QUALIPORT
Quality Bargains No More

By Maynard Paton (TMFMayn)
September 1, 2003

Where have all the bargains gone? That's the question the Qualiport is now asking. For the first time since December 2001, the portfolio's watch list offers no attractively priced shares.

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

1. Identify superior companies;
2. Determine attractive valuations 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, the Qualiport's watch list -- detailing the companies this Foolish portfolio is happy to own -- is updated. The list includes 'buy prices', which (hopefully) 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. Of course, as time passes by, things change and the buy prices will inevitably alter. Any queries on the watch list companies or valuations can be directed to the Qualiport message board.

Education

But please note: the watch list should not be seen 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    (29/08/03)  Price     Required
                           (£m)       (p)       (p)        (%)

Imperial Tobacco          7,205       988       927         -6
Gallaher                  3,629       557       502        -10
Emap                      2,189       855       613        -28
Associated British Ports  1,336       407       384         -6
Johnston Press            1,315       464       377        -19
London Stock Exchange     1,031       347       331         -5
Carpetright                 546       756       627        -17
Halma                       538       147       116        -21
Capital Radio               461       558       287        -49
DFS Furniture               437       410       404         -1
Renishaw                    381       524       352        -33
Rotork                      310       363       290        -20
Scottish Radio              272       820       484        -41
Games Workshop              221       735       467        -36
Ulster Television           166       316       238        -25
Metal Bulletin               99       182       104        -43

Not a cheap share in sight.

The only company change since the previous watch list update has been the inclusion of Rotork (LSE: ROR). Meanwhile, Johnston Press (LSE: JPR), Carpetright (LSE: CPR), Halma (LSE: HLMA), Capital Radio (LSE: CAP), Renishaw (LSE: RSW), Scottish Radio (LSE: SRH), Games Workshop (LSE: GAW) and Metal Bulletin (LSE: MTLB) have all issued results in the last three months or so, though the figures from the latter have yet to be reviewed on these pages. In fact, there's the possibility of Metal Bulletin being replaced on the list by fellow media group Taylor & Francis (LSE: TFG) in the future.

Dilemma

The current lack of attractively priced shares presents a dilemma for investors sitting on cash. Do they now 'pay up' for the prospect of a long-term earnings recovery, or remain on the sidelines and risk getting left behind should company profits take off?

You see, the market is forward looking and will, at some point, correctly anticipate a recovery in corporate earnings well before they're actually generated. Watch list companies such as Capital Radio and Renishaw, for example, have all suffered significant profit declines of late, though their current ratings all indicate a revival is imminent.

Of course, share price rallies have occurred many times before during this bear market, only to disappoint the 'suckers' drawn in. However, the gains witnessed since the market's mid-March low could be just the start of things to come. Nobody really knows.

Thankfully, the Qualiport does not have this worry. The portfolio is already fully invested, having loaded up on Johnston Press and Emap (LSE: EMA) during the market panic of September 2001, and London Stock Exchange (LSE: LSE) and Halma during the gloomy days of late 2002/early 2003. All in all, the best time to buy individual shares is when the market isn't expecting any sort of profit upturn, yet the quality of the companies involved makes an eventual recovery as near a certainty as possible.

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