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TV this week Roger?

Investing Education | Comments (66)

TV this week Roger?

Yes! Bridie Barry, Peter Switzer and Kim Slater have invited me to appear on three shows tomorrow (Thursday) night on the Sky Business Channel.

First at 6.30pm is Market Moves with Bridie Barry.

Then at 7pm Peter Switzer and I have something very special planned. Our mission? To create the Switzer Montgomery Portfolio. Only businesses that pass the Montgomery Intrinsic Value and Quality Rating and Switzer Scaredy Cat Wise Investor Test will be admitted. This is one not to be missed.

And I will finish off the night answering your questions on Your Money Your Call. The number at the studio is 1300 303 435 (lines open at 8pm) or email your questions prior to the show to yourmoney@skynews.com.au.

Upcoming appearances are posted on the Talks page here at my blog and also on Facebook. If you miss any of the shows, I publish the highlights to my YouTube channel shortly after.

Posted by Roger Montgomery, 22 September 2010.

If you missed my appearance on Switer TV last week, here are the highlights.

Part I: How do Roger Montgomery and Peter Switzer select stocks for the Switzer Montgomery portfolio?

Part II: What stocks make it into the Peter Switzer Roger Montgomery portfolio?

INVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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66 Comments

  1. Duncan
    :

    Hi Roger or anyone who can help.

    Monadelphous Valuation.
    i’m finding it difficult. i have
    current iv of $13.40,
    2011 $15.26
    2012 $16.23
    2013 $14.38

    this is done on a RR 10%
    ROE a constant 57.5% on the tables.

    current equity per share of $1.67 rising to
    $1.82 , $1.977, $2.06

    what’s is your valuation? why is it going done in 2013 what am i doing wrong if you disagree?

    thanks loads

    Duncan

    • Roger Montgomery
      :

      Hi Duncan,

      My preference is to post lists of my valuations in one go but I will make an exception and give you my numbers. I get $15.10, $15.90 and yes, another rise in 2013 based on 54%, 52% and 53%. I am not sure why yours declines. If your equity is rising and the payout ratio and ROE you are using remains the same, it shouldn’t decline. You will have to check your spreadsheet for changes in your formula or perhaps its referencing the wrong cell. Hope that my 2 cents helps. Seek and take personal professional advice.

  2. Brad
    :

    v. true Lloyd..

    Buffett once wrote: “In looking for someone to hire, you look for three qualities: honesty, intelligence and energy. But the most important is honesty because if they don’t have that, the other two qualities, intelligence and energy are going to kill you!”

  4. James
    :

    Hi Roger,

    I was wondering your opinion on FSA – ROE is good, 0% payout and will benefit from higher interest rates (they are a debt provider to individuals and businesses)

  5. Ken Milhinch
    :

    Roger,

    I assume you have not given us a look at all of your A1 & A2 companies ? I have a system of evaluation, the highest scores from which seem to mostly line up with your A1’s & A2’s. That being the case, I wonder if these are in your list.

    AGO
    ALF
    ANG
    BHP
    BPT
    FFI
    IBC
    IFL
    KOV
    MRE
    RCG
    RMD
    SWL
    TSM

    Regards, Ken

    • Roger Montgomery
      :

      I will have to check those out Ken. I went through the first three and got a B1, A3 and C3. Doesn’t sound right. Rather than trying to crack the nut and reinvent what has already been invented, add some value instead. What industries do you know well? What line of work are you in and what can you tell us about the competitors in that space? Who is the best, the worst and the biggest possible threat?

      • Ken Milhinch
        :

        Roger,

        My business is retirement, but I worked the majority of my life in retail. The last 12 years as the National Inventory Manager for Coles supermarkets. I was managing about $12B per year in that role, but now I am just managing my own money, and it’s not as easy I must say.

        My view of retail in Australia is that Woolworths do almost all aspects well, and stand alone as the very best retailer. David Jones are good and The Reject Shop has the runs on the board but I would never consider investment in Wesfarmers, Myer, Just Jeans (Premier Inv) , Noni B, Kathmandu, Harvey Norman, Nick Scali, Fantastic or Specialty Fashion Group (Millers).

        The two that have me a little puzzled are Oroton and Cash Converters. Oroton because I would have regarded their brand as old fashioned and the risk of knock-offs potentially damaging to the Ralph Lauren brand, but they seem to be going great guns. Funny, some years ago I bought a couple of genuine Ralph Lauren shirts and then went to Taiwan to live where I bought a few knock-offs. The knock-offs lasted a couple of years longer than the genuine ones !

        Cash Converters, I believe, has the potential to become a very special business, as they become more a shopfront lender as distinct from a pawn shop. Time will tell, and I won’t be risking any of my funds in it, but I will watch their growth with interest.

        I don’t see Wesfarmers posing any threat to Woolworths in the forseeable future. When the takeover of Coles was first mooted, Wesfarmers were trumpeting what good retailers they were, based upon the success of Bunnings. I pointed out in a letter to Richard Goyder that as they had bought out all the competition, they were essentially competing in a one horse race so they should be careful of self congratulation. I then proceeded to tell him some of the things that I thought were wrong with Bunnings. Their CEO made contact and arranged a meeting to discuss my points, but at the last minute decided an overseas trip was more important and cancelled.
        In any event, I can tell you that the hordes of Poms they have brought in to manage Coles have succeeded in lowering the staff morale, increasing staff turnover, increasing the inventories and producing very little in the way of improvements. In the meantime, Woolworths & Loewes are at the door with a very big gun. I wish them well.

        Regards, Ken

    • Ashley Little
      :

      Ken that is some fantastic insights

      Keep up the good work

      Your comments regarding the staff moral at coles is very accurate from the information i have received.

      It is funny to watch what happens when a stock is popular though. A little while ago when WES and WOW released their quarterly sales figures a family member came to me and said I must be wrong about WES as the are now performing so much better than WOW.

      I asked the family member why he thought this was the case and the family member replied that the press said so.

      We sat down with the two press reseases and compared the 2 preformances and it was apparent that WOW was at least equal if not slightly better than WES.

      You would not have got that immpresion if you had just listened to the press.

      Thanks again Ken

    • Lloyd Taylor
      :

      In the case of Enron they were 5000% good which is why Andrew Fastow is doing time. I think Munger was speaking of accounts that are compliance with US GAAP, rather than falsified accounts as there is no protection against criminal management. That’s why my first investment filter is one of business leadership integrity.

  7. Andrew
    :

    Hi Roger

    I sent an email into YM, YC but unfortunately none were answered. It was about Seymour Whyte LTD. Just wondered about your IV for this company. Using FY10 figures i calculate an IV of $2.25. Even using a 35% ROE which is 6% lower than reported ROE i get a value of $1.82. It’s had a bit of a run since i bought but still at a good discount to even my conservative IV.

    • Roger Montgomery
      :

      Hi Andrew,

      I am sorry you haven’t had your questions answered on air. As an invited guest, I don’t have any involvement in the production of the show, so I can’t say why that has been the case. Regarding SWL (Seymour Whyte) I get $2.10. Can you identify a competitive advantage that is sustainable. I don’t, based on present estimates, get any rapid growth in intrinsic value after 2011 however. The current discount however is worth investigating.

      • Andrew
        :

        Thanks Roger.

        Not having any real competitive advantage was a concern for me also. Living in Brisbane though and seeing the number of infrastructure projects in the pipeline for the future eased these concerns. They have continued to pick up new work and the growth prospects by moving into northern NSW were enough to get me over the line and believe IV for next couple of years should be on the increase.

        Sorry if it appeared as though i was blaming you for not getting to the question. I watch YM, YC often enough to know not everyone gets answered and it’s not the panelists who decide which questions to take. In my opinion the show would be more interesting and relevant to most investors if you did get to decide.

        Thanks
        Andrew

    • Ken Milhinch
      :

      Andrew,

      I get an IV for 2010 of $2.87, probably because I allowed for the $1.4M one-off listing costs, which brings the NPAT figure up to $12.91M, which in turn gives me an ROE of 45%. In any event, they are trading at a discount and I have been happy to buy some recently. I believe one of the competitive advantages they have is their prequalification for government work, which tends to flow fairly regularly. They are an “old school”, trusted company in government circles and that counts for a lot.

      Regards, Ken

  8. Matt
    :

    Hi,

    I’m curious if when selecting a company to buy shares in, should I contact the company and generally, what questions should I be asking (or perhaps, they can answer).

    thanks, Matt

    • Roger Montgomery
      :

      Hi Matt,

      It appears you are very new to investing in the stock market. Generally a listed company cannot promote its own shares. You need to speak to a stock broker. Before that, join the Australian Investors Association or Australian Shareholders Association and attend some of the local seminars held by them and speak to other members. You will also find free beginning material on the ASX website.

  9. Damian
    :

    Roger,

    I have some doubts regarding your approach to dividends. I totally understand your point about it being better for a company to retain earnings if it can generate a high ROE. However, my concerns about a company that pays no dividends or low dividends are :
    1) If you have sold no shares, you only have profits on paper. A company might have a few good years, then one bad result can smash the share price. The opportunity cost of being in these shares is then high.
    2) You mentioned that if you need income, you can sell some shares. What about if the market goes down? (eg. the GFC). Even quality comanies had their share price hit, so if you’re in the shares, you can’t sell. The share price should eventually come back, but you may be waiting a long time.
    3) In the GFC, the share prices dropped dramatically, but the dividends dropped much less.
    4) Dividends are real money in your bank account that you can immediately use, capital gains exist only when you sell.
    I’m not trying to contradict you, but I am very wary about investing in companies that pay no dividends.

    • Roger Montgomery
      :

      Hi Damian,

      They are all excellent points and precisely the reasons why 1) Australian investors quite rightly demand their dividends, and 2) companies that cannot reinvest at high rates of ROE should return all their profits as dividends (those profits that are not inhibited). Regarding the point that shares can go down and selling shares at lower prices is an adverse outcome; I 100% agree with you and thats why I have always said a) invest long term and b) “provided you are not in too much of a hurry, the approach will work out ok for you.” I concede that prices can fall.

      Let me make this final point: I really like receiving my dividends too. In the book (and here again) I emphasise that the aim is not to find a business that pays no dividends. The aim is to find businesses that generate very high rates of return on equity. If a business pays dividends, its intrinsic value is less than the same business that doesn’t and so you must pay a lower price for it. Thats all.

      And Damian,

      Please don’t ever worry about disagreeing. Thats what make the market!

  10. Matt
    :

    Roger,

    Really enjoyed those. Keep up the good work. I note SXE is in trading halt. A big contract could be just what it needs to climb up from A3.

    Look forward to your next session in Melbourne.

    Matt

  11. baden
    :

    thanks for the book roger, I’m working my way through it , makes a lot of sense. I’m fast approaching retirement age and have decided to take a small amount of money $20000-00 and see what I can do with it over the next 2 years mate, so I’m looking at perhaps rpdata hansen dws ezl to make a dollar on , what do you think….I just cant get good financial advice as most are commision based, I know you dont like giving advice but what do you think would be a good portfolio say 5 stocks , ….Baden

    • Roger Montgomery
      :

      Hi Baden,

      Even with an AFSL I am not going to offer you any advice here. If you are going it alone you need to do a lot of research. Start with the aim of knowing enough about each company that you would be content to own all of it. Proper due diligence is what I am referring to. Experience only allows you to speed up the process rather than take short cuts. Of the companies you have nominated only RPData has any borrowings (a good start) and all have reasonable rates of return on their equity. You will need to understand the drivers of revenue and profits, their operating leverage and asset utilisation and so forth. Most importantly, you need to satisfy yourself that they have sustainable competitive advantages.

      Note that Buffett recently sold down his stake in Moody’s stating that they had lost some of their competitive advantage. In June this year, Buffett spoke at the hearing of the Financial Crisis Inquiry Commission and said in giving AAA ratings to faulty mortgage-backed bonds, Moody’s Corp had simply not seen the GFC coming. Most recently he’s been selling down Moody’s Corp; Buffett said that Moody’s and competitor Standard & Poor’s previously benefited from the fact that borrowers had little choice except to go to the firms for ratings, giving them the power to raise prices (a truly valuable competitive advantage). Their dominance is now threatened. According to Bloomberg, “the U.S. Senate in May approved a plan to allow regulators, instead of bond issuers, to choose who rates asset-backed securities after investors said the ratings companies inflated assessments of mortgage bonds because they were paid by Wall Street firms selling the debt. A panel, overseen by the SEC, would assign a credit-ratings company to evaluate an offering”.

  12. deb
    :

    Hi Roger,

    I have a beginner question. Quite often I see comment on “seeking professional advice”. I’ve been assuming this to mean an accountant, but in what terms exactly? i.e. are the company’s financials sound? review or audit of statements? it’s value?

    or perhaps you mean a stock broking firm, that offers guidance/advice?

    thanks, Deb

    • Ashley Little
      :

      Hi deb,

      I am an Accountant and most just don’t get this ROE investing,

      Mosy accountants are great at saving you tax but know nil about growing your wealth.

      Take it from me – There is a chasm of difference between paying less tax and accumulating wealth. In fact I have seen some tax savings measures (maybe alot more than some) be very wealth dilutive

    • Roger Montgomery
      :

      Hi Brad,

      I am working on a way to deliver that in an easily digestible format for everyone. Far too many people in the finance industry without the originality to come up with it themselves. Do you need those numbers for Oroton?

      • Brad
        :

        Thanks Roger

        Yes, good guess re Oroton

        Amazing business, requires little capital to run the business and grow. I went with a ROE of 80%, RR of 10% and payout ratio of 82.5%. My guess is a value around $9.50.

        I note your comments about the finance industry and originality or lack of in it.

        Most of The industry is obsessed with price and price direction. I guess that, in part creates the opportunities.

        Your work in your book and the media helps spread the word but not everyone will be converted.

      • Roger Montgomery
        :

        As I say in the book Luke,

        The model is a straight line model and so produces valuations that are arguably high in some circumstances for very high ROE companies. I get $9.20 for ORL. But that shouldn’t matter. Remember we want to buy at very big discounts.

      • Brock
        :

        Just to clarify Roger, the review article which had a few IV’s posted had F2011 ORL at $9.70, what has caused such a change so quickly?

        Im still trying to graduate!

      • Roger Montgomery
        :

        Hi Brock,

        Way back I discussed the fact that I use a two models. One based on actual numbers and one based on the recent performance continuing. That would explain the difference. But each of the numbers can change based on fresh information coming to light. Upgrades, downgrades and company guidance will alter the number.

  14. Michael
    :

    Hi Roger,

    Great to see you on Sky last night. Please ask the producers to bring back Bridie and Brooke. No offence to the new hosts, but they are much more suited to being guests than hosting.

    Regards
    Michael

    • Greg Mc
      :

      Peter Switzer himself started on the Business channel as a guest and grew into his current role. I imagine that it is a lot different leading the interview than just answering the questions. I don’t mind seeing Brooke or Bridie instead of the blokes mind you.

  15. Chris
    :

    Hi Roger,

    Watched all three shows last night and thought they were fantastic. Its amazing how your simple consistant message manages to baffle even the most experienced market commentators.

    I amust admitt that although Peter Switzer said he had read your book, no-one who has read this book would comment that they will write a “for Dummies” edition, nor would have requested stocks paying “high dividends” as the basis for a quality value investment. I was dissapointed that he only gave you about 30 seconds to menttion what would have been the real Mongtomery Value portfolio.

    Well done & Thankyou.

    Cheers

    Chris

    • Roger Montgomery
      :

      Hi Chris,

      Peter’s audience write to him and do ask him questions that quite rightly he tries to answer by asking me in the same language they use. And while its sad, he does get the odd person who encourages him to be cynical towards the value investing approach. By the way, I thought he did say he hasn’t read all of my book yet. Thanks for the feedback and encouragement Chris.

      • Craig
        :

        Hi Roger,

        To me, your message is delivered so simply, clearly and consistently, that if a pundit does not accept the principles of value investing in a relatively short period of time, then they likely never will. And that is fine – we don’t want the whole world adopting it. Personally, I also get light entertainment out of your banter with Peter. Good stuff.

        Regards,
        Craig.

  16. Grant
    :

    Interesting to see forge adding roughly $66m to its order book. I know a few people were concerned about its FY11 book only equalling FY10..

  17. Ken Milhinch
    :

    Roger,

    Re: MOC Mortgage Choice

    I was alarmed to hear you say that MOC’s valuation was a dollar odd. I have it at $3.59 using a 10% RR, but even if I crank that up to 14% it’s still $2.16. (All of the others you quoted were within a few cents of what I had, which was very reassuring.)

    I have just rechecked my numbers and I really can’t understand why we are so different. Can you please help ?

    TY Equity $77.28
    LY Equity $66.40
    NPAT $23.48
    ROE 32.68%
    Divs $13.1
    Shares 118.44
    RR 10 % IV = $3.59

  18. Lloyd Taylor
    :

    Roger,

    Subject: QR National and the Dead Elephant in the Room

    Great shows in which you exhibited a cool head.

    Your summary of the pending QR National IPO at the start of Your Money Your Call and the parallel discussion in the Eureka Report are on target, with one exception, that of Business Leadership which is the dead elephant in the room that no one seems willing to discuss. So I’ll raise the topic here.

    Management at QR National are some of the same people that arguably ran BHP onto the rocks in 1998. The problem that led to the disaster was that of the arrogant culture of the “Big Australian”. The culture led to massive errors in capital allocation in a capital intensive industry with disastrous consequences for shareholders that continued for a long time when.

    Fast forward to the QR National IPO advertising campaign. Notice the parallels in the advertising for the for the float with the “Big Australian” ethos of the nineties? And QR National is a very capital intensive business with massive structural and business cultural deficiencies that are the result of its existence to date as a Government owned sheltered workshop.

    The leadership ethos appears to be such that the “planets are aligned” for shareholder value destruction on yet another grand scale.

    Regards
    Lloyd

      • Lloyd Taylor
        :

        Roger,

        I picked up this Charlie Munger quote from another publication today “One thing about accounting, the liabilities are always 100% good.” The same may no be said for the valuation of assets. I strongly suspect that Charlie’s point and its corollary will be worth remembering when reviewing the QR National Balance sheet.

        Regards
        Lloyd

      • Roger Montgomery
        :

        Thanks Lloyd.

        When the prospectus is released, lets all have a go at its valuation. Lets make the blog, the place for everyone to come to find out whether QR National is indeed a great company.

    • Ashley Little
      :

      LLoyd as you know I just love your posts,

      Perhaps QR will recruit jennifer Hawkins to sure that all the retail investors are totally fleeced again

      • Roger Montgomery
        :

        Hi Ashley,

        I am sure anyone would be more attractive than a great big dirty coal train with the word BIG plastered on its side. Its whats inside the prospectus that counts.

  19. fred
    :

    Hi Roger,

    What happen to Bridie? My value on ERA is just under $8.00. Is that what you think?……..

    Thank’s for your thought’s

    Also regarding intrinsic value, I thought that I heard W.Buffet say a long time ago that intrinsic value didn’t work any more? I think it was Warren!

    Since we all like to follow Warren are we too not leaving our stuff to our kid’s?

    Warren is a good short term investor…….think about it!

  20. fred
    :

    Hi Roger,

    Using my method of pricing which of course come’s with help from value-able & other source’s . This may differ from your way but, you have to think for yourself in this world.

    These are not precise pricing,

    NWS; 17.00

    DWS; 2.00

    FGE; 4.50

    WOW; 20.00

    FWD; 9.00

    STU; over $1.00

    Roger, you would know if i would be close to the ball?

  21. James
    :

    Hi Roger,

    I was wondering whether you liked ANG (Austin Engineering)

    Low Payout, High ROE and seems undervalued at present.

    Recently named in Forbes as one of the best companies under $1Billion.

    Also; LYL looks undervalued also at present, however, Comsec’s forecasts in
    the future look bleak. If these forecasts are correct, will this change
    your rating for the company?

  22. Ashley Little
    :

    Hi Roger,

    Can’t wait, I am guessing it will be a pretty short list and WES & TLS won’t be on it

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