Qualiport

Translating Wise Speak
Wednesday, 23 December 1998

Qualiwatch - Dell make the grade

By Bruce Jackson (TMFGoogly)

Kilburn, London -- This is the second to the last update of 1998. It is about this time that Wise cost-a-lot institutions start giving their predictions for 1999. Read them with a large pinch of salt. The only reason they are doing this is to induce people to trade. The more you trade, the more commission they make.

Wise Brothers, the investment bank, will come out with something like this…

"We see the Footsie starting the year higher, and expect that in the first quarter it will move past the closing peak of 6179 achieved on 20th July this year. A period of volatility may follow as the markets worry about the short-tem effect of the Asian crisis. But, as interest rates fall yet further, by the year end we expect the situation to have stabilised and the Footsie to again be challenging its all-time highs. Our 5 shares for 1999 are PizzaExpress (PIZ), Unilever (ULVR), Independent Insurance (IIG), EMAP (EMA) and Marks & Spencer (MKS). Our December 31st 1999 FTSE 100 prediction is 6300, or a rise over the 12 months of about 6.8%."

Here's a quick translation into FoolSpeak™:

"We've really got no idea where the market is heading. We have to make these silly predictions because we want to encourage people to trade, and thus we will earn more in the way of commission. When the market does fall, as it inevitably must at some stage during the year, we will tell everyone to sell out. That will generate more commission for us. Then, when the market starts to rise again, we'll tell everyone to pile back in, and we'll come up with a completely different list of top 5 shares. The result will again be more commission for us -- yummy. I can't wait for my year end bonus. The 5 shares for 1999 are just guesses, but we'd like those nice people at the Motley Fool to do well next year, so maybe our recommendation will push the share price higher for them (and us -- we own them too)."

The Motley Fool encourages you, the individual investor, to take control of your own financial affairs. Part of that process means you realise much of the stuff written by the Wise has an ulterior motive, normally known as lining their own pockets.

We don't make any predictions. We are confident in the long-term returns to be made from investing in the stock market. We don't really care if the market rises or falls over the next 12 months. That is such a short time in an investor's lifetime. We want to see our net worth go up over the very long term.

On that note, I should remind you that the Qualiport's aim is to beat the market and achieve 15% returns per annum over the very long term. As to whether we've beaten the market this year, it is quite difficult to judge. This is because our value per share method of portfolio accounting gives a very distorted view of our returns since the beginning of the year. There have been periodical debates about this on the message board, and again in this last week it has reared its head. There's a post from pyad and one from CityMacca.

I do not feel comfortable showing us to be up about 40% when in pure pound terms we've only just nudged ahead of breakeven. So, on the boards I put up this proposal. The Motley Fool, and the Qualiport, is all about integrity and accountability. We don't want to hide behind misleading numbers, even if they may be calculated correctly. Please let me know about the proposal regarding the numbers, either by email or on the message board.

I believe the table below gives the best indication as to whether the Qualiport has beaten the market. It measures the performance of each individual company against the FTSE 100 index from the date of purchase.

                           Buy     Now    Up/(Down)

Rentokil Initial    FTSE   5020    5909      18%
Purchased 19/12/97  Shares  255     456      79%

EMAP                FTSE   5922    5909      -0%
Purchased 17/04/98  Shares 1185    1123      -5%

Marks & Spencer     FTSE   5969    5909      -1%
Purchased 11/05/98  Shares  554     415     -25%

Unilever            FTSE   6116    5909      -3%
Purchased 17/07/98  Shares  672     671      -0%

Independent Ins.    FTSE   5232    5909      13%
Purchased 27/10/98  Shares  258     252      -2%

PizzaExpress        FTSE   5623    5909       5%
Purchased 04/11/98  Shares  793     795       0%

In very simplistic terms, if you add up the total of the FTSE 100 percentage increases and decreases you get 32%, compared with a total of 47% for the Qualiport companies. Although this is not conclusive, we're claiming victory in our battle against the market for 1998.

As pyad says in the Beating the Footsie re-caps, and it is very true, the only real test is the monetary one. As of today, the Qualiport has appreciated in value by over £600. On a total initial investment of £16,184, this isn't very impressive. We'd have done better by leaving our money in the bank. By whichever measure you choose, we've fallen a long way short of our 15% per annum appreciation target.

Periodically I use these re-caps to go over what I consider the mistakes we've made. Life is one long learning process, and especially life as a stock market investor. One of the mistakes we made was over-paying for our holding in Unilever. We paid 672p per share. The current share price is virtually bang on our buy point. Because we thought we paid too much for Unilever at 672p, does that mean we now think it is becoming overvalued?

The Qualiport's sell philosophy is relatively simple. We will sell if something materially changes about the company, for the worse. An unexpected profit warning may be the catalyst, an untimely and ill conceived acquisition, or a loss of confidence in the management and direction of the company. I see this scenario as being very rare. The only other time we will consider a sale is if we think we can find a better home for our money. We would not take this decision lightly, because there are relatively few really quality companies out there and precious few, if any, are trading at attractive valuations.

There is a big difference between us saying we got the Unilever buy point wrong and the company being overvalued. At its current price, I don't see a lot of upside potential over the next 12 to 18 months. But, that's not to say the shares won't hit 800p in that period. In the short term, the market is a voting machine, meaning the share price will go up and down depending on supply and demand. However, over the long term, the market is a weighing machine, meaning that ultimately earnings growth (or not) will determine the valuation of the company.

We won't be selling Unilever anytime in the near future. On top of the points outlined above, we also have to consider the company's importance in the portfolio. Unilever is a giant of a company, with worldwide sales of £30 billion. It is not going to be the most exciting performer in the world, but it's not going to go bust either. All portfolios need a good portion of ballast -- big companies with good balance sheets and steady long-term growth prospects. Part of our ballast is our holding in Unilever.

Qualiwatch

As I think more and more about Dell Computer Corp. (DELL), the more I like the company. I'm going to grant them official Qualiwatch status. Dell's highly efficient low-cost operating model gives them a huge competitive advantage. They assemble PCs virtually on demand. A customer places an order with them (there's no middle man, so no costs involved there) and in a matter of days the finished product is shipped. There's little valuable cash tied up in stock, and they can take advantage of falling chip prices because again they don't hold much in the way of stock.

This low cost model enables Dell to be very competitive on pricing to the customer. But here's their huge competitive advantage. Dell's customer service is first rate. Anyone who's bought a computer will know how important this is. They are breakable objects, and things naturally go wrong with them. I bought a Dell machine. The box itself is nothing special, but the customer service is. When one letter on my keyboard packed up, I phoned Dell (no waiting time on the phone) and the next day a brand new keyboard arrived, no questions asked. My mouse packed up -- same result. When you combine Dell's low prices with their great customer service, you are looking at a very impressive company.

As usual, I'm not the first person to spot this, and at about $70 Dell currently trades on a January 1999 price to earnings ratio (P/E) of 66. On the surface, that feels far too high for the Qualiport's liking. But, this company is growing rapidly, so earnings compound up very quickly.

Over the Christmas break, I'll leave you to ponder this potential quick fire valuation for Dell.

Recent Price $70

Jan 99 EPS estimate $1.06
Jan 00 EPS estimate $1.45

Estimated growth rate 01 - 04 35% per annum
Estimated growth rate 05 - 09 25% per annum

Jan 09 EPS potential $14.70
Jan 09 potential P/E 30
Jan 09 potential share price $441

Potential 10 year compound annual growth rate (CAGR) 20.2%

This is not the only way to value this, or any company, but it's not a bad starting point. The growth rates may be complete pie in the sky, but based on their recent record, they may also be conservative. Let us know what you think on the Qualiport message board.

Have a very Merry Christmas. The next Qualiport re-cap will be next Wednesday 30th January. But, the Fool is not closing down, as the message boards are open at all hours. I wonder how many posts we'll get on Christmas day?

Have you registered as a Fool? You know you want to be one.

Qualiport Numbers

                    23/12/98 Close

               Company  Change    Bid
                 EMA    +0.28    11.23
                 IIG    +0.07     2.52
                 MKS    +0.09     4.15
                 PIZ    +0.02     7.95
                 RTO    +0.15     4.56
                 ULVR   +0.16     6.71

Qualiport Stocks

Last Rec'd  Total #  Company   In At  Current Change
 19/12/97    783       RTO      2.55    4.56   78.8%
 04/11/98    245       PIZ      7.93    7.95    0.3%
 17/07/98    298       ULVR     6.72    6.71   (0.1%)
 27/10/98    755       IIG      2.58    2.52   (2.3%)
 17/04/98    169       EMA     11.85   11.23   (5.2%)
 11/05/98    368       MKS      5.54    4.15  (25.0%)

Last Rec'd  Total #  Company   In At    Value    Change
 19/12/97    783       RTO    2046.53  3570.48  1523.95
 04/11/98    245       PIZ    1966.34  1947.75   (18.59)
 17/04/98    169       EMA    2052.57  1897.87  (154.70)
 27/10/98    755       IIG    1972.64  1902.60   (70.04)
 17/07/98    298       ULVR   2052.54  1999.58   (52.96)
 11/05/98    368       MKS    2054.11  1527.20  (526.91)


Cash:                                £3,975.57
Current Total :                     £16,821.05

Total Invested:                     £16,184.62
Profit/(Loss) :                       £ 636.43

Value Per Share

                    Day     Month     Year     History
Qualiport          2.42%    6.77%    41.49%    44.67% 
FTSE 100           1.12%    2.87%    15.06%    17.70%
FTSE All Share     1.04%    1.92%    11.04%    13.38%

Click here for the latest Qualiport share price quotes.

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