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By Bruce Jackson (TMFGoogly@aol.com)
Baker Street, London -- Minimise the downside. Simple as it may seem, for a value investor such as myself, this is a vitally important consideration.
Fools may be aware that we've recently started a new section within our Stock Ideas aggregator area called Value Investing, penned by Stephen Bland, aka TMFPyad. I cannot recommend highly enough the first two articles in the series. Here's the links:
Some clarification is necessary, because I'm not a value investor in the same way as Pyad is a value investor. Whilst he looks for largely down-and-out companies -- although there's much more to his approach than this, as the articles above show -- the Qualiport looks to buy quality growth shares at reasonable prices. For example, I see value in Dell Computer Corporation (NASDAQ: DELL) shares at 75 times earnings, whereas Pyad would rather play chicken with a 40-ton lorry than buy shares in a company at that rarefied level.
However, I want to minimise the downside with future Qualiport purchases, and that means minimising mistakes. Just one mistake, like the error I made by buying Marks & Spencer (LSE: MKS), can ruin the returns of any actively managed portfolio.
On that note, it was good to see some positive news about Marks & Spencer in the press today. Although the Qualiport has sold its holding in this once great company, I don't bear any grudges. It wasn't their fault that I bought the shares in the first place. I had a choice not to buy the shares, but declined that offer, to my expense. But, all is not lost, as I've taken it as a big learning experience.
I sincerely hope Marks & Spencer turn things around. The press report today says that the new autumn/winter clothing collection is a good 'un and that they've gone back to their roots of providing consumers with quality clothes at affordable prices. That's great to hear. However, I remain confident that my decision to sell M&S was the correct one. The predictability of earnings, which should come with an investment in a company like this, has disappeared. If and when they return is the great unknown, but there's more than that to the M&S story, in my view. They are destroying value at the moment, because they are not meeting their cost of capital.
A brief explanation of that is in order.
Say you buy a house, as an investment, for £100,000 taking a mortgage for the full amount at 8% per annum. You then find that you can rent the house out at £500 per month.
Cost of capital -- £8,000 per annum
Return on capital -- £6,000 per annum
Your returns are not meeting the cost of your capital.
I calculate Marks & Spencer's cost of capital at 10.6%, and their return on capital at about 7%. They are destroying value, and it will take a long time, if ever, to turn things around. That's why I'm happy to be out of the shares.
Did I miss a trick by not buying Glaxo Wellcome (LSE: GLXO) when they briefly dipped below 1500p? I originally said I'd only consider buying them at that price or below, but when crunch time actually arrived, I decided I wouldn't buy unless they hit 1300p. Today, after another good day at the stock market office, Glaxo finished up 50p at 1683p. This is 12.2% ahead of the 1500p I could have bought them at.
I still can't help thinking that Glaxo have got away lightly with two profit warnings -- firstly at the Annual General Meeting (AGM), and this was reiterated at the time when the interim results were released. Before that warning, the shares stood at 1752p, just 4% above their current level. Just imagine what would have happened had a smaller company disappointed the market like Glaxo did. The shares would have been decimated, and taken a hell of a long time to get back to anything like their pre-profit warning level. Admiral (LSE: ADC), for example, have plummeted from over 1400p to just 648p this year as the market took fright with a couple of somewhat downbeat trading statements.
Despite the recent share price rise, I stand by the 1300p Glaxo buy target. At the moment, I believe the upside is already priced into the shares, and the downside is not minimised. Time will tell.
Are Misys (LSE: MSY) the devil's share? Today they acquired Independent Financial Adviser (IFA) network business of Financial Options Group Limited for a possible total of £40 million. Here at the Motley Fool, we've got a bit of a problem with IFA's -- not the people themselves, but their title and business practices. Read Step 6 for more. Anyway, Misys are believers in the IFA network, and clearly believe it is a growth market. We're not so sure, but at the moment it is hardly a reason to sell the shares. This is small beer for a company with total sales of £600m
.
I've got a great idea for boosting the share price of EMAP (LSE: EMA). It's very simple -- they should change their name to eMap.com. According to our editor Martin Wake (TMF Sorted), "a capital letter in the middle of a company's name is very good for the share price." Thanks Martin. PizzaExpress (LSE: PIZ) already do it, and I think UniLever (LSE: ULVR) would be well suited to it. RentOKil Initial (LSE: RTO) is a tricky one, as is MiSys.
A little more seriously, I want to have a closer look at EMAP's current valuation. With the shares continually being marked down, there may be an opportunity to top up on our existing holding. I'll come back with my findings on Wednesday. See you then, and/or on the Qualiport message board.
Company Change Bid DELL(US)-0.60 43.20 EMA -0.04 9.86 IIG 0.00 2.87 MSY +0.07 5.41 PIZ -0.05 7.55 RTO +0.03 2.38 ULVR +0.12 5.92 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 27/10/98 755 Indep Ins 2.58 2.87 11.2% 27/01/99 74 Dell (US) 44.63 43.20 (3.2%) 04/11/98 245 Pizza Exp 7.93 7.55 (4.7%) 22/04/99 347 Misys 5.76 5.41 (6.1%) 19/12/97 783 Rentokil 2.55 2.38 (6.7%) 17/04/98 169 EMAP 11.34 9.86 (13.1%) 17/07/98 266 Unilever 7.53 5.92 (21.3%) Last Rec'd Total # Company In At Value Change 27/10/98 755 Indep Ins 1972.64 2166.85 194.21 04/11/98 245 Pizza Exp 1966.34 1849.75 (116.59) 22/04/99 347 Misys 2028.71 1877.27 (151.44) 27/01/99 74 Dell (US) 2007.42 1937.45 (69.96) 19/12/97 783 Rentokil 2046.53 1863.54 (182.99) 17/04/98 169 EMAP 2341.32 1991.72 (349.60) 17/07/98 266 Unilever 2052.00 1574.72 (477.28) Cash: £3,433.46 Current Total : £16,694.77 Total Invested: £18,184.62 Profit/(Loss) : (£1,489.85) Value Per Share Day Month Year Qualiport 0.19% -1.63% -11.23% FTSE 100 2.29% 1.45% 7.47% FTSE All Share 1.86% 1.38% 10.90%