Qualiport

[ June 12, 2000 ]

Bye Bye Unilever

By Bruce Jackson (TMFGoogly)

Unilever Sold

Following on from Friday's Qualiport article, in accordance with the Fool's trading rules, today we sold our entire holding in Unilever (LSE: ULVR). Gone. Kaput. Outta here. Our 266 shares were sold at 441.25p, and after commission of £15 deducted, gave us proceeds of £1,158.73.

Unilever was our worst performing share. Not necessarily our worst performing company, because share prices often move completely independently of the underlying performance of the company. That's in the short term. In the long term, there's a 100% correlation between a company's share price and its financial performance. That time period may be as long as 20 years, but it definitely rings true.

Unilever remains a solid if unexciting company. It will continue to grow at a reasonable rate, although that will undoubtedly be inhibited by its sheer size. More importantly, however, the growth prospects of branded goods companies in general are relatively limited. The world is just not gagging for more soap powder or tea bags. They'd much prefer mobile phones and the mobile Internet.

Ouch

The Qualiport paid too much for Unilever. Far too much. The original buy report says as much. Back in the July 1998 I said;

"Since 1993, turnover has increased by a total of 6.8%, or a compounded annual growth rate (CAGR) of 1.7%. Normal earnings per share (EPS) have grown every year since 1993 and by a total of 31.1% for a CAGR of 7.0%. Hardly inspiring stuff, particularly when you realise the company is trading at a trailing price to earnings ratio (P/E) of about 33."

A P/E of 33! How could I buy a slow growing company trading at such a lofty valuation? It's certainly expensive lesson, and one well learnt.

Au Contraire Qualiport Unilever

Quite a few of the weekend newspapers were apparently tipping Unilever as a buy. In a strange sort of contrarian way, I like going against popular opinion. In fact, most of all the great investors have gone against popular opinion, and that's one of the reasons they've been so successful.

I'm not saying that by going against the crowd by selling Unilever that's going to instantly make me a great investor. Fat chance. It could help, but only if you get the decision right.

I haven't actually read the book Extraordinary Popular Delusions & the Madness of Crowds, but I've heard a lot about it. It looks at the true stories behind the South Sea Bubble and Tulipmania, the common thread being that most investors following the crowd ended up all the poorer for their experience.

(Did you know that the South Sea Bubble was actually a boom and bust in the share price of one specific company -- the South Sea Company? And their business? They were slave traders. Alan Oscroft tells the tale in this excellent Fool's Eye View.)

I like going against the crowd. The newspaper tipsters are entitled to their opinion, and they may ultimately turn out to be right. But, unlike them, we've got our money on the line with Unilever. That fact alone certainly focuses the decision-making process. We don't feel comfortable with the price Unilever paid for Bestfoods (NYSE: BFO), and feel the margin of error is minimal.

And, in a nutshell, that's why we're selling.

Poll & PizzaExpress

Thanks to those Fools who voted in our poll. As of writing, the voting was very close when judged between those between who thought PizzaExpress (LSE: PIZ) a buy and those who didn't. Click here to either vote or check out the current tallies.

The PizzaExpress top-up has not happened yet. We've got another 4 days left before we have to execute the trade. In that time, we're hoping the shares fall even further, having dipped below 660p today. When we ultimately buy, we want to be going against the crowd, buying when all others are selling.

There are risks involved in buying more PizzaExpress. Domestic growth is slowing. Competition is increasing. PizzaExpress could turn out to be yet another themed retailer/restaurateur which grew quickly as new outlets were rolled out, but faltered as saturation point came ever closer. Time, as ever, will tell. But with PizzaExpress trading on a forward P/E of about 15 (equivalent to an earnings yield of 1 / 15 = 6.67%) we believe there's sufficient margin of safety in the price to compensate us for those risks.

Finally...

As Maynard said on Friday, considering Unilever consisted of just 6% of the Qualiport, we devoted a lot of column inches (in cyberspace of course) to its progress. For quite some time we've been questioning its place in the portfolio, often falling on the negative side of the fence.

Well, we've finally pulled the sell trigger. So long Unilever. We wish you well. We don't blame you for our investment losses. That was entirely our own fault. We'll be interested to track your progress in the future, especially as the massive Bestfoods acquisition beds down. But, ultimately we're happy having our money riding on a different horse.

Comments and suggestions encouraged to the Qualiport discussion board.

Related links

• Unilever - Qualiport originally buys
• Unilever - Qualiport sells
• PizzaExpress -- Your Say
• South Sea Bubble
• Extraordinary Popular Delusions & the Madness of Crowds