QUALIPORT
Shares To Buy And Hold

By Maynard Paton (TMFMayn)
December 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 -- a list of companies that I'd be happy for this Foolish long-term portfolio to own. I've generally felt sixteen shares is an appropriate number to monitor. But as we'll see, there's now room for one addition.

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 below. (In addition, any queries on the valuations can be directed to the Qualiport message board, where I'll be happy to go into more detail.)

Of course, as time passes by, things change and the buy prices will inevitably alter. For instance, results from Carpetright (LSE: CPR) later this month will probably lead to a change in its 'fair value' level. However, the buy prices do give a rough guide as to how far some of the 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 value, here's the watch list:

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

Lloyds TSB               28,697      514      622          
Imperial Tobacco          7,022      963      915         -5
Gallaher                  3,798      585      500        -15
Emap                      2,033      794      661        -17
Associated British Ports  1,259      385      384           
Johnston Press            1,082      382      330        -14
London Stock Exchange       950      320      324          
Carpetright                 451      601      597         -1
Halma                       432      119      115         -3
DFS Furniture               394      372      391          
Renishaw                    253      348      337         -3
Scottish Radio              217      655      393        -40
Ulster Television           180      343      258        -25
Games Workshop              135      452      408        -10
Metal Bulletin               71      130      119         -9

Changes

Three changes have been made to September's update.

1. ABP for Clydeport

Following just a three-month spell on the watch list, Clydeport (LSE: CLY) has been replaced by fellow harbourmasters Associated British Ports (LSE: ABP). The reason? The Glasgow port operator recently agreed to a 440p per share cash offer from property group Peel Holdings (LSE: PEEL).

For Peel at least, the deal looks attractive. Paying a price to earnings ratio of 14 for such a steady business hardly looks demanding. In addition, Peel's boardroom will undoubtedly help maximise the potential of Clydeport's considerable property interests.

2. Halma for PizzaExpress

In line with the recent portfolio disposal, PizzaExpress (LSE: PIZ) has been removed from the watch list. And as a replacement, I'm pleased to welcome back Halma (LSE: HLMA).

To recap, when the Rule Shaker bought Halma earlier this year, the company was dropped from the Qualiport radar to avoid the possibility of duplicating (or conflicting) articles. But the Rule Shaker has now closed for business and Monday's Qualiport will catch up with the engineering firm.

3. Ultraframe out

Finally, out goes Ultraframe (LSE: UTF). Operating with almost no replacement business, the conservatory roofing specialist came dead last in this 'repeat purchase' study of the Qualiport possibles. Indeed, the company's annual results on Tuesday provided a few worrying statistics on this particular issue.

Ultraframe confirmed that UK conservatory installations were currently running at 200,000 per annum, with 85% of the addressable domestic market (10.2m properties) still to go for. If you believe 30% of suitable UK properties will ultimately have a conservatory, then Ultraframe could effectively see its core profit-generator run dry within ten years.

Will Ultraframe's 30% operating margins come under pressure as less affluent homeowners are targeted for conservatories? Was the £90m purchase of US business Four Seasons a sign that growth at home may be slowing? Although the latest results continued to highlight impressive accounts, I believe the story will be very different a few years down the line.

Trading Update

Within the next five trading days, the Qualiport will:

* Sell approximately £1,500-worth of shares in Carpetright, and;
* Reinvest the proceeds, plus the portfolio's £2,600 cash pile, in the London Stock Exchange (LSE: LSE).

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