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By Bruce Jackson (TMFGoogly)
Baker Street, London -- I like market crashes. They present buying opportunities. Over time, we've seen many market corrections, but each time amazingly (in some people's minds) the market has always recovered to hit a new high.
On Monday, I said I'd seen a couple of potential Qualiport buying opportunities. This is after a long period of time where I'd struggled to see any value in any of the companies I'm interested in. The Qualiport is aiming to buy the best, and the best is rarely cheap. Qualiwatch target prices of 1050p for Vodafone AirTouch (LSE: VOD) and 1300p for Glaxo Wellcome (LSE: GLXO) don't look like getting breached anytime soon.
One of the companies which piqued my fancy was current Qualiport holding EMAP (LSE: EMA). The share price has fallen all the way from 1418p all the way down to below 950p. There has been a bit of negative news surrounding the company in recent times, including a drop in the circulation numbers and difficulties with the new weekly magazine Heat, but that alone shouldn't be responsible for the 40%+ share price decline.
But, having looked at EMAP's valuation, I've decided not to add to the Qualiport's existing holding in our media company. Firstly, in hindsight, I probably paid too much for EMAP. Having a look back at my original buy report, on most measures EMAP didn't pass the 15% valuation hurdles. At the same time, the growth rate assumptions were arguably too optimistic -- 16% per annum earnings growth in this low inflation environment is very difficult to achieve.
So, because I paid too much for EMAP when I first bought them at 1185p, the fact that the shares are down about 18% from there doesn't necessarily mean they are cheap. At about 940p, I reckon they are trading just below their intrinsic value. The recent acquisition of Petersen also throws a spanner in the valuation works. Only by the end of the current financial year -- March 2000, but results not released until June 2000 -- will we know exactly how that big acquisition has performed and impacted on EMAP's financials.
If all that wasn't reason enough to not add to the EMAP holding, further justification is provided by portfolio management. One of the reasons why unit trusts consistently under-perform the market is that they have holdings in lots of different companies, sometimes over 100. That instantly means that, at best, their returns tend towards the market average. When you take into account initial unit trust charges of, say, 5%, annual charges of, say, 2%, and trading costs of, say, 3%, you can see how difficult it is for these funds to actually beat the index.
The best investors run relatively focused portfolios. Some have portfolios of between one and five companies. Our resident value investor TMFPyad often runs a one-share portfolio. To be a successful investor, you obviously have to be confident of your stock-picking ability. This is even more the case when you run a focused portfolio. This fascinating topic was the subject of Robert Hagstrom's book The Warren Buffett Portfolio, previously expertly reviewed by Alan Oscroft.
If I was to add to the Qualiport's holding in EMAP, I would instantly be making it the biggest holding in this portfolio. At that stage, I asked myself whether I'd be happy having EMAP, out of all the other 1700 odd companies quoted on the London stock exchange, not to mention other world stock markets. Whilst I think EMAP remains a good company, and worthy of its position in the Qualiport, I'm not that confident for it to be the biggest holding.
Having talked about focus investing, I'm now going to go ahead and diversify the Qualiport even further by announcing our 8th buy. I'm not confident enough in my own stock-picking ability to run a truly focused portfolio, hence the diversification. However, holdings in eight separate companies is not super-diversified, and going forward I don't envisage adding too may more individual holdings. In fact, there could come a time where one existing holding is completely sold and the proceeds invested into another existing holding which shows better long-term prospects. We'll wait and see
Foolish Buy Report -- Lloyds TSB Group
Sometime in the next 5 trading days, in accordance with the Fool's trading rules, the Qualiport will buy £2,700 worth of Lloyds TSB (LSE: LLOY). As a disclaimer, I already own shares in this company. This investment will make Lloyds TSB the Qualiport's biggest holding.
What follows will be the brief buy report, because of a lack of time and space. I also wanted to rush the report out today as the share price has only recently fallen into what I consider the attractive zone.
Lloyds TSB are the acknowledged best bank in the sector, and one of the best managed banks in the world. Under the leadership of Sir Brian Pittman, they have a consistent record of increasing shareholder value. Since the takeovers of TSB and Cheltenham & Gloucester in 1995, earnings will have more than doubled, and dividends will have increased more than fourfold, based on 1999 forecasts. With that sort of growth, it's not surprising that the share price has followed higher, rising from about 330p at the start of 1996 to today's price of about 750p.
As for passing the Qualiport's 10 ideal criteria, without going through them in any detail I believe Lloyds TSB gets past virtually all of them. Banks are notoriously difficult beasts to value, and evaluate. That's because they are not widget-makers, and things like gross margins and operating margins either don't exist or are not easily identifiable.
One could argue that Lloyds TSB doesn't have a sustainable competitive advantage, and that is definitely a risk. There have been lots of new entrants in the banking arena in recent years, and they've been taking market share away from the traditional high street banks. If I was looking for a mortgage, or a current account, or insurance, I'd look for the cheapest out there, and not any particular brand name.
Yet, despite that competition, Lloyds are definitely doing something right, and that something usually involves creating shareholder value. They are one of the only companies I know who manage the feat of simultaneously increasing turnover and reducing costs.
The deciding factor to buy Lloyds TSB was their recent acquisition of Scottish Widows. For quite some time I've been looking for a company in the life assurance sector, because that is definitely a growth industry. As individuals realise, or are forced to realise, that the government won't be able to provide them with a financially comfortable retirement, they will more and more turn to life companies to do it for them. The stakeholder pension is a classic example, and I'm hoping Scottish Widows will be a beneficiary of this new savings device. The fact that Lloyds will own that venerable brand, and at the same time cutting costs from this mutual, will hopefully mean that they can continue their record of increasing income whilst reducing costs.
I've already gone on too long tonight. Rob's back in this slot on Friday and Monday. More will follow on Lloyds TSB, including looking at their valuation. In the meantime, I point you to this old message board post from US colleague Dale Wettlaufer for more on Lloyds TSB and how to evaluate banks. On this post, I had a brief look at a possible valuation. The price to adjusted book value for Lloyds TSB is now down to about 4.3.
Thoughts and opinions encouraged to either the Lloyds TSB message board, or the Qualiport message board.
Other Qualiport Company News
Yesterday, Unilever (LSE: ULVR) had one of those closed-shop meetings for the privileged few, where institutional analysts are invited along to hear about the company's plans for the future. Whilst there's nothing wrong with the company communicating with the investment community, they would do well to remember there's thousands of shareholders out there who also would like to know of Unilever's plans. This thing called the Internet is an excellent distribution tool.
I only found out about yesterday's analyst meeting on Monday, and am still awaiting a reply from Unilever regarding my attendance at the event. Of the 6 UK quoted companies in the Qualiport, only their investor relations department remains to be breached by the Motley Fool.
I've now been to post-result analyst presentations at Independent Insurance (LSE: IIG), Rentokil Initial (LSE: RTO) and PizzaExpress (LSE: PIZ). I'm on the EMAP invitee list. Recently, the Misys (LSE: MSY) Corporate Communications Director contacted me, noting my lack of understanding of what this IT company actually does, inviting me to an 'Introduction to Misys' afternoon. Now that's impressive -- a pro-active company.
Back to Unilever. Reading the press reports, the meeting yesterday was well received. The key points were;
Some of this news is relatively old, but it's good to see the company put them out there as targets. I'll be interested to follow the company's progress.
Happy Wednesday.
Company Change Bid DELL(US)-2.30 46.40 EMA -0.03 9.38 IIG -0.04 2.81 MSY -0.08 5.63 PIZ -0.22 8.13 RTO -0.05 2.27 ULVR +0.06 5.92 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 27/10/98 755 Indep Ins 2.58 2.81 8.9% 27/01/99 74 Dell (US) 44.63 46.40 4.0% 04/11/98 245 Pizza Exp 7.93 8.13 2.6% 22/04/99 347 Misys 5.76 5.63 (2.3%) 19/12/97 783 Rentokil 2.55 2.27 (11.0%) 17/04/98 169 EMAP 11.34 9.38 (17.3%) 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 2121.55 148.91 27/01/99 74 Dell (US) 2007.42 2080.97 73.55 04/11/98 245 Pizza Exp 1966.34 1991.85 25.52 22/04/99 347 Misys 2028.71 1953.61 (75.10) 19/12/97 783 Rentokil 2046.53 1777.41 (269.12) 17/04/98 169 EMAP 2341.32 1894.76 (446.56) 17/07/98 266 Unilever 2052.00 1574.72 (477.28) Cash: £3,433.46 Current Total : £16,828.33 Total Invested: £18,184.62 Profit/(Loss) : (£ 1,356.29) Value Per Share Day Month Year Qualiport -1.43% 0.02% -10.52% FTSE 100 -0.73% -5.32% 0.53% FTSE All Share -0.81% -5.18% 4.23%