Qualiport

Let the Race Begin...
Wednesday, 30 December 1998

The Qualiport looks to 1999

By Bruce Jackson (TMFGoogly)

Kilburn, London -- The markets closed early today, for some reason that eludes me. Also, the London Stock Exchange is closed all day tomorrow, too. Perhaps it has something to do with getting everything ready for the introduction of the euro. Or perhaps the stock exchange has got its dates wrong and is closing down a year early for fear of the pesty little year 2000 bug throwing a spanner into the works. More likely, however, is that it is completely pointless having the market open during this Christmas/New Year break, as there is little news of note, the City offices are deserted (but not the bars) and trading volume is virtually nonexistent.

That fact was borne out in the movement in the share prices of the Qualiport companies today. Looking more like the latter part of the Australian batting order, the scores were:

0, 0, 0, -1, -1, -2

The Qualiport has finished its first full year in the black to the tune of £624.98. On top of that, we've also spent a total of £321.53 in brokerage and stamp duty, over half again of the cash gain we've made. We have made a total of 10 trades as we've set the portfolio up, and in the future this number will be much reduced.

The total return is hardly anything to shout about when you consider we've now invested a total of £16,184.62 in the market. But at one stage a few short weeks ago, it was looking like we'd finish the year showing a loss. It just goes to show how quickly market sentiment can change. Remember that our preferred holding period is 10 years, so the ups and downs of share prices over the period of just a couple of months is completely inconsequential.

As I have mentioned many times previously here and on the Qualiport message board, the value per share method of accounting, although correct, is completely misleading. It shows us as having gained 41.23% over the course of the year. I want to rectify that situation.

The Motley Fool is always open and accountable. Everything we write, whether that be on the message boards or on the main site, is whisked off to the archives for posterity. There's no hiding behind "lost" reports, and no claiming "we never said that." And, unlike a popular investment magazine (published every Friday), we are not just going to scrub this portfolio and start all over again. This is real money, again unlike any other so-called portfolios run by tip sheets and magazines.

Following in that vein, in last week's Wednesday Qualiport update I invited comments about my proposal to scrub the "year" and "history" figures -- basically to reset them to zero for the Qualiport, FTSE 100 and FTSE All Share as at 31st December 1998. Rather than claim victory versus the market in 1998, I'm going to call it a nil-nil draw. But we are not going to pretend that 1998 didn't exist. As I said earlier, all the reports and numbers are in the archives for all to see. This report will also sit in the archives, showing everyone exactly what we've done to the historical returns.

So, for the record, the cash numbers on this page are the final results for 1998 and also the starting point for 1999. The Qualiport starts its quest for market supremacy with a total value of £16,809.60 after adding our recently received £8.79 Unilever (ULVR) interim dividend. The FTSE 100 starts at 5882.6 and the FTSE All Share starts at 2673.92. Let the race begin, and may the best Fool win. The 1998 gains for the main indices are not distorted and herald yet another solidly successful year for the market as a whole.

(It is not commonly known that the FTSE indices are Foolish. In fact, they are even more Foolish than us. They are long-term investors, have a great historical record, trade very infrequently and are completely unemotional. As we say frequently throughout the site, and particularly in Step Seven of our Ten Steps To Investing Foolishly, buying the index is a great, low cost way to start your investing career. For starters, you'll outperform 90% of all unit trusts.)

It is worth reminding Fools that we will be adding £2000 cash to the portfolio on April 1st and October 1st each year. We want to keep stoking the burning fire. We are not intending letting this new money sit on the sidelines for too long, and we will look to invest it into new or, more likely, existing Qualiport companies. We will account for this additional cash by using the value per share method, but this will not distort the portfolio's percentage returns.

With the share prices of many of the Qualiport companies approaching their 1998 high points, the challenge to beat the market in 1999 looks tough. Some of the valuations look quite full, but that also goes for many companies, as the FTSE 100 isn't that far away from 6000 again. In the short term (and that means the next 12 months), we just don't know which way the market, and the fortunes of the share prices of the Qualiport companies, will head. It is impossible to accurately time the market so as to sell at the peak and buy at the trough. As long as our Qualiport companies keep performing as expected (with the exception of M&S, our big loser), in theory the progress of their share prices should at least match that of the index. In practise, something completely different will happen, because over the short term individual share prices move in irrational ways.

I did receive one interesting e-mail last week that perhaps succinctly shows the challenge ahead of the Qualiport for 1999. I've reprinted part of it here:

Share                 Yield   P/E

Rentokil Initial       0.9   42.9
EMAP                   1.7   24.1
Marks & Spencer        4.4   14.0
Unilever               1.6   14.8
Independent Ins        1.7   12.4
Pizza Express          0.7   29.3

Mean                   1.83  22.9
FTSE                   2.78  22.7

Wish us luck in 1999.

Qualiwatch

As the market has risen since we sold half of all our holdings back in October, we have suffered by leaving half of that cash in the bank. Earning minimal amounts of interest, it obviously hasn't been able to keep up with the sharp advance in the market. But we don't intend having that money sitting around on the sidelines for too much longer.

Qualiwatch looks for great companies, then aims to value them, with the intention of buying them if they jump our minimum hurdle of 15% per annum returns over a 10 year period. The first company to be awarded Qualiwatch status was US PC manufacturer (amongst other things) Dell Computer Corporation (Nasdaq: DELL). Trading at a trailing price to earnings ratio (P/E) of almost 80, they are hardly cheap. Next Wednesday, we will look a bit closer at their valuation and attempt to put a maximum buying price on them.

Another of the growth sectors we've already looked at is Telecommunications. Unlike the Technology sector, this is an area where UK companies can successfully compete internationally, so we will restrict our search to these shores. Out of interest, I've done a bit of valuation work on Energis (EGS). Along with Colt Telecom (CTM), they are one of the new kids on the telecoms block. Energis was recently spun off from parent National Grid (NGG) and has already built large parts of its network infrastructure along the existing power lines and through parts of the London Underground. Energis targets high volume business customers, like Colt, but at first glances it doesn't have the massive valuation to match that of this year's best performing share.

I've stuck a couple of posts up on both the Qualiport and Energis message boards on the web, inviting feedback and comments. Are they Qualiport material? The thing I like about these smaller start up telecoms companies is that they are rapidly building market share, whilst the more established players like British Telecommunications (BT.A) are losing customers and operate continually under the threat of pricing caps.

Here's to 1999. Happy new year, Fool. See you next Wednesday.

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

Qualiport Numbers

                    30/12/98 Close

              Company   Change    Bid
               EMA       0.00    11.45
               IIG       0.00     2.50 
               MKS      -0.01     4.10
               PIZ      -0.01     8.00 
               RTO       0.00     4.51
               ULVR     -0.02     6.72

Qualiport Stocks

Last Rec'd  Total #  Company   In At   Current  Change
 19/12/97    783       RTO      2.55     4.51    76.9%
 04/11/98    245       PIZ      7.93     8.00     0.9%
 17/07/98    298       ULVR     6.72     6.72     0.0%
 27/10/98    755       IIG      2.58     2.50    (3.1%)
 17/04/98    169       EMA     11.85    11.45    (3.4%)
 11/05/98    368       MKS      5.54     4.10   (25.9%)

Last Rec'd  Total #  Company   In At     Value      Change
 19/12/97    783       RTO    2046.53   3531.33   1484.80
 04/11/98    245       PIZ    1966.34   1960.00     (6.34)
 17/04/98    169       EMA    2052.57   1935.05   (117.52)
 27/10/98    755       IIG    1972.64   1887.50    (85.14)
 17/07/98    298       ULVR   2052.54   2002.56    (49.98)
 11/05/98    368       MKS    2054.11   1508.80   (545.31)


Cash:                                 £3,984.36
Current Total :                      £16,809.60

Total Invested:                      £16,184.62
Profit/(Loss) :                        £ 624.98  

Value Per Share

                   Day     Month     Year     History
Qualiport        -0.03%    6.65%    41.33%    44.51% 
FTSE 100         -0.99%    2.41%    14.55%    17.18%
FTSE All Share   -0.74%    1.79%    10.91%    13.24%

Click here for the latest Qualiport share price quotes.

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