QUALIPORT
Sixteen Shares For A Long-Term Portfolio

By Maynard Paton (TMFMayn)
December 3, 2001

Carburton Street, London -- The four steps to successful long-term investing are:

1. Identify superior companies;
2. Determine an attractive valuation for those companies;
3. Wait for Mr Market to offer you the attractive valuations, and;
4. Buy the shares.

Back in June, I officially revived the Qualiport's watch list.  Essentially, it's a list of companies I'd be happy to see in this long-term portfolio. After six months of running the watch list, I feel the present list of sixteen companies contains a manageable number to monitor. I guess any newcomers to the list will be replacements, rather than additions.

To recap, I intend to publish an updated watch list every three months. And as September's review showed, I now include "buy prices" which I consider to represent attractive valuations for each company. Generally speaking, these entry prices are based on each company's prospective free cash flow being capitalised at around 7-8%. However, certain valuations were based on other methods. Details of each company's valuation can be found by clicking on the company's name within the table. (In addition, any queries on the valuations can be directed to the Qualiport message board, where I'll he happy to go into more detail.)

Of course, as time passes by, things change and the buy prices will inevitably alter. However, they do give a rough guide as to how far the shares currently have to fall before a purchase will be considered.

Education

But please note. The watch list should not be seen simply as a list of tips. The Motley Fool's portfolios are run for "Education, not Recommendation". Remember also that the Foolish portfolios are NOT real money portfolios.

So, in order of market values, here's the watch list.

Company               Market     Current    Buy     Price Fall     
                      Value       Price    Price     Required                         
                       (£m)        (p)      (p)         (%) 

Lloyds TSB            40,177       722      645        -11

 
Imperial Tobacco       4,323       830      750        -10
 
Allied Domecq          4,053       380      347         -9    
 
Emap                   1,906       746      638        -14 
 
London Stock Exchange  1,093       368      268        -27 
 
SSL International      1,071       567      350        -38 
 
Johnston Press           707       352      285        -19 
 
Halma                    608       169      127        -25 
 
PizzaExpress             585       819      666        -19 
 
Carpetright              442       591      590          0 
 
Renishaw                 326       449      294        -35 
 
Ultraframe               222       228      180        -21 
 
Games Workshop           170       558      332        -41 
 
Ulster Television        154       293      235        -20 
 
Metal Bulletin           103       190      134        -29 
 
Latchways                 31       283      240        -15 

Dilemma

Of the sixteen companies listed, three are due to report results in the next fortnight. Obviously there's a chance these results will have a material effect on their stated buy prices.

Company          Reporting Date            Qualiport Review

Ultraframe       4th December               6th December
Halma            4th December               10th December         
Carpetright      11th December              13th December

Indeed, it's worth reflecting on recent events at Ultraframe (LSE: UTF). Over the past few months, the conservatory roofing firm has presented something of an investment dilemma for the Qualiport.

During the summer, Ultraframe issued a profit warning and bought an American conservatory business for around £75m. While the profit warning was not that surprising, given Ultraframe's sensitivity to a stalling UK economy, the US purchase did send alarm bells ringing. At a stroke, Ultraframe's lovely £29m cash pile turned into borrowings of about £40m, with the company now generating 40% of group sales from the US as opposed to under 1% before the purchase.

I've written in the past about UK companies coming to grief in the US. Former managers of Emap (LSE: EMA) and Marks & Spencer (LSE: MKS) will tell you how aggressive ventures into the States will almost always result in a costly retreat. In short, I have real doubts over the near-term performance of Ultraframe's new US operation.

With that uncertainty in mind, I wrote the following within September's watch list review: "Using the company's own revised full-year profit forecast, I've pencilled in a buy price of 180p... However, I'm inclined to wait for the company's annual results (due early December) before making a firm investment decision."

Of course, every company has a price. When Bruce (TMFGoogly) highlighted the shares had fallen to 163p, the company had a forward price to earnings ratio of 7.6 and offered a prospective dividend yield of 6%. With the company still having a very attractive core business, did the 163p share price offset the risks in the US? Probably. Should the Qualiport have bought at 163p? Er...

Ultraframe's shares are now 228p. Tomorrow's results from the company should start to show whether the 163p share price really did offset the risks.

The author owns shares in Carpetright, Games Workshop, Johnston Press and Latchways