QUALIPORT
Twenty Companies To Watch Out For

By Maynard Paton (TMFMayn)
June 7, 2001

Rochester, Kent -- Over recent months, I've reviewed many companies that would be worthy of Qualiport status. To bring everything up to date, this feature will outline what's on the portfolio's watch list. In effect, I'm reviving the Qualiwatch.

Admittedly, I've argued against maintaining a watchful eye on just a handful of businesses in the past. However, my experience, and from that of others, tells me there's just no alternative. The more you follow a company, the greater your understanding of its business, and thus, the greater your chances of spotting an inherent undervaluation. Put simply: identify superior businesses, wait until they become attractively priced, buy the shares.

In terms of Qualiwatch numbers, I'm limiting myself to an absolute maximum of twenty companies. Reading forty results statements a year is more than enough for anybody.

In order of market value, here's the present watch list. The latest review of the company can be found by clicking through on the company's name:

Company          Market Value      Share Price
                    (£m)               (p)

Lloyds TSB         40,655               738
Allied Domecq       4,622               433
Imperial Tobacco    4,073               785
Emap                2,065               810
SSL International   1,058               560
PizzaExpress          635               917.5
Johnston Press        594               295.5
Halma                 518               143.5
Carpetright           486               642.5
Ultraframe            307               329.5
Metal Bulletin        162               300
Ulster Television     138               263
Games Workshop        110               354.5
Latchways              37               337.5
MMT Computing          26               218.5

Regular Qualiport readers may be surprised at my inclusion of newspaper firm Johnston Press (LSE: JPR). After much indecision on my part, did I not finally dismiss them in January? I surely did.

Although I've previously expressed concerns about Johnston's level of debt and returns on equity, looking forward, a brighter picture should emerge. Given few significant acquisition opportunities remain in the newspaper industry, Johnston's excess cash should start to reduce borrowings and enhance shareholder returns. Fundamentally, the newspaper industry is still an attractive one for investors seeking simple, stable and cash-generative businesses.

Also, while I'm not intending to top up the Qualiport's holding in MMT Computing (LSE: MMT), due to the company's un-Qualiport like business, the company must take up a position on the list. I still have to monitor MMT's progress!

All in all, there's a fair spread of industries represented in the watch list. That goes against a key tenet of investing -- drawing a circle of competence. However, I'm quite comfortable with the selection. With the exception of MMT, each is the pre-eminent operator in its respective sector or sub-sector. I do not know the exact ins and outs of each particular company and their products. But every company's financial record, and my own gut feel, tells me they're all attractive businesses for the long-term investor.

Five more for the list

With fifteen companies already on the watch list, there's just room for five more. Here are five companies I've been contemplating over recent weeks. Are any Qualiport material?

1) Enterprise Oil

The oil sector has traditionally been off my radar. Blame it on indecipherable accounts with the industry giants and operational activities in faraway lands with the small fry. But following a prompt from discussion board regular Hallicugenia, I've found Enterprise Oil (LSE: ETP) nicely straddles the sector middle ground.

The company has reasonably clear financials, plus it operates mainly in the relatively safe haven of the North Sea. Capitalised at £3b, Enterprise currently sits on a forward price to earnings (P/E) ratio of just 10. While the shares are cheap, I'm unsure whether medium-sized exploration firms possess a competitive advantage when looking for their oil.

2) Wyevale Garden Centres

Wyevale Garden Centres (LSE: WGC) is the UK's leading specialist garden centre operator, a position underpinned by its purchase of the UK's number two, Country Gardens, last year. As so often happens with specialist retailers, Wyevale's rapid expansion has a suffered a hiccup. Yesterday, the group issued a profit warning and blamed "appalling weather" for the financial shortfall.

While Wyevale operates in a tough sector, its economies of scale must give the company some competitive advantage in what is a fragmented and growing market.  Will Wyevale repeat the share price rollercoaster (documented here) of former troubled retailer JJB Sports (LSE: JJB)?

3) Provident Financial

Provident Financial (LSE: PFG) is one of the country's leading doorstep moneylenders. The company has shown significant growth over the past ten years and is now expanding into Eastern Europe. On the face of it, special dividends, 22% operating margins and next-to-nothing spent on fixed assets make Provident's business quite tasty.

What's more, Provident has incurred the wrath of pressure group Church Action on Poverty. According to the Investors Chronicle, various institutional shareholders are now reviewing their holdings in light of Provident's alleged "profiting from poverty". Stock market worries over ethical issues could create an investment opportunity.

4) Renishaw

Renishaw's (LSE: RSW) business concerns the design, manufacture and sale of precision metrology and inspection equipment. While I know nothing about Renishaw's products or the nature of its competitive advantage (if any), the group's accounts do highlight an intriguing business. Steady sales growth, 24% operating margins and a chunky cash pile (currently representing 10% of the company's market value) tweaks my interest.

5) Manchester United

A controversial choice perhaps, given that the only people to make money out of football are the players. Yet the company does have many shareholder attractions. It's simple, visible, generates regular content required by broadcasters and has very loyal customers.

Although the shares trade at a pricey P/E of 34, there is the distinct chance of a downturn at Manchester United (LSE: MNU). With Sir Alex Ferguson stepping down from his managerial role at the end of next season, will an investment opportunity arise if or when Man Utd lose their grip on the Premiership?

Your turn

Have any comments on the companies under the Qualiwatch spotlight? Wish to suggest other companies suitable for a long-term quality portfolio? Then post your thoughts to the Qualiport discussion board.

Disclosure: The author owns shares in Carpetright, Games Workshop, Latchways and MMT Computing.