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By Bruce Jackson (TMFGoogly@aol.com)
I was pleasantly surprised to see Independent Insurance's (LSE: IIG) share price jump 20p yesterday, and another 5.5p today. As for the reason, the newswires were bare. As I said on this message board post, IIG have a pleasant habit of beating analyst expectations when they report results, and I'm obviously hoping this trend continues with their interims next Thursday 12th August.
Whilst it's great to see IIG up 24% from our purchase price, it also reminds me of a missed opportunity. Back in November last year, the company issued a trading statement. Whenever you see one of these coming through the newswires, you can be almost guaranteed the news will not be good. Anyway, back then IIG said that they'd been hit for £10.5m additional UK weather and Hurricane Georges related claims. At the same time they decided to postpone plans to enter the financial services sector, resulting in a £5m exceptional charge.
This announcement, although not containing the greatest of news, is hardly the sort of thing that is unexpected of an insurance company. Think of how insurance works for you -- you pay, say, £100 per annum for piece of mind, and in year 8 you might make a claim for £500. You're happy, and the insurance company is relatively happy, despite the fact that they have to pay out a big claim from you all in one chunk. That's simply the nature of the business. And, when you do it well, as IIG does, insurance companies have very attractive economics. Warren Buffett's vast fortune has been made largely on the back of investing in the insurance industry.
(We've got a 9 part guide to insurance in our Finance area, including an enlightening section on life insurance.)
So, the news that IIG were suffering some weather-related claims all at once should not have been all that surprising. Yet, as it is wont to do, the market reacted negatively, and pushed the shares south. And they kept falling, hitting 204p in November last year. What a great buying opportunity that turned out to be. With the shares now trading at a mid-price of 324p, that's a near 60% gain for those lucky enough to time the bottom, but brave enough to buy when everyone was selling.
As investors, there's many times we sit and look at companies and say "look how cheap they are". That's the easy part. I could say that about a company like Abbey National (LSE: ANL), who are on a forecast forward price to earnings ratio (P/E) of 13 versus the P/E for the FTSE 100 of about 26. Until its recent dip below 1300p, Abbey National was a Peter Lynch 10-bagger for people who've hung onto their free flotation shares. Actually taking the plunge and buying shares in companies who are friendless is a very difficult thing to do.
That's why people like Warren Buffett recommend you turn the stock market off. Take PizzaExpress (LSE: PIZ) for example. I might think a fair value for the company is £600m. On a daily, weekly or monthly basis, that valuation shouldn't change that much. However, if you look at the stock market, and see the share price falling on a daily basis, the tendency is to think there must be something wrong. The fear of the unknown, and of making losses, means we don't dare go where others fear to tread. Yet, when the shares go back up again, as they did with IIG, we castigate ourselves for not buying at those knock-down prices.
On that note, I've been watching with great interest the falling share prices of many of the broadly defined US 'Internet' companies. Back in November last year -- it was a busy month -- I wrote a briefish article on the four companies I considered would be winners. They were:
Price Price Recent High
16th Nov 1998 3rd August 1999
AOL (NASDAQ: AOL) $36 $89 $168
Amazon (NASDAQ: AMZN) $42 $95 $210
Ebay (NASDAQ: EBAY) $43 $85 $215
Yahoo! (NASDAQ: YHOO) $87 $125 $219
Should I be crying into my pint? Perhaps not, because knowing my timing, if I decided to buy I'd probably have bought at the recent highs rather than back in November!
My thinking now has changed a little, and I now place Amazon and Yahoo! ahead of the other two companies. AOL have such a huge lead in the US that they will always be a winner in the Internet Service Provider (ISP) race in that country. They now have so much clout that they can call the tune in the US 'Internet' market -- they are capitalised at about US$100 billion, making them bigger, by that measure, than our own Glaxo Wellcome (LSE: GLXO)! Despite all that, their international strategy is struggling. In the UK, the Freeserve (LSE: FRE) phenomenon has seen AOL UK's business model thrown into disarray. They are bit players in other international markets, such as Australia. As I can't see or feel AOL's power, from where I sit, I can't get enthusiastic about the company.
Ebay have had some recent high profile 'outage' problems, which has naturally adversely affected their auction business. However, these are only temporary, and haven't really changed their business model too much. What is has done is potentially deter them, in the short-term, from taking full advantage of their existing customer base.
In contrast, look at what Amazon are doing. An extra tab at the top of their site, and a whole new retailing world opens up. For those that thought they are still a bookshop, look again. You can buy toys, videos, music, electronic goods and they have auctions too. The Wise analysts focus on Amazon's burgeoning losses, without necessarily realising the company is deliberately building for the long-term, and isn't particularly worried how much money it loses in any given short-term time period.
Whilst I like Amazon, Yahoo! is my current Internet favourite. They are profitable, although that's not necessarily important at this stage in their development, and are the one truly global brand. As for brand awareness, they are surely second to none. Sure, there's low barriers to entry, but the same could be said of something like the UK men's magazine market, and EMAP's (LSE: EMA) FHM still dominates that crowded sector. Why? Brand name.
So, whilst the US Internet stocks continue to get pounded, as a potential buyer, I'm feeling happy. Will the Qualiport buy shares in Yahoo? They'd probably have to get a bit cheaper yet to pass our strict valuation requirements. But I'll be watching.
Rob's back on Friday. If you're a Yahoo, IIG, Abbey National, PizzaExpress or Unilever (LSE: ULVR) fan, I'll see you on the Qualiport message board. If you're not, I hope to see you there too. Unilever report interims on Friday, and they'll no doubt be covered in this space, and probably the Foolish Lunchbox, up by 12.30pm every market day.
Happy Wednesday.
Company Change Bid DELL(US)-0.45 39.40 EMA +0.07 11.64 IIG +0.05 3.20 MSY +0.13 5.68 PIZ -0.10 7.20 RTO -0.01 2.32 ULVR +0.20 6.16 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 27/10/98 755 Indep Ins 2.58 3.20 24.0% 17/04/98 169 EMAP 11.34 11.64 2.6% 22/04/99 347 Misys 5.76 5.68 (1.4%) 19/12/97 783 Rentokil 2.55 2.32 (9.0%) 04/11/98 245 Pizza Exp 7.93 7.20 (9.1%) 27/01/99 74 Dell (US) 44.63 39.40 (11.7%) 17/07/98 266 Unilever 7.53 6.16 (18.2%) Last Rec'd Total # Company In At Value Change 27/10/98 755 Indep Ins 1972.64 2416.00 443.36 17/04/98 169 EMAP 2341.32 2351.28 9.96 22/04/99 347 Misys 2028.71 1970.96 (57.75) 04/11/98 245 Pizza Exp 1966.34 1764.00 (202.34) 19/12/97 783 Rentokil 2046.53 1816.56 (229.97) 27/01/99 74 Dell (US) 2007.42 1767.03 (240.39) 17/07/98 266 Unilever 2052.00 1638.56 (413.44) Cash: £3,411.04 Current Total : £17,135.43 Total Invested: £18,184.62 Profit/(Loss) : (£1,049.19) Value Per Share Day Month Year Qualiport 0.57% 0.96% -8.88% FTSE 100 -0.24% 0.06% 6.00% FTSE All Share -0.12% 0.18% 9.59%