Qualiport

[ February 11, 2000 ]

Special Situations

By Bruce Jackson (TMF Googly)

Fitzrovia, London -- I'm in danger of missing yet another writing deadline, so will keep tonight's report rather brief. There's been a flurry of reporting activity surrounding 2 Qualiport companies -- Dell Computer Corporation (Nasdaq: DELL) last night and Lloyds TSB (LSE: LLOY) this morning -- but I'm not going to cover them in any detail tonight. Call me disorganised, and you're right. However, in my defence, if we've done our homework in the first place, and picked the right companies for the Qualiport, it shouldn't matter whether we pore over their numbers today, next week or next month. Don't get me wrong -- it's something we ought to and will do -- but these things take time, and that's something I ain't got today! (What's new?).

On Wednesday the Qualiport sold its entire holding in Rentokil Initial (LSE: RTO), being 783 shares at a price of 241.5p, less dealing costs of £15. The Qualiport's full trading history can be accessed by clicking on one of the "See Also" links down the left hand side of this article.

The proceeds have been added to our cash balances, leaving us with just over £1,900 in the kitty. On a different note, last night I was discussing the sell decision with a couple of fellow Fools. They weren't necessarily questioning the Qualiport's sell decision, but whether we could have avoided buying them in the first place. After all, after holding the company for over 2 years, the Qualiport actually lost money. That's not good investing.

We came to the conclusion that back in December 1997, it would have been very difficult to foresee Rentokil's future problems. Boosted by the BET acquisition, sales were growing and operating margins were on the up and up. It was classic Rentokil behaviour, following their time-honoured acquisitive route to success. In hindsight, it was actually the BET acquisition that probably signalled the start of Rentokil's problems.

Previously they'd gobbled up much smaller companies, and usually those acquisitions were friendly. Pre-BET, Rentokil's organic growth was struggling, and because of the need to hit their 20% per annum earnings growth target, they had to look for bigger and bigger deals. BET fitted that bill, but the bid was most definitely hostile. When completed, it simultaneously took Rentokil into both capital-intensive and commodity business -- not a good mix.

For 2 years post BET everything looked rosy, as Rentokil simply used BET's huge sales base and stretched the profit margins. But eventually, without organic sales growth, something has to give, and that finally happened in August last year when Rentokil dropped their 20% earnings growth target.

For me it's another learning experience. I still don't think we made a major mistake in buying Rentokil back in December 1997. But, in future I'll be very wary of buying acquisitive companies, because organic growth and a growth market will win hands down. It's not too difficult to identify those companies, but it is almost impossible to buy them at reasonable prices.

Bye, bye Rentokil. We wish you well, and don't hold any grudges. We've learnt from the experience, and in the long-term, that's what stock market investing is all about.

Special Situation Investing

Before closing today, and especially as the Qualiport now is sitting on some cash, I thought I'd touch on special situation investing. The Motley Fool's investment philosophy is simply long-term buy and hold of quality companies. But, as investors, we should also be looking to maximise our returns. Sitting on cash, earning an after tax return of less than 4% per annum, is not my idea of maximising returns, even though it is risk-free, something which is not to be underestimated.

To that extent, I've been thinking about some potential short-term investments whilst waiting for an opportunity to re-deploy the Qualiport's cash into a suitable long-term holding.

What the...? Are you Fools are turning into day traders?

Most certainly not. I'm just exploring opportunities to maximise the Qualiport's returns. IF, and that's a BIG IF, we can find a company which MAY rise by 20% in the next 3 to 6 months, AND we invest a small portion of the Qualiport's cash, we will be maximising returns.

I see a special situation as being just that. There are plenty of companies out there who could conceivably pass for a special situation investment, but in reality these will be few and far between. There is a precedence for this, as witnessed by Warren Buffett's big winning punt on silver in 1998. He simply figured that based on the laws of supply and demand, the price of silver was irrationally and temporarily depressed. Buffett also dabbles in arbitrage situations, something I've written about previously.

I'm not about to delve into the seedy world of commodity trading, because it's well outside my circle of confidence. But I'd like to investigate some potential opportunities with larger capitalised companies. I'm thinking we'll be looking for a quality company, but one which is not necessarily in the very top echelon, and which has seen its share price irrationally hammered. The downside should be very limited, so the company should be trading on a low price to earnings ratio (P/E). It mixes deep value and growth investing, with the emphasis on value.

In my personal portfolio, I've recently bought shares in a FTSE 100 company which I think fits the bill. I'm actually looking at the investment as a bit of a test case. Next week I'll reveal the name of the company, why I chose them, and look for some other potential special situations. In the meantime, I'd be interested to see what other Fools think about this on the Qualiport message board. Have a great weekend.

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