QUALIPORT
Sixteen Shares For A Quality Portfolio

By Maynard Paton (TMFMayn)
June 6, 2002

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 a year of operating the watch list, I feel the present list of sixteen shares contains an appropriate number to monitor. As with the March replacement of Halma (LSE: HLMA) with DFS Furniture (LSE: DFS), newcomers to the list will now be substitutions 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     Recent     Buy     Difference
                      Value       Price    Price       (%)
                       (£m)        (p)      (p)       

Lloyds TSB            41,176       740      674         -9
Imperial Tobacco       8,459     1,160      849        -27
Allied Domecq          5,172       467      386        -17
Gallaher               4,178       643      473        -29
Emap                   2,253       880      667        -24
London Stock Exchange  1,396       470      322        -31
Johnston Press         1,061       376      292        -22
SSL International        742       393      345        -12
PizzaExpress             474       661      700         +6
Carpetright              478       637      590         -7
DFS Furniture            466       441      447         +1
Renishaw                 335       460      368        -20
Ultraframe               338       348      306        -12
Ulster Television        205       390      235        -40
Games Workshop           175       588      366        -38
Metal Bulletin           107       198      164        -17

Bye bye Latchways

In terms of companies on the list, there has been just one change since March's update -- Gallaher (LSE: GLH) replacing Latchways (LSE: LTC). The merits of tobacco firm Gallaher can be found here. But why get rid of Latchways?

First and foremost, Latchways remains a decent small cap company with a niche in safety equipment. However, when compared to the other fifteen companies, the company is put in shade somewhat.

For starters, lumpy contracts will soon see Latchways reporting a substantial drop in full-year profits. That's not a problem in itself, but a recent postponement (or loss) of orders suggests Latchways' safety products aren't the recession-proof 'must have' items I'd first thought. That oversight leads on to another important point: Latchways' industry is not the most visible for the ordinary private investor. Then there's the one-off nature of the products themselves. Once installed, there's generally little need for replacement business afterwards, which perhaps leads to more operating unpredictability.

Furthermore, there's the management angle. Judging the sensitivity of each watch list business to management talent and tough economic conditions, Latchways (LSE: LTC) probably has the greatest worry for boardroom inexperience. Before joining the firm in 1995 (after the last recession), Managing Director David Hearson had a long spell at IBM (NYSE: IBM), a company not exactly renowned for selling safety equipment.

All things considered, Latchways was probably the weakest of the watch list companies on a long-term basis.

Price updates

Apart from the introduction of Gallaher, the other watch list changes solely concern a bevy of buy price alterations. Following various items of news published during the past three months, buy prices have been re-evaluated for Imperial Tobacco (LSE: IMT), Allied Domecq (LSE: ALLD), Emap (LSE: EMA), London Stock Exchange (LSE: LSE), Johnston Press (LSE: JPR), SSL International (LSE: SSL), Ultraframe (LSE: UTF), Ulster Television (LSE: UTV) and Metal Bulletin (LSE: MTLB).

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