QUALIPORT
Quality Shares For A Long-Term Portfolio

By Maynard Paton (TMFMayn)
March 4, 2002

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.

Every three months, I update and publish the Qualiport's watch list. In a nutshell, the watch list comprises of companies that I'd be happy to see within this Foolish long-term portfolio. After nine months of running the watch list, I feel the present list of sixteen shares contains an appropriate number to monitor. As we'll see, newcomers to the list will now be replacements rather than additions.

The list also includes '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 are 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 size, here's the watch list:

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

Lloyds TSB            39,257       706      674         -4
Imperial Tobacco       4,922       945      750        -20
Allied Domecq          4,347       407      347        -15   
Emap                   1,757       683      638         -7 
London Stock Exchange  1,236       416      268        -35 
SSL International      1,014       537      350        -35 
Johnston Press           688       342      285        -17 
PizzaExpress             541       755      700         -7 
Carpetright              475       633      590         -7 
DFS Furniture            454       434      447         +3
Renishaw                 335       460      368        -20 
Ultraframe               287       295      250        -15 
Ulster Television        186       354      235        -34
Games Workshop           173       567      366        -35
Metal Bulletin           118       218      134        -39 
Latchways                 33       300      188        -37

In terms of companies on the list, there has been just one change since December's update -- DFS Furniture (LSE: DFS) replacing Halma (LSE: HLMA).

The reason for dropping Halma is straightforward: the Rule Shaker portfolio has also been attracted to the company's solid operating characteristics. Rather than duplicate (or produce conflicting) company reviews, my colleague TMFJimmyC will now take up sole coverage of the engineering business. (As an aside, Jimmy did tell me about Halma's suitability for the Qualiport in early 2000, when the share price was about half its present value...).

Apart from the introduction of DFS Furniture, the other watch list changes concern a handful of buy prices alterations. Following the publication of their results during the past three months, buy prices have been re-evaluated for Lloyds TSB (LSE: LLOY), PizzaExpress (LSE: PIZ), Carpetright (LSE: CPR), Ultraframe (LSE: UTF) and Renishaw (LSE: RSW).

Furthermore, Games Workshop (LSE: GAW) has also issued results since December, while Latchways (LSE: LTC) delivered a profit warning the other week. As their recent news has not been covered within the Qualiport pages, it's worth catching up on these two smaller companies now.

Games Workshop

Games Workshop issued a strong set of interim results in January. The wargaming firm revealed six-month sales jumping 21% to £51.6m and operating profits improving 24% to £6.1m. Earnings per share increased 29% to 12.5p, while the dividend payout rose 10% to 4.15p. The completion of the company's restructuring, turnover growth in all of the group's different geographical operations and the film Lord Of The Rings all helped to underpin "very good prospects" for Games Workshop.

But at 567p per share, Games Workshop offers a trailing twelve-month free cash flow yield of 4.4%. Although brokers are expecting 20% earnings growth during the year ending May 2003, there's no obvious value in the shares at the moment.

Latchways

Latchways issued a stark profit warning last month. Blaming cost pressures within the telecom sector for a delay in orders, the fall arrest safety firm admitted that forthcoming turnover and profits would be "significantly lower" than last year. However, just a fortnight later, Latchways announced that it had secured a contract to supply safety equipment for use on the Dutch electricity pylon network. Such contracts will, hopefully, be the first of many throughout Europe.

With near-term profits anybody's guess, it pays to take a 'long-term recovery view' at Latchways. A recovery to the group's 2001 profit peak in four years time, a maintained dividend and a price to earnings ratio of 15 in 2006 all combine to make an entry price of 188p appear suitable.

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