looking at valuation. Unlike the Investors Chronicle, our first step is to identify the great companies, and then we'll see if they are trading at attractive valuations. At the moment, with the US and UK markets heading up and up, it is difficult seeing us buy any of them. We are patient, though, and we remember September 1998.

Have a great weekend, Fools. And, by the way, don't say it too loudly, but...

we're in the black again.

Have you registered as a Fool? To steal someone else's catch phrase -- Just Do It.

See you Wednesday.

                    18/12/98 Close

               Company  Change    Bid
                 EMA    +0.60    10.95
                 IIG    -0.01     2.30
                 MKS    +0.05     3.97
                 PIZ    +0.08     7.90
                 RTO    +0.17     4.38
                 ULVR   +0.24     6.19

Qualiport Stocks

Last Rec'd  Total #  Company   In At  Current  Change
 19/12/97    783       RTO      2.55    4.38    71.8%
 04/11/98    245       PIZ      7.93    7.90    (0.3%)
 17/04/98    169       EMA     11.85   10.95    (7.6%)
 17/07/98    298       ULVR     6.72    6.19    (7.9%)
 27/10/98    755       IIG      2.58    2.30   (10.9%)
 11/05/98    368       MKS      5.54    3.97   (28.3%)

Last Rec'd  Total #  Company   In At     Value    Change
 19/12/97    783       RTO    2046.53   3429.54  1383.01
 04/11/98    245       PIZ    1966.34   1935.50   (30.84)
 17/04/98    169       EMA    2052.57   1850.55  (202.02)
 27/10/98    755       IIG    1972.64   1736.50  (236.14)
 17/07/98    298       ULVR   2052.54   1844.62  (207.92)
 11/05/98    368       MKS    2054.11   1460.96  (593.15)


Cash:                                 £3,975.57
Current Total :                      £16,233.24

Total Invested:                      £16,184.62
Profit/(Loss) :                        £  48.62  

Value Per Share

                  Day      Month      Year     History
Qualiport        2.80%     1.90%     35.02%    38.06%
FTSE 100         1.00%    -0.03%     11.81%    14.38%
FTSE All Share   0.86%    -0.74%      8.15%    10.42%

Click here for the latest Qualiport share price quotes.

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