QUALIPORT
Sixteen Shares For A Quality Portfolio

By Maynard Paton (TMFMayn)
September 5, 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 the stock 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 sixteen companies that I'd be happy to see within this Foolish long-term portfolio. At present, I feel the present group of shares contains an appropriate number to monitor. As we'll see in a minute, newcomers to the list are substitutions rather than additions.

The list also includes 'buy prices' which I consider to represent attractive valuations for each share. Generally speaking, these entry prices are based on each company's historic 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. Indeed, provisional buy prices have been set for Metal Bulletin (LSE: MTLB), Clydeport (LSE: CLY), Gallaher (LSE: GLH), PizzaExpress (LSE: PIZ) and Ulster Television (LSE: UTV), as their late August/early September results have yet to be reviewed on these pages. However, the target prices do give a rough guide as to how far some shares have to fall before a purchase will be considered.

Education

But please note. The watch list should not be seen simply as a collection of tips. The Motley Fool's portfolios are run for "Education, not Recommendation". Remember also that the Foolish portfolios are NOT real money portfolios and big mistakes have been made in the past. The ultimate message is simple: Do your own research and make you own decisions.

So, in order of market size, here's the watch list:

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

Lloyds TSB            29,897       536      622        +16
Imperial Tobacco       7,846     1,076      849        -21
Gallaher               4,119       634      473        -25
Emap                   1,780       695      667         -4
London Stock Exchange  1,050       354      300        -15
Johnston Press           978       346      330         -5
Carpetright              480       626      597         -5
DFS Furniture            408       386      383         -1
PizzaExpress             296       413      503        +22
Renishaw                 288       395      337        -15
Ultraframe               227       234      289        +24
Ulster Television        197       375      235        -37
Scottish Radio           194       588      475        -19
Clydeport                176       421      352        -16
Games Workshop           128       427      408         -4
Metal Bulletin            78       143      111        -22

Changes

There have been two company substitutions since June. Out go Allied Domecq (LSE: ALLD) and SSL International (LSE: SSL) and in come Scottish Radio (LSE: SRH) and Clydeport (LSE: CLY). Why the change?

Basically, Allied and SSL were always on the watch list fringe. Both companies were initially proposed in early 2001 (here and here), a time when quality shares selling at attractive valuation were few and far between. At that time, it made some sense to consider one or two 'special situations'. But these days, with the portfolio fully invested and plenty of great companies around selling at cheap prices, there's no need to consider these marginal businesses.

To briefly recap, SSL is currently undergoing a substantial restructure and reorganisation. Its wide range of branded healthcare products should mean -- in theory -- the company eventually transforming into a great long-term business. However, theory is one thing, reality is another! There are no guarantees with the transformation and SSL's complex results have yet to show any business quality.

With Allied, the company's short record as a focused drinks business has yet to suggest a real quality operation in action. There are one or two financial signs that Allied is a better-than-average firm, but the jury's out on the company's acquisition strategy and the resultant shareholder rewards. Allied's financial record is also quite complicated.

Other maybes

Earlier this year, Electrocomponents (LSE: ECM) and Cadbury Schweppes (LSE: CBRY) were also reviewed. While both companies exhibit a handful of commendable characteristics, no decision was made at to whether the shares should join the watch list. And given the list above, umm... they've not made it.

Instead, the Qualiport has gone for the more attractive financials of Scottish Radio and Clydeport. Scottish Radio's cause was aided by the 'circle of competence' issue (Scottish Radio operates within the same industries as portfolio members Emap (LSE: EMA) and Johnston Press (LSE: JPR)), while Clydeport's acquisition-free history and demonstrable competitive advantage helped it gain watch list status. That said, the Qualiport will review the other listed port operators in future, so Clydeport's inclusion may not be permanent.

The author owns shares in Carpetright, DFS Furniture, Games Workshop, Johnston Press and PizzaExpress