QUALIPORT
Beat The Market With A Watch List

By Maynard Paton (TMFMayn)
June 2, 2003

One of the best decisions an investor can make is to start using a watch list. By monitoring just a handful of shares, you get to improve your stock picking in two ways. First, you find yourself knowing more about the companies within your remit, thus building up a circle of competence and so on. Second, stock market noise and distractions are reduced, both of which tend to be costly.

The benefits of a watch list can be seen through the Qualiport's own performance. When the portfolio's watch list was first published in June 2001, the FTSE 100 stood at 5,948 and the portfolio was valued at £21,037. By Friday (May 30th), the blue chip index had subsequently tumbled 27.6% (with dividends reinvested), while the Qualiport had slipped only 5.3% (to £19,917).

Four steps

To recap, the Qualiport's four investing steps are:

1. Identify superior companies;
2. Determine an attractive valuation for those companies;
3. Wait for the stock market to offer the attractive valuations, and;
4. Buy the shares for the long term.

Every three months I update and publish the Qualiport's watch list -- the group of companies that I'd be happy for this Foolish long-term portfolio to own.

The list also includes 'buy prices', which I consider to represent attractive valuations for each share. Generally speaking, the 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 valuation can be found by clicking on the relevant 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.

Education

And note this: the watch list should not be seen simply as a collection of tips. The Qualiport is run for Education, not Recommendation. Remember also that this Foolish portfolio is NOT a real money portfolio and big mistakes have been made in the past. The ultimate message is simple: Do your own research and make your own decisions.

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

Company                   Market     Price      Buy     Price Fall
                          Value    (30/05/03)  Price     Required
                           (£m)       (p)       (p)        (%)

Imperial Tobacco          8,021     1,100       930        -15
Gallaher                  4,004       615       503        -18
Emap                      2,191       855       613        -28
Associated British Ports  1,198       365       384          
Johnston Press            1,135       401       365         -9
London Stock Exchange     1,014       342       331         -3
Carpetright                 466       620       597         -3
Halma                       450       124       115         -7
DFS Furniture               410       387       404        
Capital Radio               401       488       313        -36
Renishaw                    298       410       337        -18
Scottish Radio              252       763       393        -48
Games Workshop              163       547       377        -31
Ulster Television           144       273       238        -13
Metal Bulletin               68       125       104        -17

Only one change has been made since March's update: the introduction of Capital Radio (LSE: CAP). Both Capital and Scottish Radio (LSE: SRH) published their interim results last month, though the two sets of half-year figures have still to be reviewed on these pages. Still, we're not missing anything. Sparked by recent bid rumours, a cursory glance at the share prices of the two radio companies suggests no obvious value.

Meanwhile, two shares trade below the indicative buy prices: DFS Furniture (LSE: DFS) and Associated British Ports (LSE: ABP).

As I noted in April, DFS is a good company, but selling furniture is hardly the stuff of business franchises. There's plenty of innovative retail competition about and lots of management running must be done just to stay still. Of the fifteen shares on the list, DFS is the weakest in terms of the overall 'moat'.

ABP has a much better 'franchise'. Indeed, I'd say it, as well as either one of the tobacco firms and Ulster Television (LSE: UTV), would be my favourites for any portfolio 'switch'. So it was with some annoyance to watch ABP shares jump 5-6% today from the 365p price listed above. Oh well, there'll always be a next time.

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