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*The Independent Insurance P/E is based on consensus forecasts before investment gains or losses are taken into account. This is known as trading profit. Based on the first half year results, and the continued weakness in the bond markets, IIG could see full year net profits and earnings per share (EPS) come in less than the trading profit, therefore raising the P/E.
In the past few Qualiport reports, all 3 contributors have pontificated about which company(s) should be bought or sold or whatever -- basically looking at portfolio maintenance. Thinking about it again, all this proposed activity smacks a little of a trading portfolio. We're into long-term buying and holding here at the Fool, and switching out of one company and into another seems a little short-termist. After all, it's not as if we're being rushed into a decision by anyone.
"Buy Dodgyshares.com up to 150p. This shell company has been overlooked by the market, despite transforming itself into an Internet company by adding the dot com suffix. With the continued insatiable appetite for all Internet-related companies, we feel Dodgyshares.com (currently 20p) can reach 150p by the middle of 2000."
Starting next Sunday, expect plenty of newspapers and magazines to be tipping shares for 2000. Some will come up with excellent ideas -- for example last year the Investors Chronicle tipped ARM Holdings (LSE: ARM) at 368p. Today the shares are trading above 4000p, a gain of over 1000%. Returns like that, in the space of just 12 months, are as rare as hen's teeth, and those lucky and skilful enough to have ridden the 1999 ARM wave should be aware of just how uncommon yet superlative these gains have been.
Despite that Investors Chronicle success, Fools should remember that tips can and will go wrong. And when they do, if you've bought into them on the back of a glowing tip report, only YOU will be accountable for any loss. Although we don't tip shares at the Motley Fool, we do run real money portfolios, like the Qualiport. When we buy shares in a company, we put our own money on the line, and are therefore fully accountable -- but only to ourselves.
We are trying to build long-term market beating portfolios, with the main emphasis being on their educational qualities. I find I learn more from my mistakes than anything else, and at the same time I hope you learn from our mistakes. Magazines, tipsheets and newspapers make mistakes too, but notoriously only review their past winners, rarely coming back to say "oops, we're sorry about that one". A real-money portfolio hasn't got that luxury, and besides that's not what the Motley Fool is about.
Today is the last Qualiport report of the year. Barring a big reversal tomorrow, it looks like the portfolio is miraculously going to finish in the black for 1999. I say miraculously, because only 8 weeks ago the Qualiport was down almost 19% in the year to date. Admittedly, in that time the market has also taken off, rising about 13%, but the Qualiport has outpaced it over that very short period of time. At this stage, it would be pure folly to read anything into this advance, especially given that the market has given the Qualiport a shellacking in 1999.
As we look forward to 2000, what can the Qualiport expect? This time last year we did a quick review of the then current holdings, and I'll do the same today. The yield and price to earnings ratios (P/E) are based on forecasts for the listed year end date.
Company Yield % P/E Y/End Portfolio %
Independent Ins 1.8 13.3* 12/99 13.8
Lloyds TSB 3.5 15.4 12/99 12.3
Rentokil Initial 1.9 16.3 12/99 7.9
Unilever 2.6 17.8 12/99 5.5
Pizza Express 0.9 18.3 06/00 8.2
EMAP 1.5 23.1 03/00 18.1
Misys 0.4 51.7 05/00 23.1
Dell 0.0 70.3 01/00 10.9
Mean 1.6 28.3
FTSE 2.1 30.0
What does all that tell us? Not a lot really, because no-one can tell what the market or an individual company's shares are going to do over the next 12 months. It's just too short a time-frame. Over the long-term, a company's share price will follow its earnings, be they higher or lower. We're obviously hoping they'll always be higher, but over an extended time period, that won't always be the case. Unilever (LSE: ULVR) is a case in point, as in 1998 its normalised EPS actually fell by 6%.
Having said that, the above table doesn't tell us too much, I'm now going to make some observations. Of the Qualiport 8, on the surface it seems shares of Independent Insurance (LSE: IIG), Lloyds TSB (LSE: LLOY) and PizzaExpress (LSE: PIZ) have the best chance of progressing over the next 12 months. That thinking is based upon their relatively low P/E ratios and their growth rates. Although Unilever and Rentokil Initial (LSE: RTO) are on similar P/E's, their sales growth is by contrast rather anaemic.
Which leads me onto another point...
Portfolio Maintenance
On the other hand, if we can see we've made a mistake in choosing a particular investment, or something about the company has changed for the worse since we bought the company, or we think we can find a better home for our money, then why shouldn't we go ahead and sell the shares? Arguably Rentokil Initial fit that bill. However, having read some very informed and rational comments about the company on its message board, I'm of a mind to give them a bit more time to get re-get their act together again.
It's always a tricky choice, whether to sell one company because you think you've found a better investment opportunity. Maybe I should be thinking of taking some profits on Misys (LSE: MSY), being up about 90% in the last couple of months? With a prospective earnings yield (the inverse of the P/E) of 1.9%, there doesn't seem too much room for error in its valuation. Yet, who's to say the shares won't go higher from here, in this turbo-charged technology led market? I don't know. Do you? Conventional Fooldom says run your winners and cut your losers. However, the value investor in me says Misys can't go much higher than this.
As usual, I'm going to bide my time before jumping to any decision. Having learnt the hard way, I'm now prepared to wait for a significant margin of safety before buying any shares, be that in an existing portfolio member, or another company. I've written about topping up on PizzaExpress at 730p, but following on from Maynard's articles and some excellent message board posts, I'm reducing the target top-up price to 650p.
There's also been some very informed and incisive comment about Warren Buffett's Berkshire Hathaway (NYSE: BRK.A). Amongst others, Larry Duff's concluding comments in this post sum things up in my book.
"I'm not saying that the Qualiport should buy Berkshire Hathaway. First, we need to decide whether or not Berkshire is a Qualiport company. Secondly, we need to decide on a valuation. But if Berkshire passes the tests, I see no reason not to buy it."
I wish you all a happy and bug-free new year.
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Company Change Bid DELL(US)-0.75 51.50 EMA -0.48 12.45 IIG 0.00 2.62 MSY -0.06 9.08 PIZ 0.00 7.22 RTO +0.01 2.19 ULVR +0.11 4.52 LLOY +0.21 7.61 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 22/04/99 542 Misys 5.57 9.08 62.9% 17/04/98 301 Emap 10.20 12.45 22.0% 27/01/99 74 Dell (US) 44.63 51.50 15.4% 27/10/98 1133 Indep Ins 2.60 2.62 0.8% 29/09/99 356 Lloyds TSB 7.56 7.61 0.7% 04/11/98 245 Pizza Exp 7.93 7.22 (8.9%) 19/12/97 783 Rentokil 2.55 2.19 (14.1%) 17/07/98 266 Unilever 7.53 4.52 (39.9%) Last Rec'd Total # Company In At Value Change 22/04/99 542 Misys 3065.85 4921.36 1855.52 17/04/98 301 Emap 3139.85 3747.45 607.61 27/01/99 74 Dell (US) 2007.42 2309.70 302.28 29/09/99 356 Lloyds TSB 2723.20 2709.16 (14.04) 27/10/98 1133 Indep Ins 2990.63 2968.46 (22.09) 04/11/98 245 Pizza Exp 1966.34 1768.90 (197.44) 19/12/97 783 Rentokil 2046.53 1714.77 (331.76) 17/07/98 266 Unilever 2052.00 1202.32 (849.68) Cash: £ 38.91 Current Total : £21,381.03 Total Invested: £20,184.62 Profit/(Loss) : £1,196.41 Value Per Share Day Month Year Qualiport -0.46% 7.36% 1.24% FTSE 100 0.43% 3.62% 16.21% FTSE All Share 0.43% 3.77% 19.79%