QUALIPORT
Panics, Bargains and Dilemmas

By Maynard Paton (TMFMayn)
September 24, 2001

Carburton Street, London -- At the Motley Fool, we've often written about stock market panics. "Look back at history" we'll say, "The stock market eventually recovered after the crashes of 1929, 1974 and 1987...".

It's easy to revisit the panics of the past and say what great investing opportunities they were. It's not so easy when the panic is in the here and now.

Panic

Friday was a day of stock market panic. At one point during the day, the FTSE 100 index had plunged 7.4% with the best performing FTSE 100 share down 2%. At other times in the day, nearly a third of FTSE 100 shares were down 10% or more.

The reasons for such frantic selling ranged from insurance companies needing cash to meet regulatory requirements, to "investors" fearing the market would fall further because it had already fallen. Whatever the motives, most of the share price falls witnessed on Friday (and the days before, it has to be said) had little to do with the long-term fundamentals of the underlying businesses.

As I mentioned on Thursday, with the FTSE 100 falling heavily in two consecutive years, the present stock market turbulence is unchartered territory for most investors. Indeed, there's actually a parallel with the TMT boom of last year.

The dotcom bubble saw panic buying from those investors who'd never witnessed (or read about) the dangers of a speculative investment mania before. Now the current stock market slump, the scale of which has not been seen since 1973/4, is causing panic selling. But of course, as Messrs Fisher, Graham, Lynch and Buffett would generally advise, now should be the time to buy shares, not sell them.

So where should investors focus their efforts? Well, there are lots of companies whose market values have declined in the past fortnight. Airlines and insurers have understandably suffered, although neither sector is a happy hunting ground for long-term "franchise" investors. But the media sector, another stock market casualty of late, certainly is.

Media

Media shares have been falling all year. Fears of an impending recession, and the likely impact it would have on advertising rates, has been the cause. And the share price falls have, of course, been exacerbated by recent events. However, the long-term "franchise" attractions to most, if not all, of the industry's constituents remain firmly intact.

Today's trading statement from Euromoney Institutional Investor (LSE: ERM), a publisher specialising in financial magazines, highlights the general picture facing media investors at the moments:

"It is too early to measure the impact of events in the United States on the Group's results for the next financial year but the first half results are expected to be affected. However, the Group does not expect the robustness and health of its businesses to be damaged in the longer term, and it believes that opportunities may arise from the recession in financial and other markets."

Essentially, media investors have to endure short-term pain for prospects of long-term gain. The trick is to gauge how much short-term pain, and how little long-term gain, is presently priced into the shares.

Take Qualiport media company Emap (LSE: EMA). Its shares presently stand on a historic free cash flow yield of around 9%. (Remember too that, unlike Euromoney, Emap has virtually no direct exposure to the US.) In my view, ratings such as these have lots of short term pain priced in, and are very attractive for long-term investors. 

Dilemmas

That said, Emap shares looked very attractive at the time I announced their recent top-up. The shares were 656p when the announcement was made, were 582p when they were bought, and are 485p now. Such has been the panic during the last fortnight!

So a dilemma for investors is this: Should you buy now, or hold off in anticipation for further distressed selling, at which point you could pick up your chosen shares with a further discount?

For the Qualiport at least, the answer remains simply: "buy great companies at attractive valuations". If those great companies become available at attractive valuations, the portfolio will make a purchase. However, as regular readers will no doubt be aware, there's rarely been a Qualiport purchase where the "attractive valuation" has not become even more "attractive" in time.

So, call it hedging our bets, wobbly knees or market speculation. But in these days of "time to buy", the Qualiport will invest only £1,600 of its £4,084 cash pile. At some point in the future, the balance (some £2,400) will be used to purchase either a sixth Qualiport share, or to top-up the portfolio's existing members.

Dealing

Within the next five trading days, the Qualiport will purchase the following:

* £800 of Carpetright (LSE: CPR) shares, and;
* £800 of Lloyds TSB (LSE: LLOY) shares.

Thursday's Qualiport will cover the reasoning behind these two purchases. The feature will also highlight those shares leading the race for the Qualiport's sixth berth.

Disclosure: The author owns shares in Carpetright