My team tell me that this year’s combination of Easter and Anzac Day has produced a once-in-a-lifetime succession of public holidays. I have encouraged them to use the time wisely – practicing Value.able intrinsic value calculations. In addition to spending precious time with family and friends, I encourage you to do the same.
We have an extraordinarily generous community of Value.able Graduates here at the blog and on my Facebook page. Special thanks to Ashley, Kent B, Lloyd, Rob, Matt R, Steve, Andrew, Gavin, Ken, William (Bill), Greg, John M, Ron, Joab (whom we will miss dearly – please keep in touch), Jonesy, Brad, Ann, O’Reilly, James, Trav, Omar, Michael, Costas, Emily and Anthony. If I have left anyone out please let me know. Thank you for sharing your wisdom with our community! I am sure there are many others who are delighted to help recent Graduates.
Before I reveal your Easter homework, here are a couple of links you may find helpful:
Webinar – I guide you, step-by-step, through a valuation
Now to the homework…
I began with 1847 businesses and removed the 1168 that didn’t make any money last year (put $0 into the Value.able formula and you will get $0 out). That cut out 63 per cent of the Australian market… a useful first filter.
Then I applied the following criteria;
1) ROE > 20 per cent: (Chapter 6 – The ABC of Return on Equity)
2) Debt/Equity Ratio < 50 per cent: (Chapter 8 – Debt Is Not Always Good)
And then I refined the list further as follows;
3) 2011 forecast Earnings and Dividends are available: (Chapter 5 – Pick Extraordinary Prospects)
4) Must achieve one of the following Montgomery Quality Rating (MQR) – A1, A2, A3, B1, B2, B3: (Part Two – Identifying Extraordinary Businesses)
That left 255 stocks as the subject of your holiday homework. Using my discretion, I reduced the list to 14: The Reject Shop (ASX:TRS/MQR:A2), West Australian Newspapers (ASX:WAN/MQR:A2), Computershare (ASX:CPU/MQR:A2), Mermaid Marine (ASX:MRM/MQR:A3), Flexigroup Limited (ASX:FXL/MQR:A3), Cedar Woods Properties (ASX:CWP/MQR:A3), SAI Global Limited (ASX:SAI/MQR:B2), Fortescue Metals Group (ASX:FMG/ MQR:B2), Coca-Cola Amatil Limited (ASX:ASX:CCL/ MQR:B2), Retail Food Group (ASX:RFG/ MQR:B3), Telstra (ASX:TLS/ MQR:B3), McMillian Shakesphere (ASX:MMS/ MQR:B3), Bradken Limited (ASX:BKN/ MQR:B3) and Aristocrat Leisure Limited (ASX:ALL/ MQR:B3).
This homework is not about finding cheap stocks – it is about understanding businesses, return on equity, debt, cashflow and identifying extraordinary prospects. Effort calculating intrinsic value should only be exerted once you’re satisfied the business is extraordinary.
If you are keep to improve your investing with some useful examples, your holiday homework is as follows:
1. Download the 2011 Easter holiday homework worksheet – click here.
3. Then answer the following questions and perform the following tasks:
A. Of the 14 companies, list those demonstrating a rising value over the next twelve months.
B. The stocks of which companies, if any, are offering a margin of safety?
Important things to note:
- For consistency, use 10% Required Return
- 2011 Forecast Earnings Per Share and Dividends Per Share numbers are included in the Easter holiday homework spreadsheet. Use these numbers.
- You will have to get the 2010 ending equity (which is also the 2011 Beginning equity – from the annual reports)
If you need some guidance about how to calculate future valuations you can also read this post.
For those seeking a real challenge, re-read Value.able Chapter 9 on Cashflow (from page 152) and analyse the cashflow of each company using the balance sheet method. Click here to download the Cash Flow homework worksheet. At Montgomery Investment Management we only invest in businesses with strong cash flow. I will produce the cash flow analysis for The Reject Shop (TRS), Retail Food Group (RFG) and Aristocrat Leisure (ALL) after Easter.
My team and I wish you a happy Easter. I really do hope you have an enjoyable and rewarding break and that you enjoy the tasks I have set for you. I look forward to reviewing your results after the break.