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By Bruce Jackson (TMF Googly)
Carburton Street, London -- As of 12.30pm today, if not before, the Qualiport quietly moved back into the black. It is still down this year, but in the throes of recovery. Of course, the whole market has flown ahead in the past month, and the Qualiport has jumped onto its coat-tails and been taken for a little ride. Less than a month ago, this real-money portfolio was down 18.7% on the year. Check out the numbers below. For those newer Fools wondering why the Qualiport is down in percentage terms in the year to date but up in sterling terms, a look back at this article from the end of last year may enlighten.
I'm not about to jump up and down and whoop for joy at this rather low-key event. Just like I didn't turn into a manic-depressive as the Qualiport lurched from bad to worse. The current success could very much turn out to be short-lived. The rise in the share price in Misys (LSE: MSY), now the biggest holding in the Qualiport, representing just over 19% of the portfolio, has been nothing short of amazing. What has happened in the past month simply cannot be replicated.
Having said that, I'm going to give myself just a little pat on the back. The Qualiport announced three additional top-ups in late October, at a time when the FTSE 100 was trading below the 6000 level. In hindsight, this has tuned out to be a low point in the market's current cycle. Let me firstly say that in no way whatsoever was I trying to 'time' the market. I saw value in the individual companies I eventually bought. It could be a coincidence that the market was at a low point, but then again it may not be. With the market at an historically high point now, I'm sure there's some quite good companies out there which are currently under-valued by the market. As ever, finding them is the hard part.
Anyway, that's enough Qualiport gloating for today.
On Monday I started reading Super Stocks, by Kenneth L. Fisher. Usually a slow and easily distracted reader, I'm amazingly already half way through it. That's usually a sign that the book is a good read. Super Stocks was written back in 1984, but most if not all of it is very relevant to today's investors.
The book starts off by explaining the 'glitch' factor. As it grows, just about every company on the planet goes through a bad patch, and we're not just talking about share price here. Glaxo Wellcome (LSE: GLXO) is struggling to grow sales in its post-Zantac era. BP Amoco (LSE: BPA) and British Aerospace (LSE: BA.) have both almost gone bust within the last 10 years. IBM (NYSE: IBM) hit the buffers not too many years ago. In all instances, the companies have recovered, although the jury is still waiting for tangible results to filter through from Glaxo Wellcome. On that note, the pharmaceutical giant today announced that sales for the first 10 months of 1999 were up 5%. That's hardly the sort of growth a company trading on a price-to-earnings ratio (P/E) of 35 should be looking for. But, as usual, the market is looking forward to future years of outstanding growth when valuing Glaxo Wellcome. Time will tell whether the market is correct. The Qualiport has placed a 1300p buy price on the company.
The first part of Super Stocks concentrates on the glitch. All of the excellent companies mentioned above have seen their share price wobble at some time during their corporate life. Provided you're still looking at a very good company, that is the exact time to buy. Fisher's not the first person to say this, and he certainly won't be the last. Warren Buffett looks to buy good companies at reasonable prices, and reasonable prices often occur during a 'glitch'.
Fisher goes on to look at the cycle of a typical 'glitch' company's share price. After the glitch, the financial community is too bearish on the shares, and they are knocked down to an irrationally low level, from where the only place they can go is up. Secondly, the share price rises as the company gets back on its feet, earnings resume, and it starts to show signs of growth. Finally, buoyed by this sign of life, a whole new crowd of institutional investors jump on the bandwagon, pushing up the shares into the land of never-never, from where the only place they can go is down.
Stating the absolute obvious, buying at the bottom and selling at the top is the way to make your investing riches. However, it is impossible to consistently achieve this feat. Still, if you get these recovery shares at low points and sell them at high points, you'll be doing quite well, thank you very much.
Two further great quotes from the book further sum up the cycle.
"Success has a thousand fathers, but failure is a bastard"
"The fundamental problem is that investors develop expectations for companies which originally may be much too high."
At this stage, it is worth re-emphasising that the quality of the company is absolutely paramount. Fisher says you should be looking for a Super Company. Successful recovery investing is a very difficult game. For all the hundreds of companies that suffer glitches, very few actually recover. One recent example springs to mind -- Somerfield (LSE: SOF) -- re-named Sufferfield in the brand new Fool UK offices. Earlier this year, with the shares falling fast, they looked a prime example of a recovery stock. Surely they would get their act together as their historic P/E fell into single digits and their dividend yield rose into double digits, wouldn't they? As their chart shows, things have gone from bad to worse. In my mind, Somerfield does not pass the quality of company test.
Where's all this leading to? Is the Qualiport going to invest in recovery situations? I don't believe it will actively search out these opportunities, but if one comes along, I wouldn't be adverse to dipping my toes in the water. However, to be a successful long-term investor, I believe you don't have to be a 'glitch-recovery' investor. You can instead look for good companies which have been temporarily and artificially whacked by the stock market, for no apparent reason. It's looking like that's exactly what happened to Emap (LSE: EMA) just last month, although it's far too early to say whether the share price has permanently recovered from its joust below 800p.
Super Stocks goes on to look at the importance of the price-to-sales ratio (PSR), placing it far and away above that of the P/E ratio. Give Fisher a low PSR and he's a happy man. He says investors should avoid shares with a PSR greater than 1.5, and never buy one with a PSR greater than 3. Instead, seeks companies with PSRs at 0.75 or less.
As I said earlier, the book was written in 1984. In these go-get-'em tech stocks days, I wonder if Fisher still believes this holds true. I also wonder what he thinks of Freeserve's (LSE: FRE) PSR of about 800! Anyway, based on the first 120 pages, the book is a very good read. I'll finish with another great quote from Super Stocks, which certainly gives food for thought.
"It is rare to see a Super Company have a truly substantial sales decline. It is quite common to see one suffer from severe earnings reversals."
That's the glitch.
See you on the Qualiport message board, where as usual there's some very informative posts. Follow this thread in particular for an interesting discussion surrounding the performance of the Qualiport. Rob's back on Friday.
Company Change Bid DELL(US)+0.90 41.60 EMA +0.07 11.01 IIG -0.05 2.65 MSY +0.32 7.17 PIZ 0.00 8.13 RTO +0.15 2.35 ULVR -0.02 4.51 LLOY -0.02 8.93 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 22/04/99 542 Misys 5.57 7.17 28.6% 29/09/99 356 Lloyds TSB 7.56 8.93 18.2% 17/04/98 301 Emap 10.20 11.01 7.9% 04/11/98 245 Pizza Exp 7.93 8.13 2.6% 27/10/98 1133 Indep Ins 2.60 2.65 1.9% 27/01/99 74 Dell (US) 44.63 41.60 (6.8%) 19/12/97 783 Rentokil 2.55 2.35 (7.8%) 17/07/98 266 Unilever 7.53 4.51 (40.1%) Last Rec'd Total # Company In At Value Change 22/04/99 542 Misys 3065.85 3886.14 820.30 29/09/99 356 Lloyds TSB 2723.20 3179.08 455.88 04/11/98 245 Pizza Exp 1966.34 1991.85 25.52 27/10/98 1133 Indep Ins 2990.63 3002.45 11.90 27/01/99 74 Dell (US) 2007.42 1865.70 (141.72) 17/04/98 301 Emap 3139.85 3314.01 174.17 19/12/97 783 Rentokil 2046.53 1840.05 (206.48) 17/07/98 266 Unilever 2052.00 1199.66 (852.34) Cash: £ 18.41 Current Total : £20,297.35 Total Invested: £20,184.62 Profit/(Loss) : £ 112.73 Value Per Share Day Month Year Qualiport 1.70% 13.05% -3.89% FTSE 100 -0.41% 4.80% 11.44% FTSE All Share -0.21% 5.31% 14.39%