This page is quite old hence its rather spartan appearance.
Why not check out our Latest Stories page for our newest articles or search our site for anything.
By Rob Davies (TMFEssex)
In the last Qualiport Bruce said he liked market collapses because it was good for picking up cheap stock. As I write this the FTSE 100 is down 2.8% on the day, and the All Share has fallen 2.6% so far. The sell-off is not confined to London, though: most European stocks are down 2% and New York is pretty weak as well.
The blame for this fall, as is so often the case, lies with Alan Greenspan, the US central banker. In a speech last night he warned that excessive equity valuations made the market more risky and suggested that banks increase their reserve ratios to provide for contingencies. Perhaps he had in mind the exposure that investment banks suddenly found themselves with after a sharp move in the gold price.
In a classic example of the law of unintended consequences European central bankers thought they would help the gold market by announcing their intention to restrict the amount of gold they sold. That pushed the gold price up, which caused a problem to some gold miners that had sold short. Ashanti was badly hit and a hedge book worth $200m suddenly had a negative value of $500m. As most of that is owed to Goldman Sachs it obviously caused concern back in Wall Street. That sort of exposure, multiplied across many markets, can aggregate together to form a huge problem. Half a billion dollars here and half a billion dollars there and pretty soon you're talking real money.
It is this leverage, or over-indebtedness that can cause problems. Ashanti's hedge book was not overly large by comparison with some other gold miners. Where it differed was in having much more debt on its balance sheet than its peer group. That is why one of the features Bruce uses to select stocks for the Qualiport is a strong balance sheet. Although these shares are being hit by the downturn, none are in any danger of a liquidity crisis.
The table below shows the debt, or net cash position, of the non-financial stocks in the portfolio. It is hard to carry out this type of analysis on banks and insurance companies because their business relies on using the balance sheet. Also don't forget when looking at this table that Unilever (LSE: ULVR) only a few months ago returned over £5b to shareholders after selling its speciality chemical business to ICI (LSE: ICI).
Stock Net Cash % of shareholders'
(Debt) funds
Dell £1600m* 115%
Unilever £4179m 112%<
Rentokil (£294m) 152%
Misys (£30m) n/a
PizzaExpress (£1.7m) 3%
Emap (£698m) 77%
*$2669m at 0.599 £/$
Most of these companies have sound balance sheets, and Dell (NASDAQ: DELL) has a net cash and investments position equal to its shareholders' funds. The ones that don't, namely Rentokil Initial (LSE: RTO) and Emap (LSE: EMA) are among those that have suffered most in recent weeks as fears of rising interest rates have pushed investors away from indebted companies. Misys (LSE: MSY) has negative shareholders' funds because of its acquisition programme, but is not carrying much debt anyway.
The same arguments apply to both Rentokil and Emap. If the goodwill written off after acquisitions is added back, then the balance sheets of all three companies look a lot healthier.
Investors in quality companies should have no need to be concerned too much by these market wobbles. In the long term, i.e. over five years, good equity investments should outperform almost all other forms of investment.
By way of example, it is worth noting that bonds have had a very poor year. A typical bondholder in the UK this year would have suffered a total negative return of around 5.3%. Even after the declines of the past few days, the FTSE All Share index is still up 3.3% on the year and the FTSE 100 is still showing a small positive return.
As for the stocks themselves, there seems to be little to report. Misys has gone completely quiet since it lifted its skirts the other day and showed a very shapely ankle. I was happy to buy the story. However, the market seemed to take a different view and has marked the shares down since then, although some of that is due to the general setback in equities.
Rentokil has dropped back to a within a gnat's widger of the 200p level. On any reasonable valuation argument these shares look undervalued given their history.
Unilever seems to have been one of the better performers in the crashette. Its sound balance sheet and range of "must have" consumer products, like washing powder, makes it reasonably immune from macro-economic worries such as interest rates and tax policy.
PizzaExpress (LSE: PIZ) carries on its merry way. Revenues should have been boosted last Wednesday by a delegation of Fools trooping across to the local establishment after an evening of conviviality in the pub.
Finally Emap just seems to be a one-way bet these days, despite a preponderance of buy recommendations over sells from the analysts. One day the trend will bend and then
That completes this week's roundup. Doubtless the price movements will have worried some and disappointed many, but as long as you don't need the money in a hurry there is no need to rush out and trade in this market. Save your concerns for a post on the Qualiport message board and share your worries with us. We are all in the same boat.
Company Change Bid DELL(US)-0.10 44.20 EMA -0.12 8.08 IIG -0.14 2.43 MSY +0.10 5.18 PIZ 0.00 8.22 RTO 0.00 2.05 ULVR -0.11 5.24 LLOY -0.40 7.27 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 04/11/98 245 Pizza Exp 7.93 8.22 3.7% 27/01/99 74 Dell (US) 44.63 44.20 (1.0%) 29/09/99 356 Lloyds TSB 7.56 7.27 (3.8%) 27/10/98 755 Indep Ins 2.58 2.43 (5.8%) 22/04/99 348 Misys 5.76 5.18 (10.1%) 19/12/97 783 Rentokil 2.55 2.05 (19.6%) 17/04/98 169 EMAP 11.34 8.08 (28.8%) 17/07/98 266 Unilever 7.53 5.24 (30.4%) Last Rec'd Total # Company In At Value Change 04/11/98 245 Pizza Exp 1966.34 2013.90 47.57 27/01/99 74 Dell (US) 2007.42 1982.30 (25.12) 29/09/99 356 Lloyds TSB 2723.20 2588.12 (135.08) 27/10/98 755 Indep Ins 1972.64 1834.65 (137.99) 22/04/99 348 Misys 2028.71 1802.64 (226.07) 19/12/97 783 Rentokil 2046.53 1605.15 (441.38) 17/07/98 266 Unilever 2052.00 1393.84 (658.16) 17/04/98 169 EMAP 2341.32 1632.16 (709.16) Cash: £2,710.26 Current Total : £18,042.66 Total Invested: £20,184.62 Profit/(Loss) : (£ 2,621.60) Value Per Share Day Month Year Qualiport -1.52% -3.81% -16.84% FTSE 100 -2.19% -2.03% 0.42% FTSE All Share -2.06% -1.97% 3.61%