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QUALIPORT
By
Rochester, Kent – There are two parts to stock market investment: The Qualiport defines the first part here. In short, the portfolio aims to buy "great companies at attractive prices". But while Bruce and I have often commented on the buying "strategy", not much is ever said about the selling issue. Until, that is, we actually sell... So, fresh from our ditching of Dell Computer Corporation (Nasdaq: DELL), it's time to redress this issue. After making an investment, there are three general reasons to sell: During its lifetime, the Qualiport has acted on all three: the change of story at Marks and Spencer (LSE: MKS), the disposal of the overvalued Dell and the switch from the plodding Unilever (LSE: ULVR) to the faster growing PizzaExpress (LSE: PIZ). Of the three reasons to sell, the "when the company's fundamental story changes for the worse" issue is perhaps the easiest to define prior to the event. So, on fundamental grounds only then, when should we "sell the Qualiport"? Here are my concerns for each portfolio member. PizzaExpress Acquisitions are my biggest worry with PizzaExpress. The news that PizzaExpress had approached City Centre Restaurants (LSE: CTC) gave me a distinct chill. As emphasised by the success of ASK Central (LSE: AKC) and JD Wetherspoon (LSE: JDW), the trick in this particular sector is to stick to one or two simple formats. Indeed, PizzaExpress tripped up when they purchased the Café Pasta operation. If this secondary dining brand, with just a handful of outlets, required a complete overhaul before generating a suitable return, what would occur with a far larger purchase? Away from corporate activity, the key indicator to monitor the ongoing success of PizzaExpress is the like-for-like sales growth figure. The company's own figures suggest like-for-like sales growth at the core pizza chain should be around 5% over the medium term. Growth below this figure could imply all is not well. MMT Computing There are two strings to the bow of MMT Computing (LSE: MMT) -- e-commerce services and the provision of software to the energy industry. Although the company has operations in other areas, it's these two divisions that form the bulk of the group's medium-term growth. I'd like to see MMT's repositioning towards e-commerce development bearing fruit within the next twelve months, especially given the rosy near-term growth prospects for this particular IT area. I'll have real doubts over MMT should the company remain at a standstill as and when the general market for Internet development really takes off. The aftermath of the Y2K slowdown can't be used as an excuse forever. I'd also like to see continuing growth at MMT's energy software operation. While not having the same predictability as general Internet-related work, MMT's energy division does significantly underpin the company's growth prospects. Independent Insurance Just one word describes what I really look for at Independent Insurance (LSE: IIG) – discipline. If Independent's underwriting discipline deteriorates, then its substantial competitive advantage will disappear and the company will tumble into a commodity quagmire. However, apart from keeping an eye on the underwriting ratios, Independent's cash flow needs to be monitored. Over the last few years, the company has failed to generate any free cash, although the introduction of long-term policies and the natural insurance cycle have played their part in this disappointing performance. The latest noises from Independent suggest cash flow is improving. Let's hope so, as the company can't go on spending more that it earns forever. Lloyds TSB Because I've admitted that I'm no expert on the banking sector, this is where things get tricky. No glib comments from me about monitoring Tier 1 capital ratios or analysing lending exposure to dubious Third World economies, I'm afraid. When it comes to the financials, just as long as Lloyds TSB (LSE: LLOY) maintains its superior return on equity performance, I'll be remain content. Unlike every other company in the Qualiport, I'm quite happy with Lloyds TSB making a substantial acquisition. The company has a successful history of acquisitions and I'm very hopeful that the possible purchase of Abbey National (LSE: ANL) will follow the trend. What can go wrong at Lloyds TSB to inspire a sell? Well, there'll be fresh blood in charge after Chairman Sir Brian Pitman retires in April. How will a former oil executive take to banking? Apart from that, I honestly can't think of anything else to worry about. What have I missed? Emap I'd be very circumspect if Emap (LSE: EMA) announced a sizeable acquisition any time soon. The group paid a full price for the US-based Peterson group, a significant purchase that has since proved a little problematic. Emap's financial position just isn't suitable for further substantial corporate activity. For starters, Emap's interest cover is only five times and the possibility of further debt-funded acquisitions is not appealing. What's more, Emap has also committed substantial amounts of money to fund its digital activities. In other words, the debt burden will remain the same while expenditure goes towards relatively unpredictable dot-com projects. In terms of Emap's magazines, there's a genuine possibility of the company producing a global "franchise" through its FHM title. In the long term, FHM could become a one-stop-shop for global advertisers aiming for that most lucrative of (and most difficult to attract) audiences -- the 18 to 30-year-old male. While not the end of the world, I'd be very disappointed if FHM failed to live up to my somewhat grandiose imagination. Your turn Those are my main concerns of the current Qualiport membership. If any come to fruition, then I'll actively consider selling. But you can have your say, through this simple poll. Which one of the five Qualiport companies do you think is most likely to disappoint investors over the long term? Cast your vote here. And finally... Following Monday's decision to sell Dell, Tuesday saw the Qualiport dispose of 74 Dell shares at $28 3/16 a piece. After costs of $9.99, the transaction realised $2,075.88 (approximately £1,420).