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Another strong result from small Co.

Another strong result from small Co.







We have been delighted with the reports coming out from the smaller industrial companies and note again the growing divergence in the performance of the XJO versus the XNJ (ASX 200 versus All Industrials). We attribute this to a declining enthusiasm for the ‘resource story’ and the fact that many of the industrial companies we like (and own, including MTU) are producing such fantastic results despite evidence of a terrible domestic economic backdrop.


Headline revenue was down 14% as a result of the reduction of unprofitable EDirect business activity.  Thats good.  Underlying revenue (excluding the zero margin Edirect business) rose 8% and the dividend was up 29%. Business cash flow was $17.5mln compared to reported profit of $16.7mln.   The impact on valuations should be positive again but ultimately will be determined by the returns generated on the $21.8mln paid for the two acquisitions made in the current half.

Since 2003 (the year before MTU listed) the company has increased profits by more than 91% per annum and is forecast to grow profits again to $36 mln in 2012.  To generate the increase in profits (of $27mln to 2011) $60 million has been raised and $30 million borrowed.  The return on incremental equity is about 50% suggesting the acquisitions made thus far have reflected an astute allocation of capital.  We’ll be keeping an eye on the debt but reckon a recovery in the local economy (as interest rates are lowered and hopefully passed on by the banks) will give MTU another boost.

According to one of our brokers who has a buy recommendation on the stock, the following stocks are at risk of reducing their dividends:  Examining for factors…”forecast earnings revisions, payout ratios, stock price stability and free operating cashflows, the companies that are most at risk of further dividend cuts are SWM, GWA, TTS, HVN, QBE and MYR. Those that have reduced dividends but continue to pose a risk include BBG, CSR, DJS, GFF, HIL, MQG, OST, PPT, PBG, PTM, TAH, and TEN.”

Not a recommendation of course. Seek and take personal professional advice before engaging in ANY securities transactions.

Posted by Roger Montgomery, Value.able author, Skaffold Chairman and Fund Manager, 27 February 2012.


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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  1. If you’ve been watching with dismay the slide in sales for both Matrix and Zicom over the past 9 months or so, you may find this piece of interest, from the Trellebog 2011 Interim (Year-End) report:

    “Sales were favorable during the fourth quarter of 2011, with the exception of the offshore oil/gas segment in Trelleborg Engineered Systems, where there was a significant year-on-year decline. The previously announced problems – production disruptions and extended lead times – in the offshore oil/gas segment had a distinctly negative impact on both sales and earnings. The production disruptions have been resolved since year-end and we have generally noticed a steady and clear stepwise improvement in orders received as well as sales, in addition to improved earnings within the segment.”

    Of course Trelleborg has a much broader range of sales channels than either of the local duo, so overall the effect isn’t as pronounced, but inside the report figures show just how much the relevant segment – Trelleborg Engineered Systems – was hit by the slump in sales in the offshore oil and gas space.


  2. Hi Roger and Everyone

    Roger, thank you for the article on MTU.

    Share prices diving last year, facilitated more opportunities to invest (particularly from September to December) in a number of quality companies with a competitive advantage and bright prospects, as you stated Roger for MTU, “producing such fantastic results despite evidence of a terrible domestic economic backdrop”.

    For those who invested in MTU, I think it’s a more skillful choice than other stocks when reflecting on MTU’s business is in the SME sector that has been encountering a higher degree of difficulty than other sectors, for productivity investment and growth by smaller cash flows or tighter lending conditions with interest rates not decreasing in line with mortgages and others.

    I viewed MTU on Skaffold last year and it undeniably depicted a worthwhile research in it. But I decided not to invest in it because of my reservations on the SME sector. How wrong I was.

    MTU is a classic example of an extraordinary company growing in times of subdued sediment and a very good example of the wide breadth of Value.able investing opportunities in extraordinary companies when a significant discount to IV is presented.

    Roger, thank you for Skaffold. It is a powerful tool.

    It’s design is excellent, user friendly, a timer saver using the various sort filters and evaluation tools and the graphs are exceptional.

    I think Skaffold is very good value when considering the above and Roger’s intellectual property – MQRs and Intrinsic Values.

    Before Skaffold,
    – To whittle down very good companies from less desirable ones for assessment was more time consuming using other sites that at times fell short of expectations.
    Whatever, no site I have tried and I highly doubt one exists that has the design, number of filtering parameters tools and quickness as Skaffold has.

    – We all may at times been able to recognise an A1 company simply by calculating ROE, ROCE, Debit/Equity Cash flow and some other ratios (Roger uses 35 ratios to calculate quality and performance), but after Roger generously stated at times his MQR for a company how often were we right? We may have been within the preferred investment grades, but if even we thought it was a B2, how often was it below prefered investment grade.
    As Roger has stated an A1 or other preferred investment grades doesn’t suggest it has a competitive advantage – and not forgetting the other four criteria that indentifies an extraordinary company. But even taking that into account, I personally feel more comfortable and confident now that I have access to his MQR’s on a daily basis including future and average intrinsic values that are updated when required.

    – After finally filtering came the arduous task calculating historical intrinsic values, for me and am sure for others, it was too time consuming and sometimes difficult. Sometimes I used the same required rate of return (risk) for each previous and current year for a guide only to assess rising or falling IVs (another prerequisite), inappropriately disregarding inflation and change of risk. The latter can occur for companies over the years, more often than not. Inflation can impact (for various reasons) more on some companies than others and not forgetting wealth destroying including for investors (inability to purchase the same and/or more in the future).

    Roger has stated Skaffold doesn’t provide everything, but as I have stated above it possesses many valuable advantages.

    Roger, you and your team should feel very proud of Skaffold.

    Back in late August and September my portfolio for this financial year had taken a heavy hit mainly through loses on TSM -22.6% and MCE -50.4% (Share price for both only) after an increase for the latter of 43% FY 11. There have many adverse blogs directed at Roger regarding MCE. My loss was entirely my fault and I submitted a blog back in December stating why. I won’t go into detail why again, because similar recent supportive blogs have been posted.

    I have been able to get my portfolio back into a positive, by taking advantage of Mr. Market’s bearish sediment that drove share prices down last year. I am not stating this for praise, just merely to highlight the opportunities available when this occurs. Some of my gains have been (SP only – excluding fees CGT etc)
    FLT 33%
    DCG 29%
    COH 26%
    ORL 24%
    JBH 14%

    I invested in COH after a large drop in share price post their recall, admittedly still above their intrinsic value at the time. I did state my reasons in the same blog on MCE why I went against conventional value investing, I won’t go into it again except to state I would do it again and the same for any other extraordinary company who has traditionally traded at a significant premium to IV, then all of a sudden it’s price significantly dropped – there is little change to their future prospects.

    I think I was lucky with JBH, probably my IV was too high and fortunately using caution to sell it just under the IV and about 5 weeks before they announced a down grade in forecast profits that I didn’t expect.

    The launch of Skaffold gave me more time and provided some helpful data to assess others. The three I have bought have been
    CCP 41%
    NWH 38%
    CCV 24%

    Without Skaffold, most probably I would have bought only one out of those three. I mention above Skaffold saves time and I feel more comfortable and confident having access to Roger’s intrinsic value and MQRs, btw this wasn’t brought on by my heavy losses with TSM and MCE.

    Roger of course would say seek your own professional advice, but to state what Buffet said to a question “I suppose mine and Charlie’s guesses are better than most. Using that same theme of line, I think Roger’s guesses are better than ours.

    Another adverse comment towards Roger has been not selecting stocks to hold for a long period of time. As he said recently, times have changed. My opinion it necessitates a careful approach and we have no influence on Mr. Market. For a couple examples
    – NWH, one of my stocks I still hold, has increased 43% this year = minus 7% to 2012’s average intrinsic value and only 5%, 15% MOS respectively to the actual forecast IV for 2012 and 2013. If it increases another 10%, let’s say this month, I would more than likely continue to use my cautious approach and sell it. This would mean I only held the stock for only around 4 months. Who in their right mind before buying it, would state this stock will increase at a rapid rate and will be able to sell it within 4 to 6 months?

    – When I bought COH I expected it would be for at least 12 months, however the share price rocketed up 16% in one day about two months after buying it.

    Thank you again Roger for Skaffold.

    Many thanks to all who have contributed to this, as someone once said, ongoing seminar site.

    I like take the opportunity to apologise for my lack of contribution. I rarely get time, but admittedly a few lines here and there would have been easily acheivable.

    Ron F

  3. Haven’t posted in a while but my level of comfort with recent posts has prompted me, so here I am diving into the deep end.. I will caveat this with, I don’t use skaffold so pls forgive some of the detail.

    Everyone agrees to ‘doing your own research’ but there seems to be alot of comment around looking at the quality rating and MOS, then deciding to go further.

    Without knowing what goes into this ‘quality rating’ apart from public financial data, how can it form part of any research and the ultimate investment decision?

    If something is an A4 and apparently not investment grade, how would you know? If a purchase is made with this as a factor, is the inverse true for the sell decision?

    Since MCE seems a popular talking point again.. MCE quickly (is 2 years fast or slow?) went from C2 to A1 to A4, by comparison I’m guessing WOW has been a consistent B1 to B2. Think about it, when MCE was an A1 who do you think was more likely to have a ‘liquidity event’ ?

    This post has been made under good intentions by asking for even more circumspection when evaluating a company.

    • My thoughts are that firstly if you are going to use MQR/SQR’s to help form your investing decisions then you need Skaffold. I think there are a lot of merit in these ratings especially if used properly as Roger’s performance will show.

      If i were using the SQR’s then i would be placing considerable weight on those that achieve good ratings consistently over the historical period. If the history of a company is seeing volatile rankings than i think it is probably likely to continue to do so as it indicates a volatile industry (such as MCE) or lack of any distinct competitive advantage. I know the SQR’s do not specifically measure competitive advantage however a consistent A1 ranking could infer one does in fact exist.

      If my memory serves me correct when seeing some Skaffold screenshots this program also tells you if currently the quality and performance measures are currently stable, improving or declining which means you should be able to potentially see changes coming.

      What you mention about people looking at the SQR and MOS then deciding to go further has been around on this blog for a fair while (probably since the first edition of Value.Able). My observations are there are two types of people on this blog, company first or valuation first. The valuation first people will look for a company that has a MOS then go further where as the company first will analyse the company and perform the valuation as the very last part of the analysis.

      I don’t use the SQR’s (i am also not on skaffold so don’t have access to them unless mentioned here) but have found them to be a helpful guide sometimes when i am looking at companies and whether i have missed some information or not. I don’t think they are as “black box” as people think and that it is quite easy to understand what they are measuring (especially as roger has told us many times). Yes we don’t know the specific ratios used to come up with them but we do know the overall strategy. In fact i have a work in progress where the results line up considerably well with SQR’s and i only use three ratios but what they do effectively measure is the performance of the company and how financially strong they are.

      I do agree with you however, the need to be diligent when evaluating a company is very important and i think you need to look at more than the SQR and MOS. Skaffold provides a great resource of information so hopefully those using it are taking advantage of it. The most important thing is the ability to understand what it is the company is in fact doing. If you don’t understand the business/industry than regardless of the SQR at the time you are not going to have the required knowledge to make informed and timely decisions.

    • Matt

      I agree wholeheartedly regarding the do your own research spiels; but by virtue of signing up for Skaffold or any other share analysis tools what you are essentially doing is “outsourcing” your research of companies and accepting the processes, inputs and investing biases of the architects of such investing tools. Before any of Roger’s disciples pounce on me this is not meant as criticism (I’m not bagging Skaffold and consider myself an independant thinking follower), I’m merely putting some thoughts out there for consideration.

      You can take people skydiving/ swimming with sharks and ask them to sign a waiver absolving you of responsibility and it’s their decision if something goes wrong but ultimately if something goes wrong they still jumped out of your plane/ boat, using your equipment etc after you advised them that they will be safe (and charging them for it) and they have more chance of dying in car crash than jumping out of a plane/ swimming with sharks (long bow analogy I know).

      If you are utilising a third party tool to filter/ examine/ advise etc on stocks/ information then surely you are guilty of short-cutting your own research and investing decisions? And by extension if you rely on this information to make investing decisions then do you consider yourself an independant thinking investor?

      I am sold 100% on ROE and value investing however there is no guarantee that share price will ever match our calcluated “intrinsic value” of a stock. I believe this is due to emotional/ psychological biases (we ALL have them) infiltrating thought processes when it comes to investment decisions.

      For example, if we were all of the value investing frame of mind, companies such as COH, MND, BKL would never trade if people only relied upon the correlation of share prices to intrinsic values. They always seem to be priced way over intrinsic values; in contrast plenty of dodgy companies trade well above their values as well. But the point being they all still trade at these prices well below or above a calculation of value.

      For these reasons and others the psychology of investors and the market at large cannot be ignored but must form part of an overall investing stategy. We as investors can buy any business we believe to be undervalued by the market and its participants but unless other investors eventually agree with us we won’t make a brass razoo. I know price “should” eventually follow value but that’s an assumption we are making, not a given.

      At every buy/ sell price point there is a buyer and seller that believes that they are buying/ selling at a fair value price. (notwithstanding external pressures on investment decisions; i.e margin calls, wife telling you you’re an idiot etc)

      Everyone visits sites such as this and others to compare their thoughts with like-minded (or contarian thinking) individuals and possibly broaden their circle of competancy and/or expand their education. However, I think plenty of people are kidding themselves if they wouldn’t admit that their interest in some businesses and consequently investment decisions wasn’t influenced by stocks that are talked up/ hyped and highlighted. I am guilty as charged your honour. Ask yourself the same question and be honest; keep your answer to yourself as ultimately you are the only person you need to answer to.

      I just think it’s a little dismissive and judgmental to say to people DYOR, make your own decisions etc when Matt has highlighted the interesting angle above.

      As a disclosure I bought and continue to hold MCE but only a small amount and bought at $4-$5 so am happy to ride the wave and I take 100% responibility for that decision. BTW I believe in the overall long-term story and if management can learn from the recent past can rally the business and wil reflect in the share price.

      Plenty of institutional investors were happy to jump in at $8.50 and I’d hazard a guess that they were privy to a little more information than us retail investors. I know Roger said that when the facts change so do his opinions/ stances but I can assure you that however many times Roger and other analysts spoke to and had contact with MCE management that is the exact amount more than I or plenty of others did.

      Isn’t that why people sign up for subscriptions to such analysts because they believe that they might have access to more insightful information (information is THE most important commodity when investing) and/ or they know something the rest of us might not.

      The problem being when people take lead from this information then congratulate themselves on their wonderful investing decisions on the upside but want to blame the information and absolve themsleves of their responsibility on the downside when things head south.

      Just some food for thought and happy investing/ learning.

      • Thanks Sean,

        I thought your comments “I am sold 100% on ROE and value investing however there is no guarantee that share price will ever match our calcluated “intrinsic value” of a stock” were very helpful. Thanks for sharing.

        Don’t forget “valuing a company is not the same as predicting its share price”.

      • Spot on with that last paragraph, Sean. Perhaps there’s a bit of psychological self-preservation at play there – “It wasn’t my fault that it went down….it wasn’t my dumb decision….it’s Roger’s fault because he mentioned it one day on YMYC”.

        By the way, Roger, this site is doing some annoying things at the moment, mainly going to the top of the page whenever I click anywhere on the page. For example, if I want to reply to someone’s post, it goes straight to the top of the page and I need to scroll down again to find it. I’m not sure whether that is at your end or mine but it isn’t happening with any other site I visit. Is anyone else finding that or it is just me?

    • David Sinclair

      Hi Matt,

      I agree that the quality rating can sometimes be misleading. The best time to buy a good business is often when it hits a short term problem, profits fall temporarily, and the market over-reacts. The temporary fall in profits, however, will likely also cause a temporary fall in the quality rating, so what do you do? Buy when the profits, quality rating, and price are all low, or refuse to buy until the business has an ‘investment grade’ quality rating, by which time the price has gone up again because it is obvious to everyone that the problems are over. And what about poor businesses that have a good year or two? Quality ratings sometimes need to be taken with a grain or two of salt.


      • There will always be ‘edge cases’ but there are always dangers in the tails. Woe be to he who ignores the scores and adds a grain or two of salt. We certainly don’t.

        A simple addition to your strategy using Skaffold is to look at the Quality and Performance score history Evaluate screen. You can see for every single listed company how variable the scores have been over a decade. If you have any questions, please send them to the Skaffold help team.

    • A few things:

      – That’s a great question Matt (comparing WOW and MCE). We may get more insight into how this particular sausage (the MQR system) is made. Then again we might not.

      – There is so much to learn in this caper. A recent investing lesson was provided by the GR Engineering result. When I reviewed my recent decision to buy – in light of the result – I looked at the profit margins in the mining services sector, something I hadn’t done prior. What a big mistake. The A1 of A1 businesses, Monodelphous, gets by not on stratospheric margins, but on high turnover. Had I been so informed a month or two back I would have assessed that the 20% margins in GNG’s most recent results were “probably” unsustainable, or due to one off factors. I also found Forge’s 8-12% margins useful as a guide. (Oh, and I decided to sell, and take a 6% loss, rather than hope those big margins returned).

      – The issue with Matrix (and Zicom for that matter) is what I would term the “quality of revenue”. Oil rigs and the boats that service them aren’t like bread and milk, so the products and services they require won’t walk out the door in the same volume month after month. Monitoring the demand for oil and gas related products just might be beyond my abilities. (Zicom hurts – I was loaded up on very cheap shares come February last year. When that half year report came out I thought I was home. Cruel investment world.)

      – My understanding is that the MQR system is about liquidity events. Risk of having to raise capital via equity or debt. (I’m sure there’s more to it, as its based on over 30 inputs). But it clearly doesn’t mean I can switch off my brain and not assess things like sustainable margins, cyclical revenue streams etc.

      – I’ve learnt a lot from this blog. Some good news, and some bad. Its amazing how the bad is so much more informative.

      – The investing landscape is well served by this blog, value investing in general, and Roger’s methodology. That it might not be infallible is no surprise, but I wouldn’t want the baby thrown out with the bathwater.

      • I strongly agree about the bad news usually being more informative. When I am in investing education mode I very much believe in the quote that Charlie Munger mentions a few times. I hope I get this right, “tell me where it is I am going to do, so that way I don’t go there”. It might not be 100% accurate but the message is the same.

        In investing I use an adaptation of this. “show me what a bad company looks like so that way I can avoid it at all costs”.

        I believe learning what to avoid is as important as learning what to be interested in. I have been spending a little bit of time recently reading about the big collapses (Enron, worldcom, lehmans, hih,etc) to learn how I can spot these things.

      • Munger likes to quote the wise peasant, ‘Tell me where I’m going to die so I won’t go there.’

  4. Hi Guys,

    Just a comment on MTU. In early December I had a look at a number of A1 companies and figured that for most of them I seemed to have missed the boat in terms of buying them at below intrinsic value. One company however, seemed to be languishing behind the others, MTU. I bought a small number of shares for 2.805, at the end of February they are trading at 3.44 a return of 22.64%. I am also about to receive my first dividend. Sometimes investing is all about the timing when buying or selling good companies.


    • I completley agree with you about the timing of the buy. That is probably the most important decision in investing once you have found a company you want to invest in. I have always told people just starting their investing journey that the money is made when you buy, not when you sell.

      Funny how everyone knows the term “buy low, sell high” but they seldom follow it and look at you like you a crazy when you are buying during something like the “GFC”. I guess that is still the hardest part of value investing, the psychological element, the ability to go against the crowd during these times where everyone is thinking that the rational thing is to get out now (where as to me it seems the most irrational thing to do, sell in panic because everyone else is in a panic and doing like wise), but i think i have gone off on a tangent so back to normal programming.

      There is part of me that feels that if a company is still a good company than it is worth holding even though their have been a short term hiccup that causes the price to languish for a bit.If it is a long term issue than the company is no longer still a good company so i would happily consider selling.

  5. Don’t post much but should post more often. Am a big fan of Warren Buffet and Roger :) Have learnt so much from their wisdom. Love their ideas as their investment philosophy makes sense to me and suitable to my temperament. Thank you Roger.

    Basically, I do most of the research myself by studying historical fundamentals. Most of the companies in my portfolio have been classified A1 and A2 by Roger during his interviews in the past which has been pleasing to know.

    The only thing I don’t hear Roger talk a lot about is economic moats (sustainable competitive advantage) which Buffet talks about a lot (It was Munger who taught Buffett about investing in wonderful businesses). Businesses which you can invest and be more than 90% sure will be here in 10years times still thriving keeping their competitors at bay.

    Roger not trying to criticise or anything but a lot of your post talk a lot about analyst forecasts for next 2 to 3 years thereby change in IV during that time, and I believe (might be wrong) your investment ratings (A1 to C5 something) puts a lot of emphasis on these forecasts.

    Given the choice of investing in a wonderful business with strong economic moat with not much growth expected by analysts say in near future 1-2 years or investing in business which is rapidly growing but hardly any competitive advantage which one would you put your money in? (Assume you can only invest in one). For me it would be former choice.

    • Hi Hiten,

      Thats been a point of note here at the blog. Very early on I emphasised the desire to hear more discussion about economic moats. We certainly spend a lot of time talking and thinking about it here at the office and agency risk as well.

      • On the topic of agency risk Roger, would you consider it to be a factor in companies where a member of management is also a large if not the largest shareholder in the company. I can think of a few examples in Australia and abroad.

        I am a bit torn as to how to think about that as on one hand they are more likely to run it like a private company with some small partners but also the counter arguement is that they would benefit from insuring that the company is run to the shareholders best interests as they are the biggest.

        At the end of the day if you are investing in these companies you are basically betting on the person in charge as they have all the power so i guess either way you need to make a big judgement on the skills of that person.

      • Whether a large shareholder or small, if they don’t understand capital allocation, they won’t be running it in the best interest of shareholders. I don’t see links between high levels of ownership and success. The link appears to be between transaction activity (particularly selling) and subsequent business performance.

    • Hi Hiten,

      In the early days of the blog there was a lot more discussion about this and Roger has a whole (quite good) chapter on it in his book. It is definitley something a few of us pay considerable attantion to, The existence of a competitive advantage is central to my philosophy and an area i am currently experimenting with.

      I know from my time here and listening to Rogers thoughts that he does place a considerable emphasis on it, in fact i recently found an ASX presentation print out from about 6-7 years ago that i atteneded and Roger gave where he laid out the framework for Micheal Porters “5 forces” analysis which is very much linked to competitive advantage.

      I also think that understanding the competitive advantage of a company will also play a strong part in understanding the competitive landscape (hence why the 5 forces is something i pay considerable attention to).

    • A brilliant post Hiten, I agree entirely. I am always amazed by how many contributors to this wonderful blog substitute Roger’s opinion for their own. This is an ‘A1,’ investment grade! This is a ‘C4,’ not investment grade! When in fact these ratings are based entirely on quantitative measures, not qualitative ones. So you can have a company with the most amazing financials, trading well below Roger’s present and future predicted intrinsic value, although with no real competitive advantage which would make a lousy investment.

      Roger has warned against this type of approach many times in the past, on this blog and also in his book although how many people listen or pay attention?

      The disclaimer to seek professional investment advice before making any decision is I suspect included primarily for legal reasons. I would love to see Roger put as a disclaimer at the start of any blog a disclaimer along the lines of ….

      ‘First research the company to see if it has honest and able management, a competitive advantage and a product or service in your opinion worth selling, only then is any calculation of value relevant. Also, always keep in mind the fallibility of analysts when making future predictions with regards to earnings as their historical results in this area have been less then brilliant.’

      • Thats a sensible disclaimer. The time take to write it or to even drag and drop it each time is one cost to consider and then familiarity will cause the readers eye to skim it and then ignore it.

      • Nick, no one would dispute your ‘research the company to see if it has honest and able management’, but how exactly do you do that? I suppose that a long record of success is the best guarantee in general, but you might want to invest in something more recent, and indeed have apparently good reasons for doing so. How exactly would you put the probity of management of a company to the test? What would lead you to smell a rat?

      • Two ways, and I’m sure there are many others. First look for any discrepancies between words and actions. Have management delivered on what they said they would in the past? Have their revenue and profit forecasts been accurate? Have they built profits organically or through acquisitions and have those acquisitions been a benefit or hindrance to the company? If the company has a short or no history on the ASX have a look at managements past positions and look at their careers there with the previous questions in mind (this is what I did with Vocus.)

        The best test and I got this from Phil Fisher’s book, has management been timely and open with shareholders in delivering bad news? Any management team will be willing and enthusiastic about telling shareholders good news although their openness in delivering bad news is a far better indicator of honesty and integrity. It is this last point which is my only reservation about Matrix.

    • Buffets holding period is a lot longer than Rogers – so the importance of an economic moat is more important to him. With Roger often buying and selling within 6 months, an economic moat is almost irrelevant to this style of investing.

      • Hi Michael,

        “With Roger often buying and selling within 6 months”. We had a little laugh about that one. In investing its best not to reach conclusions that are based on assumptions. Those assumptions may be incorrect.

      • If I owned 13% of AMEX, 8.8% of Coke and 1.1% of Walmart amongst his other main investment holdings i don’t think i would be selling much either.That is without getting into the companies that Berkshire owns outright.

        I think there is an arguement that various realities of Australian listed companies makes it very hard for companies to be hold forever companies but that is another discussion altogether.

        As for Roger’s holding period, i have no clue so can’t comment on that but i would be surprised if his investments are as active as some would believe and i think his core holdings (of which we don’t know) would be pretty stable or in fact get added to rather than sold.

  6. Hi Roger and everyone,
    Here is one to tantalise the tastebuds. Run your eyes over GRR. It is a stock which is rarely mentioned here, but has a history of growth, and based on current fundamentals is unbelievably cheap on intrinsic values. Their RoE out of their full year report today is 28.6, quite impressive these days. Yes, it is a mining stock, and yes the gloss seems to be coming off mining a bit of late, but at these valuations it looks too good to be true.

    Maybe one to highlight on the blog? Is it too good to be true?

    What does everyone else think?

    Disclaimer: I do own them but only recently bought them however based on their half year report, another Roger Montgomery value able inspired purchase.

    Seany Biel

  7. i would like to thank you for your feedback on lcm ,I have held this stock for 3 years i have received 5.5, 6.2 and 4.5 divedend over these years on a purchase price of 0.80cents , I cant complain about the yeild . Yes it has been a bit dissapointing on some results especialy second half 2011 which was flat .But what happened they employed extra personel to cope with increase in work ,but unfortunatley most of this work was in nth queensland and the floods created losses on there contracts .
    I really think they are on track now ,i tend to look further down the track , I say to myself is this company moving forwards or going backwards and after there last result i think forward.
    the funny thing at the time i bought lcm i bought fge for 90 cents .thats why i like the market you win some and lose some,
    happy investing for 2012

  8. Hey all just my view,

    Not too many good companies in the brokers picks to get too worried.

    Wait till they down grade bank earnings…………Now that will be interesting


  9. First time at posting;
    I have had a good scan and practice run on Skaffold and it does do what Rogers has said, when he refers to narrowing it all down etc.
    It now leaves me in the position of taking responsibility for investing with Skaffold as another supporting too (so to speak)
    My question is this; my first purchase was in a company called Norfolk (NFK) which rated very well on the Skaffold score (A1).
    But then on a recent “Blog Post” by Roger where he ask us to identify a group of companies that he currently likes (mostly A1’s) I felt a bit exposed as it was not on that list and made me question my comprehension skills in that I may not be reading the skaffold correctly.
    To further qualify my point having said this it hasn’t changed my view on NFK based on the facts as I understand them, just my confidence has been tested.
    Appreciate any comments


    • Hi Steve,

      Lists are not comprehensive. Don’t expect them to contain every one of our ideas. I cannot guarantee the future of NFK but I can tell you we own the shares. Its not a large holding. Seek and take personal professional advice.

  10. Roger you seem to only post your good results. How about the ones where you explicitly go on TV and spruik like;

    1. Zicom – ZGL
    2. Matrix Composite – MCE
    3. JB Hi Fi – JBH

    Yes I know you sold out before we all did whether personally or in your fund.

    I can only guess that you will delete this post in due coarse also

    • Hi Harry,

      Thanks for sharing your thoughts and concerns. The questions I answer on air are “what do you like?” “What do you think of…?” “What’s your opinion of…?” If that is considered “spruiking” then, sadly there would be no room for such questions on air, nor in newsletters, on forums on TV or Radio. Recently I answered such a question by stating that I was investigating a particular stock but had not formed an opinion yet as I didn’t have sufficient information. I actually added “So, if you buy it and lose money its your own fault!!!” What do you think happened the next few days to the share price? If you guessed it went up, you are right. Ridiculous. Don’t buy if you don’t understand the business or are not prepared to continue researching after a purchase. If you have been visiting the blog regularly, you will discover all of the stocks you mentioned have been discussed here at the blog in detail and frequently – in some cases I have discussed my reasons for selling and only after that has the stock moved significantly. At other times I have written why I think something has become worthless and yet the some members of the investment community here have disagreed. The share price fell. We don’t predict share prices and I frequently admit that I don’t know what will happen to share prices in the short term. I also don’t know anything about you and so I also always insist you seek and take personal professional advice BEFORE engaging in any security transactions. This blog is free and will remain free but you have to realise I am under no obligation to keep you up to date every time I change my mind. Its a great blog and there are many many valuable contributors who have shared some amazing insights. Keep it up everyone. I have been surprised at the amazing jump in traffic again this year to the site and hope a few of you are willing to take the reins and post entire columns. If just 100 of you write a column, that will be nearly one post every two weekdays. But if you are not finding what you are looking for here at the blog Harry, there are many other forums, newsletters and the like available to you. Good investing to you and to everyone.

      • Guys roger states HIS OPINION if you buy based on that then you are SPECULATING!

        I have always believed that as an investor you should never invest in anything you don’t understand.

        Roger provides an insight a teacher of sorts and i have learned many valuable things from his posts/interviews.

        In regards to…

        (Zicom, Matrix Composite, JB Hi Fi)

        …of which i only owned JBH but sold. The other two rely too heavily on management’s ability to grow…

        Remember the stock market is highly irrational many companies are overvalued few undervalued… everything has a price.

        P.S Greed is GOOOOD (insert evil laugh here)

    • Harry,
      If you haven’t heard Roger imploring people to seek and take professional advice, you’re just not listening. If you have lost money on any of these things having bought them just because Roger talked about them you need to accept responsibility for your actions. No-one made you buy them.

      • Completley agree with you there Greg (and Harley). When an investment decision is made than that is your decision and no-one elses. You can listen to other peoples opinion but you need to form your own.

        The thing i still don’t get is the belief that these three companies are now terrible investments to be avoided at all costs. For starters, that type of overnight shift doesn’t happen, if you do your research you should see it coming (like many did with Matrix and said so on here). Also, I would still be happy to own at least one of the three mentioned companies. My research still makes me think quite favourable about it.

        There is only one person who can decide whether or not an investment opportunity is worth pursuing etc and that is the person pressing buy. People need to develop their own philosophy (an element i think many people ignore) and stick to that so they have a framework for making decisions.

        If your philosophy is to find out and buy what others are buying than you need to accept the big pitfall that they are not and will not tell you every decision they make and you will be swinging wildly for most of it and your chances of loss of capital will be higher.

    • This is not intended to be entirely directed at Harry above, but to the blog in general.
      I think it is a bit unfair for people to continually try to tag Roger as a ‘stock spruiker.’ Mentioning you own a stock doesn’t classify as spruiking and nobody complains when these stocks are on the way up!

      The saying “Do your own research/consult a professional/etc…” has become so overused that people don’t even pay attention to it anymore, but despite it being thrown around countless times, it should be paid attention to.

      Don’t use any expert as a signal for what stocks to buy. There is so much more work that goes on behind the scenes when researching a company than is seen when an analyst or fund manager gives you their summary of the company in a 2 minute bit on TV. If you do not completely understand the company you are investing in, or have a clear strategy/plan, then don’t buy the stock.

      I understand there is perhaps some bitterness if money was lost in a company that was given the thumbs up by any financial commentator, but you have to take responsibility for your own actions. Instead of blaming the person who recommended it, identify what YOU did wrong: not understand the company? Pay too high a price? Not sell when it became overvalued or the situation changed?

      PS To Roger: I sent a couple emails to you a month or so ago, but never received a reply. I understand if you weren’t able to reply, but wanted to check if they actually got through in the first place. Thanks!

      • No worries at all Roger. I will resend an email from the address I entered in this contact form, and see if it gets through.

      • I too could be accused of spruiking – especially about TGA shares, of which I hold a large number procured via over two dozen transactions since 2007. I watch TGA like a hawk, devouring whatever can be read about it, and subjecting its metrics extracted from published accounts to the utmost scrutiny. Consequently, I feel I can make a useful contribution sharing my TGA-related insights with others, whereas I rarely opine on holdings that do not enjoy my focus, or stock that I do not own.

        The more high-conviction posts to this forum, the better – provided the basis for the conviction are articulated, and individuals state that they hold the stock. More posts on moats and why one has exited a stock would also be interesting. Mooted IVs should give some of the arithmetic – company metrics used and the individual RRR used. On exiting a stock, when I sell some TGA shares, it will be to balance my highly-TGA skewed personal and SMF portfolios, and for estate planning reasons. My heirs are adamant that I stay alive until I have realised the large paper gain I have for TGA in my SMSF portfolio – apparently, they will have to pay capital gains if I carelessly die before locking in the capital gains tax free within the SMSF.

      • Michael,

        Good Post,

        Just a word of advice but you should talk to your accountant about this.

        Reversionary pensions may be able to solve your heirs’ dilemma

        Worth a chat


    • I strongly agree with what others have replied to this post although my investment portfolio has shrinked.

      Anyone who has read Value.Able, read the blog and listened to Roger in TV, Radio or seminars would have understand that Roger has for many years enjoyed discussing businesses and investing philosophy.

      He is excited about discussing small businesses who have the potential to grow their profit by 20% or 30% per annum. That’s just all, he didn’t ask you to buy them. You would have realised his portfolio doesn’t only made up of small businesses that he mentioned, but he has bought things like COH,CSL,FLT,ANZ,WOW. (Warren Buffett’s letter to shareholder this year mentioned that he has made his share of mistake buying small stocks, he said he should have listened to Charlie) :)

      Talking stock is one thing, investing is another, that is why you must seek professional advices.

      At the end of the day, it is the knowledge Roger has imparted to a lot of us that counts!


    • Harry, the reality is some businesses get better some get worse in the future, none of us will know and Roger’s method of calculating IV is not flawless either.

      Say for example, out of the 10 stocks I own, 3 will under perform, 6 will outperform and 1 turns out to be extraordinary. I still regard my portfolio doing well.

      Look at the performance of the portfolio rather than individual companies/shares.

    • Harry, you might want to consider investing in a fund if you’re disappointed with the stocks you’ve chosen. Your fund manager would then the proper target for your grievance. Personally, I never saw anything to like in ZGL and MCE’s short earnings history as a listed company always made it risky – at least in the short term. As for JBH, I couldn’t think of a better time to buy this battered cash-cow.

    • Hi Harry,

      I can only agree with the comments of Roger and others. For an investment of $50 (for the book) and with this blog thrown in for free, I reckon we are getting great value for money (sorry Roger, I haven’t jumped on the Skaffold train yet!). We get lots of investment ideas, have a sound methodology we can leverage, and the thoughts of Roger and many others to bounce our ideas off.

      I bought some of the shares you mention (sold ZGL at a 25% profit, sold MCE at a big loss) but for me that is all part of the learning journey (I particularly learnt most from my MCE experience!)

      Roger does warn us he doesn’t have to advise when he buys or sells, and he also posted some full and frank comments when MCE posted some disappointing results. I think he has also posted about getting out of JBH.

      Notwithstanding some downs such as MCE (and not selling CCV at 81c+), I am well ahead of the index over the 18 months or so that I have been using Roger’s input to supplement my own research. I am very grateful for the service.

  11. i have been invested in a small engineering company called lgicamms(lcm). Its half year result is quite good ,no debt ,buy back 2million shares leaves only 65mil ,profit for half year 4.7mil ,second half may do better plus 3.5cent half year dividend. could you look into this company because no one has discussed it .thank you

      • Joe,

        I am am in a hurry during reporting season………This one did not shot the lights but I will have another look……..


    • Well spotted Joe, I notice it’s safety margin is negative, and it’s earnings are down, which lowers it’s IV. But this has been due to 2 adverse contracts which they will endeavor not to repeat.

      As a business it is excellent with a high degree of specialty and top range customers.
      Roger is not so keen on the big miners, but if you look at their spending plans in the billions, obviously the people receiving that income flow are going to do well (the pick and shovel merchants of the old goldfields). Hence MND LYL FGE NFK CDD etc are the recipients of this river of gold, and LCM are in this category. When earnings pick up, (ie no more further drain from the before mentioned contracts), the IV would be re-rated upward and then it would look very promising.

    • Hi Joe
      I had a quick look and it’s only A4 so not investment quality. About the only positive I could come up with is it’s IV is forcast to rise. May I make a suggestion that you take up Skaffold’s offer and you can look it up yourself and if it helps you clean up your portfolio you could use some of the profit to invest in Skaffold, I know you won’t be sorry as it takes a lot of time that it used to take researching away so you only need a 10 second look to see if a company is worth researching and buying in the first place

      • The below is some quick thoughts on LCM. Make of it what you will as i am not familiar with the company at all, i stay away from its market and don’t really follow it or know much about it. The below is purely due to looking at their numbers.

        A4 seems about right, they are quite healthy in a financial sense but the performance side of the equation lets it down basically indicated by a low return on its equity.

        Other thoughts, cashflow seems ok and is positive, as i said earleir, quite healthy. However, goodwill makes up a sizable chunk of their assets, this would not be a problem if they had a high return on equity but they don’t. Their pay out ratio caught my eye as it seemed a bit abnormal for what they usually do, i think they could have paid more dividends and their payout ratio for the HY last year was far higher than this year which means they might have something planned that they wanted to keep some cash for. Their return on equity sure doesn’t make a positive arguement about retaining funds. However i could have read this completley wrong and as i said, i don’t know anything really about this company. Also, their profit was made higher by a $516,000 tax benefit, make of that what you will, i just found it interesting for a profitable company. i didn’t really delve into that but you may.

    • Hi Joe;
      I was in LCM a year or so ago but the flat ROE [and in fact a decline in 10/11] made me decide to sell. Safe,well managed but lack of growth prospects in my opinion.

      • This is a good study, as mentioned above, Skaffold tells us it’s an A4 and ROE is 8.4% ie not too exciting. Viewing the annual report and presentations tells us that it is a competent company with a high pedigree customer base, AND that 2 contracts (fixed price) caused it to take an earnings hit, presumably they won’t do that again. This resulted in a flattening of earnings last year which has caused the rating to be A4 and the future IV projections to be depressed. However if management can avoid a repeat of a contract pricing hit, ie have put in place procedures to avoid that, then this is a potential turn around story. This should be on your watch list. If earnings pick up, then it will fly.

  12. Hi all!!!

    I have read a lot about coh on here but no views on their product offerings.

    I see many things going right for the company.

    Firstly their are a number of b-boomers that will be utilizing coh offerings.

    Secondly one area that has exploded that has caused and will cause loss of hearing… Can anyone guess?

    The Portable mp3 player or iPod everyone has one especially if your a teenager and many teenagers have the volume so loud that they dont realize it but are doing their ears some serious harm!

    And apple don’t know it but their booming iPod will be great business for COH in 5 years time.

    Who knows maybe one day apple will be competing in this space also.

    Yours truly, C

    • I think anyone who has travelled on public transport willa gree with your thoughts regarding the iPod etc.

      As for Cochlear and their product offerings, i dare say that there has been no real reason to discuss it as apart from the recall issue, their reputation is arguably without par. In fact when you can replace the “faulty” implants with an older model which have been described as the “gold standard” of hearing implants than your offering is pretty well.

      It is a brilliant company and one i think nearly everyone here would like to be able to buy, its just that damn share price not co-operating by getting low enough, even during the recall plunge it was still too expensive for most people.

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