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By Bruce Jackson (TMFGoogly@aol.com)
Baker Street, London -- In both 1997 and 1998, we saw stock market corrections, being defined as falls of 10% or more over a relatively short period of time. The 1997 reverse happened just after we launched Fool UK, and was actually very close to a crash at one stage, with the FTSE 100 index shedding 130 points on one Thursday. That doesn't seem like much nowadays, but it was a 2.6% fall in one October trading day.
It then stood at 4841.
It now stands at 6126.
On Monday October 27th 1997, the Dow Jones Industrial Average plummeted 7.2% to close at 7,161. It now stands proudly well over the 10,000 mark.
Does this tell you something?
August is holiday month. It seems virtually the whole country goes away on vacation -- anywhere from Australia, to France, to Greece and Cornwall. If you're enjoying a well deserved break now, the chances are that you're not reading this, nor ever will. Although we'll be a little disappointed, that's good. It means you can take your eyes off the market for a few days or weeks. It also means that you're feeling comfortable about your investments. I wonder if City fund managers and day traders and penny share speculators can relax on their holidays.
I don't know how many meals PizzaExpress (LSE: PIZ) served last week, but I know it was a lot. I know the concept, proven over many many years, still works. The nation is not suddenly going to dump pizza from its favourite food list, and PizzaExpress from its favoured trendy restaurant status. It's the sort of investment where you can happily go on holiday and not worry about it.
I can do that because I'm a long term investor. Look at the difference between the FTSE 100 index of October 1997 and now. There's been a lot of water under the FTSE bridge since then, including an Asian/Russian crisis, but still the market is a cool 26% ahead from that point. And that's only in the space of less than 2 years. There's many more fruitful investment years left for most of us.
The majority of people in the UK do not directly own shares. However, many have their financial futures tied up in the stock market, courtesy of their pension funds. They are stock market investors without even realising it. But are they worried or concerned when the market falls precipitously? No -- in fact I had one friend almost positively gloating during a period of stock market correction, saying "I told you so -- you're better off keeping your cash in the building society, or buying a house." Whilst I'd never advocate against buying your own home, I quietly reminded my friend that her retirement fund was also losing value, and that perhaps that was an issue for her. "Oh, that's a long term thing" was her rather educational and amusing reply.
Each year there seems to be a stock market correction of some description. With the FTSE 100 index now some 7% off its peak of early July this year, we could be in correction phase. This time around, the market appears to be weak because of fears of US and domestic interest rate hikes. Hello market -- do you read me? Interest rate ebbs and flows are part and parcel of the economic cycle. Over the years, during which time the stock market has marched relentlessly forward, interest rates have been all over the place, as has inflation, usually at much higher rates than prevail today.
Periods of greed and panic, particularly the latter, often present opportunities. The Qualiport is ready, willing and able. Whilst many people fret and worry during a market correction, my eyes light up, looking for potential investment opportunities.
As Rob mentioned on Friday, and has been mentioned before in this spot and on the Qualiport message board, British Telecommunications (LSE: BT.A) is a potential portfolio candidate. I spent last Friday afternoon ploughing through the fiscal 1999 annual report. It was hard going, courtesy of lots of exceptional charges and a somewhat less than friendly presentation. I was trying to get a basic feel for the company's valuation, given that the shares had dropped some 18% from their recent high on fears of competition from cable companies, principally Telewest's (LSE: TWT) high speed Internet access. Was this a rational mark down, which could in turn present a buying opportunity?
My quick and dirty valuation placed a rather disappointing value on BT of between 517p and 665p. Is this me being too conservative with my assumptions? It is based on double digit earnings growth for the next 10 years, which is not too pessimistic, is it? After all, BT's normalised earnings per share (EPS) were 38.3p in 1995 and are forecast to be 37.7p in 2000. Is this really a growth company?
Now BT is a company I admire, and I think they'll be a long term winner. But at the moment, with the shares at 950p, I just don't think they represent very good long term value. That's a pity, but life moves on. I do need to double check my valuation spreadsheet, but even so I can't see BT being bought by the Qualiport anytime soon. Did you know that in 1997, BT shares traded at an average price to earnings ratio (P/E) of just 11.4? They now trade at a forecast forward P/E of 25. Based on my valuation, it appears much of the future growth is already priced into the shares.
One final thought for this Monday evening -- which company has the best management in the world?
Berkshire Hathaway (NYSE: BRK.A) comes close. Its Chairman is none other than Warren Buffett.
The B shares (1/30th of the A shares) trade at about US$2030 each. Dale Wettlaufer, manager of the US Boring Portfolio, reckons their intrinsic value is about US$2500. Berkshire for the Qualiport? Comments to the message board. See you Wednesday.
Company Change Bid DELL(US)+1.10 39.70 EMA -0.01 11.42 IIG +0.02 3.15 MSY -0.09 5.54 PIZ -0.18 6.75 RTO +0.04 2.27 ULVR +0.09 5.99 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 27/10/98 755 Indep Ins 2.58 3.15 22.1% 17/04/98 169 EMAP 11.34 11.42 0.7% 22/04/99 347 Misys 5.76 5.54 (3.8%) 27/01/99 74 Dell (US) 44.63 39.70 (11.0%) 19/12/97 783 Rentokil 2.55 2.27 (11.0%) 04/11/98 245 Pizza Exp 7.93 6.75 (14.8%) 17/07/98 266 Unilever 7.53 5.99 (20.4%) Last Rec'd Total # Company In At Value Change 27/10/98 755 Indep Ins 1972.64 2378.25 405.61 17/04/98 169 EMAP 2341.32 2306.84 (34.48) 22/04/99 347 Misys 2028.71 1922.38 (106.33) 27/01/99 74 Dell (US) 2007.42 1780.48 (226.93) 19/12/97 783 Rentokil 2046.53 1777.41 (269.12) 04/11/98 245 Pizza Exp 1966.34 1653.75 (312.59) 17/07/98 266 Unilever 2052.00 1593.34 (458.66) Cash: £3,433.46 Current Total : £16,845.92 Total Invested: £18,184.62 Profit/(Loss) : (£1,338.70) Value Per Share Day Month Year Qualiport 0.25% -0.87% -10.54% FTSE 100 0.09% -1.69% 4.14% FTSE All Share 0.07% -1.34% 7.93%