Are these the best value stocks right now?

Companies, Market commentary | Comments (317)

Are these the best value stocks right now?

With reporting season over, and armed with the Value.able mantra, how are you uncovering the very best stocks worthy of your attention?

Lifebuoy soap was once marketed as Floating Above the Rest. Are there any companies post reporting season doing the same?

While many of my peers believe 2012 could be a very difficult year for investors, there are currently a selection of companies that appear to be both high quality and trading at prices offering a rational safety margin compared to our estimates of their intrinsic value.

Each reporting season we present a short-list of companies worthy of careful analysis. This reporting season is no different. As always, the list is not exhaustive. You are free to agree, disagree or append the list. Indeed, I encourage you to do so. For debate often brings A1 ideas.

I decided to look for Large Caps, Mid Caps, Small Caps, Micro Caps and Nano Caps with an A1 or A2 Quality Score across all sectors and industry groups.

I’m also interested in companies for which there are analyst forecasts for at least one year ahead and whose current market price offers a safety margin of more than 10 per cent.

From over 2080 listed companies, 17 meet the criteria.

An attractive and sustainable Return on Equity is also important, so let’s seek out companies whose ROE is greater than 20 per cent in the most recent financial year, have a forecast dividend yield of more than four per cent and whose intrinsic value that is forecast to rise at least six per cent per annum.

The result?

Nine companies trading at a discount to intrinsic value that may be worthy of your attention.

Here they are: Seymour Whyte (ASX:SWL), Nick Scali (NCK), Codan (CDA), M2 Telecommunications (MTU), Credit Corp (CCP), Global Construction Services (GCS), Breville Group (BBG), GR Engineering (GNG) and Flight Centre (FLT).

If we were in a bull market, I suspect a stampede to get ‘set’ may ensue, without proper research. With the luxury of a market where the tide may still be going out, you may just have the indulgence of time to conduct plenty of research. Regardless, independent research is essential. As is seeking personal, professional financial advice.

So, what have you been researching? Go ahead and list your “Top 5”. We’ll put together a worthy riposte.

Alternatively, put forward your A1 suggestions and we’ll compile a list of intrinsic valuations and Skaffold® Quality Ratings for the next blog post.

Finally, keep in mind that I cannot predict where the share prices for these companies are headed. They could all halve, or worse. And remember, seek and take personal professional advice.

Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 stock market service, 8 September 2011.

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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317 Comments

    • Andrew
      :

      There is not much for me to refute in this post, but i have to say i disagree. There will always be a market for retail and especially a retailer who is innovative in their approach.

      Retails not dead, only those retailers who can’t innovate. Not all retail companies are created equal, some still have product offerings and competitive advantages that mean they still are relevant and have a market.

  2. Andrew
    :

    Just had a quick glance at Orotons yearly results, and it has come in above what i was expecting. Seems to be an ok result. The ROE dropped as i predicted so i am not too worried here, Oroton can only generate ROE of 80%+ for so long. Profit growth of 7.9% which is a bit lower than the 18% for the previous year which could mean that the growth is slowing and the company becoming more mature. This is something worth investigating, my gut says it is. positive Like for Like profit growth leads me to believe that this profit didn’t just simply come from new stores as was the case with Jb Hi-Fi.

    Inventory jumped a fair bit but the stock turns was pretty flat, oroton introduced new product lines and 8 new stores (ORL and RL combined). So this does not raise too many concerns with me.

    Debt went up, but interest cover of around 33x means that it is still completley manageable.

    According to the preso, the Oroton online store no makes up greater than 6% of company sales and online sales grew by about 180% apparently against the previous year.

    Apparently the first 7 weeks of this current financial year (2012) exceed their expectations (wish i knew what they were expecting so i could make a better judgement as to how good this statement is).

    I am a big fan of this company and i have a sneaking suspicion that after i get into the valuation nitty gritty it might be at a good margin of safety.

    I think it is still the best listed retailer on the ASX.

    My quick valuation for the 2011 figures just announced comes to about $9.79. I will come up with my forecast values for the upcoming periods after some further digging. At the moment and due to my forecast calculator being a very conservative one it is sitting at just over $7.00 for 2012 and just under $8.00 for 2013, but as i said my method for future IV’s is very conservative.

    • Roger Montgomery
      :

      Good result. ROE boosted by hedging loss but otherwise very, very clean result – no abnormal items.

      ORL reported NPAT of $24.789m, up 7.9% • LFL sales were up 7% (Oroton LFL +4% with ‘controlled discounting’, Ralph Lauren +10%,
      online sales growth of 180% – now 6% of total sales) • NPAT margins of 15.1% were down slightly from 15.7% • COGS were stable, the margin pressure came in additional warehouse / distribution,
      marketing and selling expenses. • – no abnormal items. Large -ve movement in reserves of -$4.2m was due to a cash flow hedge.

      Inventory was up $6.7m – a 28% increase – note: aged inventory declined, Opened 9 stores
      in total. Also distorted by RL stock purchases in line with Northern Hemisphere.

      OCF $24m was in-line with NPAT • Investment totalled $6.9m – this was down last on last year’s given their refurbishment
      program is mostly complete. • FCF – $17.1m • Dividends paid $19.6m.

      Opened 8 new Oroton stores – 4 in Aust / NZ, 4 in Asia (KL and Singapore). Refurbished 11. • Opened 1 new RL store @ Birkenhead Point. Refurbished 3. • 50,000 facebook fans

      Will open 5 New Oroton – 4 of these in Asia. • Will open 4 new RL concession stores. • Stronger start to the year than expected for the first 7 weeks of FY12 trading. • Management believe that the overal Australian retail market is undergoing a restructure
      creating opportunities for those who are innovative. This last point reflects Sally’s passion on the subject of innovation – something ‘old skool’ retailers at big electrical chains and supermarkets haven’t worked out.

      • Peter
        :

        ORL stockturns last year 1.99, this year 1.57. With such poor numbers there is no way they don’t have a lot of aged stock. Of course as they always do, ORL have got a bit creative with the calculations in their presentation. (For example, they have reinvented the ROA and the ROCE calculation to suit, and have stated their stockturns to be 1.8 instead of 1.57.)
        The lack of information on sales/profit for the Asian stores is also an alarm bell.

        Peter

      • Ash Little
        :

        Hi Peter ,

        Think Roger has refered to this re seasonality of northern hemisphere stock..

        Think this was excellent in the current enviroment……..Much better than DJ’s or Myer.

        Cheers

  4. Phil Crossan
    :

    Hi All,

    I would like mention IDE. This company has been doing well for about 3 years now and has reasonable prospects for the near future. I am an owner of shares in this company.

  5. Jefferey
    :

    Hi Roger and Grads
    Here are my top 5 , After reading value – able i made a mistake and brought a couple of companies at not a big enough discount to I.V. Not a lot invested and happy still to hold them, though the most vaulable thing is patience, so next time around im looking for the best at the best discount. And due to the current climate im also looking for companies for the longer term.
    l also continue to drip feed the market and targets at different levels.

    WOW looking for 22.00
    IRE Getting more attractive ??
    COH Want a bigger discount 43.00
    CSL watching the dollar $$ 23.00 9.00 How long till we get an interest rate drop??

    Could it be just like buying a car if you cant get that CV8 Z for the right price
    there might just be another one come up tomorrow.
    Also intersted in
    CTD,CCP,GEM.

  6. Graeme
    :

    Hi all,

    My 5 most watched list are

    SMX
    OZL
    CDA
    SWL
    CBA

    I would post some reasons why but am on Holidays at Thredbo so I have higher priorities this week :)

    Graeme

  7. Andreas
    :

    First of all I would like to say thank you to Roger and the team also all of you Value Investors for all you have contributed to this forum.

    These are the 4 companies to look at:

    1.GNG – GR Engineering
    2.ANZ – ANZ bank
    3.FGE – Forge
    4.MTU – M2Telco

  8. Nigel
    :

    Roger
    If i can have the liberty to stretch the list to a top 6. ROE > 25 %, nett debt to equity 30%.

    NOE
    MCE
    BHP
    FGE
    TSM
    IFM

    Nigel

  9. Nigel
    :

    If i can have the liberty to stretch the list to a top 6. ROE > 25 %, nett debt to equity 30%.

    NOE
    MCE
    BHP
    FGE
    TSM
    IFM

    Nigel

  10. Nigel
    :

    Roger,
    If i can have the liberty to stretch the list to a top 6. ROE > 25 %, nett debt to equity 30%.

    NOE
    MCE
    BHP
    FGE
    TSM
    IFM

    Nigel

  11. Roger Gibson
    :

    My current best five picks are:
    MGX, DRA, DCG, IFM and CWP though I feel more inclined to sit on the sidelines until I can get an injection of confidence. Perhaps a win in the Rugby would help?

    Roger G

  12. Scott T
    :

    Thanks Roger, I am very keen to have re-affirmed the IV’s for 5 stocks and their Skaffold quality ratings. All 5 of these I currently hold and am considering adding to my holdings.

    BHP
    TSM
    VOC
    IVC
    ARP

    All the best

    Scott T

  14. Slide
    :

    Apart from perennial star performer ARP, I believe FWD was a stand out performer in FY11.
    I’m impressed with this company’s vision and strategy. They made a clever acquisition during FY11 (BRB Modular) which gives then a lauching platform for their manufactured accomodation in the eastern states.
    The company has demonstrated it has the processes and skills to build and operate accommodation facilities for the large mining companies (Sea Ripple in Karratha WA). FWD is expecting further large scale contracts of this nature in FY2012.
    FWD continues to invest in their business. They continue to invest in the design and process technology of their products (like ARP). This is where I believe their competitive advantage lies. They are also adding new production lines to meet demand, and sourcing more materials from the Asian region.
    This all adds up to a competently managed company, which knows what it does well, and continues to build on those strengths. I can’t help but be impressed, and a glance at average ROE shows that it is rising while keeping net debt very low.

  15. Rob
    :

    Hi Roger,
    Going with five, I have these. Recognising value as not necessarily being the greatest MOS, COH a good example of this.
    COH
    GNG
    MTU
    RMS
    ZGL
    Hey, I got into RMS at about 40c and there’s no way I’m selling in the current environment.
    Some say gold is in a bubble atm. No way, currencies will continue to be rerated.
    Cheers
    Rob

  16. Chris L
    :

    Most of the usual suspects appear in my top 5 –
    JBH
    MCE
    UOS
    FPS
    TWD

    UOS I’ve only seen mentioned once here, but it passed through my screens. I’d be interested in comments on that one.

    Similarly, another one on my list, VRL, isn’t anywhere near being in the buying zone yet, but passed through my screens – nevertheless, I’m not comfortable about it; there seems to be too much “financial restructuring” going on. Comments?

    • Andrew
      :

      As for VRL, i think it is in a very tough kind of market and any owner in this business should expect it to be very similar to riding one of the roller coasters in there theme park.. Looking at some estimates of ROE over ten years appears to back this up. I can see a lot of external pressures on the companys earnigns that they have no control over

      I am interested in an american company (at the right price of course) that is a similar type of business but i wouldn’t be to keen on VRL. Even thie american company has some issues with it which leaves me to wonder whether it is a wonderful riverboat worth climbing aboard on or whether they are pirates who will make me work off the plank into the waters of the Carribean.

      These types of businesses especially theme parks can be quite capital intensive. Designing, installing, running and maintaining theme park rides can be incredibly expensive.

      The cinemas are only as successful as the movies that are released during the year and you cannot be sure how successful a movie will be when released. The rear view mirror would not really tell you much in regards to this company. Internet priacy is a huge risk to this units earnings.

      Theme parks tend to be a bit more stable and have better scope to raise prices in line with inflation/costs etc. But it is dependent on the area where the parks are located continuing to be a tourism drawcard and need to ensure they keep investment up to stay relevant, they are also very seasonal businesses especially the Wet and Wild parks.

      As i said, it is a hard company to value and i can see exactly why you are not comfortable with it. These types of businesses can be hard to predict, the rear view mirror shows varied results. If you are like me and place an emphasis on strength and stability in companys than i don’t think you could pull the trigger on it. If you must value it than i would use a large required return and would need a MOS of giant drop proportions.

  17. Rod
    :

    This question is off-topic, but it has puzzled me for a while. Delete if too irrelevant. Roger, you’ve said a number of times that it’s very hard for an Australian company to establish a competitive advantage because Australia is so small. I live in Finland presently, a country of 5 million. Some of the major companies here include Wärtsilä, Orion (manufacturing for ACR, by the way), ABB (formerly Strömberg), Ponsse, Kone, and Fiskars, all of which appear to have done very well for many years, and presumably have some kind of continuing competitive edge. I leave Stora Enso, UPM Kymmene, and Nokia out of this for obvious reasons, but they have been in this class in the past and may be again. What does Finland do right that Australia, four times larger, cannot do? Is it purely a fact of geography? Or it is just a question of perspective? Please note that I have not researched the companies I’ve mentioned apart from reading the papers, etc.

    • Roger Montgomery
      :

      Hi Rod,

      What I have said is that its hard to sustain the most valuable competitive advantage and I have usually (but not always) been referring to retailers. Kone is a successful international business. if a company has been in the class in the past but isn’t now, thats the point I was making. Keep well.

  18. Brett Aked
    :

    Hi everyone, had a phone conversation with Mr Paul Wright from Matrix on Thursday. I do hold Matrix shares. The gist of the conversation confirms what other bloggers have already posted (Ron shamgar I think) but thought I would share it here anyway.
    Paul Wright is the CFO and was the CEO before Aaron Begley.
    * there will be be statements to the market in a couple of weeks to “clarify” the order book.
    * 2012 will be “solid” but not “brilliant”. A year of consolidation.
    * growth expected 2013/14.
    * riser buoy business expected to contribute 57% of revenue over next 2-3 years, down from current 80%. the engineering business currently contributes $30 million revenue and this is expected to grow. This diversification is seen by the company as a positive.
    * it is a lumpy business
    * the strong growth in the last 24 months was due to a lack of supply of new drilling ships, but this supply deficit has now been corrected.
    * the world drill ship market currently stands at 200. In the next 5 years the new drill ship market is expected to grow to 300 ships. There should be strong demand for matrix products here.
    * the other positive is that the MCE riser buoy products have a 10 year life cycle, so the replacement fleet market in the next 5 years is expected to exceed Henderson plant capacity.
    * further equity raisings are not on the agenda, but couldn’t be ruled out 3-4 years down the track.
    * the main purpose of the equity raising this year was to make the balance sheet bulletproof. The raising should have been done closer to $7 rather than $8:50.
    * the current price is an overreaction.

    Hope this is useful or interesting to somebody. I continue to hold shares and am looking forward to touring the henderson plant in the next couple of months.

    Cheers,

    Brett A

    • Roger Montgomery
      :

      Hi Brett,

      This is very useful and a wonderful contribution. Thank you for taking the time to post.

      Question; Do you think that; “there will be be statements to the market in a couple of weeks to “clarify” the order book” and ““solid” but not “brilliant”” could mean 1) “downgrade” or 2) upgrade or 3)reaffirm current guidance?

      Never listen to a newly listed company’s opinion about what the current market reaction is or is not.

      • Greg Mc
        :

        Thanks for the post, Brett. Certainly ‘solid but not brilliant’ doesn’t sound like an upgrade to me – my guess is that there will be a drop on the numbers from only a month ago. ‘Consolidation’ in this instance is code for ‘Not as much work as we would like’. Would they prefer ‘consolidation’ over ‘running Henderson flat-knacker to satisfy demand’?

        Growth in 2-3 years time? Hmm. What have their predictions been like recently?

        It raises another question for me – if demand is expect to exceed Henderson capacity at times over the next 5 years, why might there need to be another capital raising in 3-4 years?

        On the other hand, of interest regarding the MCE order book is this excerpt from the most recent Austock research report:

        “Not all the work MCE does needs to be covered by the order book. ~20% of MCE revenue is short lead time, short turnaround orders that regularly come in. Taking this into account, we estimate that MCE needs to win $66m to support our FY’12 revenue forecasts. Given each drill string is equivalent to ~$14m, this is only 5 drill strings. In our opinion, this risk is not that high. The outlook for deep sea rig build (see below) is positive, but MCE is now in the position that it needs to converts quotes to orders to turn around its fortunes. The announcement last Tuesday that National Oilwell Varco (NOV) had won the contract to supply the drilling equipment to the first seven Petrobras drill rigs was positive, NOV is MCE’s largest customer.”

      • ron shamgar
        :

        Thanks Brett.

        in my opinion it will be a downgrade. but i thought it was already priced into the shares of Matrix anyway. So maybe Mr market’s schizophrenic mood will push the shares up??

        As a patient investor i am willing to hold this one for now, as in the next 2-3 years, MCE should have at least ONE stellar year!

        From current share price levels, that should provide an adequate return on investment. lets wait and see.

        cheers.

      • lloyd
        :

        How to reconcile this to the detail (c.f. Macondo driven drilling standards upgrades etc) of what was said in the Switzer interview with the CEO posted on 4 March 2011 a short six months ago ?

        Goal posts and timing seem to move very rapidly in this business despite the long term investment horizon of its clients – not very confidence inspiring in the reconciliation.

        Beware the hockey stick shaped demand projection, so loved by business leaders and analysts.

      • Brad J
        :

        The problem we have here is management. They haven’t been transparent enough with their share holders and now have a good track record of over promising and under delivering. I have spoken to them as well and have been very excited about this company in the past. The problem I have is if management have under delivered and over promised in the past, which is the opposite to what Aaron Begley said his mantra was when interviewed on Switzer, what now should give us confidence that they won’t do the same in the future? If they announce a downgrade shortly, this will be further evidence of this and in my opinion makes life very difficult for their investors. I still own some MCE and will continue to but right now Management are not making me feel as confident as I did in the past. There would be no need to announce confirmation of what they have just told us and it is unlikely by the language used that it will be an upgrade, so it looks to me that the chances are that there will be a downgrade. That all said they will more than likely have a great 2013 but the short term looks very uncertain. Now investors are fearful about MCE and as value investors we need to work out whether the companies MOAT and bright prospects are bright enough to take advantage of this.

    • Emily
      :

      Hi Brett,
      Thanks for the report. It certainly looks solid from a long term perspective. One question… When Paul talked about riser buoy contribution going from 80% to 50%, did he mean that revenue contribution (orders) would go down, or was he referring to the growrh in engineering outbalancing the growth in riser buoys? By your comment that the replacement demand for riser buoys exceeding Henderson capacity I assume the later (which would be fantastic), but thought I should check..
      Thanks
      Emily

    • David
      :

      Doesn’t sound like the same company discussed here six months ago. This has been a bit of a case study in mass hysteria really.

      David

    • Christopher
      :

      Thanks Brett,

      Great post. Regarding the upcoming announcement, I wonder if this is a change in the way investor relations are handled, or just a one off?

    • Matthew R
      :

      Thank you Brett – very much appreciated

      I read somewhere a long time ago that riser bouyancy normally has a 20 year life span. I don’t recall specifically where it was I read it but this is interesting to hear from MCE it is 10. I wonder if that is comparable with other manufacturers.

      If replacements exceed Henderson plant capacity in the next 5 years then buyers of MCE today may look very smart (assuming margins etc are maintained). If correct, this may provide a much more stable order book than the current one.

      If the replacement market gets going MCE will enter a stable phase. It is then I would like to hope that MCE has a durable competitive advantage that it can build upon. It is now that it can build that. If there are any MCE execs reading this – a durable competitive advantage is what you need to focus on. Don’t worry about today’s, tomorrow’s, or June’s prices.

    • Brad
      :

      >25% ROE; solid long term growth prospects, able, driven and straight up mgt, sustainable competetive advantage; trading at 2.5x book = I write out a cheque

    • lloyd
      :

      MCE’s spin master is reported to have said ” the current price is an overreaction. ”

      Now at what price did they vend this company into the IPO two years ago and what does that tell you about the MCE leaderships’ comprehension of value, as opposed to price?

      Then ask yourself, how does this assessment flow to your assessment of the risks associated with substantial capital investments made subsequent to the IPO and what is the realistically sustainable ROE of the business subsequent to that investment?

      Still an ‘overreaction’?

      Hmmmmm! Not so clear is it?

  19. Chris
    :

    My top 5 looking like good value:

    FGE
    BHP
    MCE
    CCP
    TGA

    I was looking at Mortgage Choice (MOC) and it seems like quite a good company, high levels of ROE, no debt etc etc. While management did not give any guidance, I couldn’t find anything bad that they have flagged for next year. Why then, do analysts predict EPS of around 15-16 cents for 2012 when last year, EPS was almost 23 cents?

    Using 23 cents, I get a ridiculously high 2012 valuation (more than double current share price) and even dropping EPS to 15 cents, it still looks cheap.

    Could somebody clear up what is going on here?

    Thanks,

    Chris

    • Richard C.
      :

      Hi Chris,

      You need to look carefully at the accounts and not just the headline profits. Profits this year were abnormally inflated as they made an adjustment to future trailing commissions. What you want to look at is the cash flow for a real indication of profits. If you take out the abnormal one off profit (which is really an accounting profit) then EPS was closer to 13.4c. Therefore, assuming there won’t be this abnormal profit in 2012, EPS will be closer to 15c. With a RR of 13%, my valuation is $1.15 in 2012 and $1.23 in 2013. I hold the stock for it’s high FF yield of over 11% but not because it is undervalued. I hold it instead of holding cash but would sell it and invest better opportunities as the market improves. The danger is that MOC would fall with the market but I don’t expect that it’s dividend would fall and the dividend yield should cushion any fall in the price.

  20. Peter A
    :

    The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.
    – The Intelligent Investor, Third Edition, 1959

  21. Trent
    :

    HI Roger,

    My apologies, I wasn’t sure were to post this, but it seems that COH is being discussed a bit here.

    I was wondering how yesterdays news that Sonova (which owns one of Cochlear’s main rivals, Advanced Bionics) has announced the immediate re-entry of AB’s HiRes 90K implant into the US, after having received approval from the FDA has affected your valuations?

    UBS have adjusted their forecast of earnings-per-share for fiscal period 2012 and 2013 by 11 percent.

    Cheers,

    Trent

    • Roger Montgomery
      :

      These announcements are timed to remind clinics they have a choice. Thats all. There has been a 10 month gap since their own recall (one of many recalls mind you) and I believe the fault of one of Cochlear’s competitor’s product caused electric shocks to the user. WHat does affect my near term valuations is the scenarios I have mentione here; Whats the worst case scenario of 2012 – a $400 million revenue hole (50% of rev this product) and no fill from Freedom range (so NPAT of $30-$70 million and down from $180mio). OK then that would be a shock and the stock could fall to $8.00 – $19.00 (on a P/E of 15). How many month/years before their R&D gets it back on the shelf or produces a new and superior product? (they spent $109 million on R&D last year – a not insignificant barrier to immitation). AB returned to market after 10 months. In the meantime how much market share can a competitor take take back when they have not only had their own recalls but their products have caused electric shocks to patients? As Chalrie Munger noted, he’s a better investor because his “guesses” are better than most.

      • Trent
        :

        Thanks Roger. This is such a great company and this market over-reaction has certainly produced an excellent buying opportunity. Its nice to finally be holding this one.

        Cheers,

        Trent

      • Roger Montgomery
        :

        Price could halve Trent. I just don’t know and it will depend on the financial impact, which remains unknown although rapid distribution of previous model seems to be stemming any permanent significant adverse impact. Only time will tell.

      • Greg Mc
        :

        ” although rapid distribution of previous model seems to be stemming any permanent significant adverse impact.”

        You’d think so. Indeed, it would be naive to think that COH hadn’t prepared for this pre announcement of the recall. I imagine they would have had Freedom units bagged up and dropped off at the courier destined for every place that uses COH implants on the morning of the announcement. It may have come as a surprise to the market, but the company would not have waited until making the announcement to start thinking about what they were going to do to minimise their financial impact.

  23. Michael
    :

    Roger,

    In putting together this list of businesses, have you taken into account their competitive advantages and future prospects beyond the predicated growth in intrinsic value? In my opinion, the predicted growth in intrinsic value is only one piece of the puzzle when assessing the future prospects of a business. A classic example is MTU. Although it is an A1 and has solid predicted growth in IV, as you said on Switzer, no one really knows what affect the NBN will have on MTU. So even though it is an A1, if we can’t accurately predict its future prospects because of some signifcant variables, can we really class it as investment grade?

    I myself am not yet convined of the future prospects of MTU. I don’t like that it relies on scale and a couple of key relationships in such a dynamic industry. In a few years time, I don’t think this competitive advantage will compare to that of companies in this industry that are currently snapping up their own dark fibre (most notably another blog favourite).

    Thanks for continuing to provide such high quality posts.

    Michael

    • Roger Montgomery
      :

      Michael,

      The post is about encouraging investors to do exactly the sort of investigating that you describe. Regarding MTU, I am comfortable its qualities are better than many, many others in the wasteland of profitless prosperity referred to as the ‘market’.

  24. MattB
    :

    Roger,

    What are your current thoughts on TSM?

    I know there are strong Australian dollar concerns with their British expansion but it appears Eurozone fears are spooking investors and bringing this business down heavily. I can see no other justification for a 10% drop in the last week (aside from Mr Market being irrational).

    So my 5 at the moment would be:
    FGE
    COH
    CBA
    JBH
    *TSM

    *pending further information than above.

  25. Ryan Joyce
    :

    An apt description by Robert Gottliebsen in articles he wrote

    “This is a market dominated by computer traders who are driven by charts and by coordinated shorting or buying. The days of value stocks have, for the time being, been pigeon holed. Value investing will return, but for the moment computers run the games – hence the enormous fluctuations.”

    I found this a useful opinion as a relatively amateur investor with too much enthusiasm and probably too much money in the market. Though i have learnt that its a lot harder to be comfortable with decisions you have made during periods of turmoil which has taught me that completing adequate due diligence and understanding the business is as important as buying with a MOS when it comes to peave of mind.

    For the record my current favourites
    – BHP
    – DCG (though the market is testing me)
    – FGE
    – DTL
    – TSM (especially if the AUD continues to fall)

    • Simon Anthony
      :

      Remember Ryan that “during periods of turmoil” its the Value investor that quietly limbs over the parapet and walks across no mans land picking up parcels of beaten down/discarded stocks- sometimes 30% cheaper than they were just days earlier. Think MCE and more recently COH. If it wasn’t for charts, day traders and CFDs then we would have to wait longer and longer for the next period of Mr Market mania.

      • ian
        :

        and certainly will take a while for google to impact FLT if this continues… “Sorry, locations outside the U.S. are currently not supported.”

      • Matt
        :

        The android market when it first launched had a fairly limited list of countries, this was only in early 09 and has expanded a fair bit since then. This will change and when you own the web-site where ppl type in “book flight to X” and can place your service at the very top, that’s very important.

  27. Uni
    :

    Just in my home country in South East Asia, almost 5% of new born babies suffer from hearing loss. And more and more people can afford to treat their babies by implant technique. Local hospital can now master the process. Also, because of the huge social benefit of restore (or recreate) hearing, people has been proposing the process to be covered by public medical insurance (like medicare).Turn on your ethical filter and this would be on top of the list.

    It’s just like one step back so we can step in.

  29. john f
    :

    Hi Roger,

    Two stocks that I would like to recomend that both have increasing cashflow and discount to intrinsic value

    1) FML
    2) LYL

  30. Trent
    :

    Hi Roger,

    My top 5 are:

    COH (just got into this one yesterday)
    BHP
    DML
    SEK
    MAQ

    I got into DML on a George Soros investment tip and very happy with its performance to date. IMO its still a bargain at todays price.

    Cheers,

    Trent

    P.S I am very, very excited about Skaffold, thank you so much for the invite!

    • Chris B
      :

      From memory (so don’t quote me) George Soros is reported to have bought DML when the stock was trading less than 60 cents. It is now $1.40. The company has not made a cent, although I have read all about it and agree that it does look promising, although it is certainly not for me in this messy, more than usual unpredictable market.

      I understand this is a stock that gets spruiked a fair bit.

      Take care,

      Chris B

      • Trent
        :

        Hi Chris,

        You are correct, George Soros did get onboard with DML quite early on and bought in at an enviable amount. I am not usually one to buy into a company that is yet to start generating revenue, in fact this is my first. However I think this particular company is something a little bit special. They are hitting all of their targets and they are on schedule to begin producing in the first half of 2012. I agree that this was spruiked a bit in the months following the Soros buy in but I think that this one has been off the mainstream radar for sometime now. IMO the foundations are solid but I understand that this would not be everyones cup of tea. Having said that, this company has been the strongest performer in my portfolio in the last few months. This is definitely one to watch.

        Cheers,

        Trent

  31. John C
    :

    Great list Roger! I do value dividend yield and it plays a part in my stock selection process, as the primary purpose of my particular portfolio is income. If good stocks drop in price, but continue to pay healthy dividends, that doesn’t bother me, because I don’t need to sell them. Since buying and reading your book, I’ve certainly changed the way I approach investing, but I still have an eye on yield. There are plenty of other people who rely on their investments for steady income but also invest for capital growth, so thank you for including yield as a filter for this particular list of yours.

    My top 5 are:
    FWD
    ARP
    MND
    MIN
    HSN

    Monadelphous isn’t so cheap now, but I bought it a couple of years ago at $14.49, and it’s a great company. The other four are still reasonably priced though.

    From your list Roger, I also own some CDA, MTU & BRG, so very pleased to see them make your list.

  32. Brad
    :

    I had lunch with a financial planner yesterday. They have their clients asset allocated: 75% cash, TD’s / 25% equities.

    They said they won’t be increasing their asset allocation to shares until the all ords is back to 5000 – 5500 and can demonstrate it can stay there – markets too uncertain / risky at present etc….

    So, they think it’s less risky to buy after a +20% rise.

    This thinking is not uncommon.

    • Roger Montgomery
      :

      Hi Brad,

      If the index goes to 5000 and then a month later is at 7000, has it demonstrated its ability to stay there? What are your thoughts on the requirement for hindsight to satisfy this criteria?

      • Brad
        :

        Hi Roger,

        This kind of thinking, from a market profession, is a contemporary example of the kind of behavour Buffett describes in his 1979 Forbes artice “you pay a very high price in the stock market for a cherry consensus”.

        I had to train my mind to go against the crowd, but to be certain one is right, you need an anchor.

        Waiting for prices to rise 20% to buy is stupid.

        Brad

      • yavuz
        :

        A well known Eureka Report writer (not Roger) wrote the same thing. Wait until All ords goes up at least 30% and demonstrates that it stays there for at least 3 months. I listened to him. The problem was All Ords kept going up and and up until it went up by 50% and then stabilized there. I was hoping it would somethow stabilize at some point, but certainly I did not expect that it would go up by 50%. This recommendation came almost at the very bottom of GFC (around March that year). I see similar sentiment these days. I cannot tell what happens. But that sort of strategy doeas not work certainly. I see the same person in the same newsletter making similar recommendations these days along the line of going to low levels of cash. You have to have a sense and make a decision at some point. Individual stokcs can move in different directions to All Ords.
        Cheers
        Yavuz

      • Chris
        :

        Interesting that if you applied the same logic to property, no one would ever buy houses. How many people say “ooh, I think I’ll wait until it goes 10% higher before I buy a house”; they don’t.

        The property market is perhaps slightly less volatile, but that impression is also underlined by the fact that there is no ready intraday market for property (except REITs). If there was, you may be very surprised about what your house or investment property really was worth !

        When the median price of houses goes up, those without one and renters usually complain. People don’t do the same when sharemarkets go up and stay there, saying “boo hoo, shares are too expensive”.

        In 2007, it was getting stupid and every man and his dog were making easy money by picking any old resource company, and taking out margin loans to do so. I actually thought “it’s like the secret is out and everyone knows about the sharemarket. This is not fun anymore”; the same feeling as when everyone latches on to the secret and it’s not secret anymore.

        “What we need is a really good crash to get rid of all the newbies” I thought, and hey presto, we did. The sad thing is though, some of those people will walk away, hating shares and saying “the sharemarket is a casino controlled by rich people” because that’s what they unconciously viewed it as – a ‘get rich quick’ game, and that property is ‘safer’ or ‘better’.

        When bananas (a soft commodity) went up to $12, $15, $20 and stayed there, what happened ? People either didn’t buy or went and bought something else because the intrinsic value – the experience and taste of eating the banana – was not there to justify paying that price.

        It was the same in Rich Dad, Poor Dad when Rich Dad offered Mike and Robert (as kids) to clean his store and earn an amount of money that eventually, got ridiculous. The metaphorical fun balloon then popped.

        If you are like me, you buy when you have the money, and when you can, what you can. Example – I invested all the way through November 2008 to March 2009, picking up some great companies, but it is useless me saying “ooh, I should have thrown more money in, I should have bought that or this” because what’s done is done. Any fool can borrow or throw more money into the market – where does it end ?

        At that moment in time, it was the ‘right’ thing to buy and at the ‘right’ price for me. Needless to say, I expect to get proved right in my selections over the next 5-10 years.

        Take your swing at that one, big, fat pitch and live with it.

    • sapporosteve
      :

      I had the same discussion with a supposed value investor in 2008/9 who said that he was waiting for the ASX to rise to 4000 and then he would invest.

      This thinking is not uncommon but it sure is irrational. If they think it will go to 5000, then shouldn’t they invest wisely now and collect the upside? If they think it will decline then they can wait and buy great companies when they come into value or they can go all into cash.

      I feel sorry for the people who entrust their money to fund mangers who maintain these thoughts.

      regards
      Steve

    • Scott T
      :

      You are right brad, this thinking is not uncommon, and just plain lazy. After the All Ords is up to 5000 and sits there for 6 months, they will pile their clients back into “Blue Chips” like Qantas, Amcor, Onesteel, Fosters, Westfield.

      6 months later their clients will be calling asking why they haven’t made any money, even thought they are now 80% invested in the market.

      That’s what makes a market I guess.

      All the best

      Scott T

  33. Evelyn
    :

    Hi Roger

    My top 5 ROE > 20%, high dividend yield are

    JBH
    MMS
    HSN
    MTU
    MIN

    Other favourites are FGE, MND & DCG.

    Thanks for all of your quality insights. I have learned a lot from you.

    Evelyn

  35. Brenton
    :

    Ok, so here we go. My best 5 discounts (for today!)

    TRS
    DWS
    LYL
    ANG
    RIO

    Thanks to previous posters for sharing. Always cool to widen the net a little.

  36. Parag
    :

    I know people here love their gold stocks yet no one mentions sandfire resources (it’s a copper play ad well). 4 brokers have dcf valuations of $8-11. High quality reserves. Anyone else have views on this. Currently trading at $6.80.

  37. Josh E
    :

    I thought i’d post the stocks that i’d be looking into buying if I was constructing a portfolio and had the funds to do so. The score column is just something i’ve included within my spreadsheet to score the value investing nature of the stock. For comparison purposes i recently scored Qantas a 15.10 (Out of 100).

    Stock MOS SCORE IV
    FGE 39% 92.98 $7.12
    ACR 14% 50.35 $4.15
    PTM 17% 77.49 $4.31
    IRE 16% 68.51 $8.64
    MML 11% 75.36 $9.70
    HSN 56% 85.18 $1.35
    ARP 12% 64.90 $9.10
    RIO 60% 77.43 $110.10

    I think it gives a good mix of mining services, Info Tech, Gold mining, Diversified Mining, Financials, Financial services (IRE) and Bio-tech. Only others I might think of adding is a bank (ANZ) and some consumer stocks (WOW, JBH or maybe DMP).

    Interested in the thoughts of others.

    • David Martin
      :

      Hi Josh – curious to know where you get $1.35 for HSN. I’ve owned it for some time now and came up with a figure of between $.91 – $1.00 based on most recent results – ROE of around 25%. You might use a lower RR than me – i am using 12%.

      Regards
      DAvid

      • Josh E
        :

        Hi David,

        I use a slightly diff valuation technique so that may be for starters what is driving the different valuation. I also used ROE of 25% and a RR of 12.5% but then that doesn’t mean a whole lot when our equations are different.

        Looking at HSN’s past i think its the kind of company I want to own for the very long term. Continues to pay dividends at a healthy yield while earnings have also continued to expand over the last 4 years. Plenty of opportunity for the world-wide as energy consumption is and will be a huge factor going forward.

        I just like the way they have a pretty steady cashflow from contracted customers and can easily add to that as they approach or market to others.

        Regards

        Josh

      • David Martin
        :

        Well said – i also reckon its a gem and with the need world wide to better monitor and ration energy, the market for their technology will become larger.

        THere is also a very close corellation between its operating cash flow and profit – with no debt. Not a bad space!

        Regards David

    • Roger Montgomery
      :

      Hi Zoran,

      Thanks for your rather frank post. Coincidently, I asked my team that very question today. They responded they would like to give their ‘frequent flyers’ something special. A way of saying thanks. That’s all. I couldn’t argue with that. If you can make a convincing argument in the absence of one from me, go right ahead and drop the team a message at my email address roger@rogermontgomery.com. Put “Team Skaffold” in the subject line and they’ll get it.

      • David King
        :

        I play the card game of Bridge. First I took lessons. Now I can read articles on bridge play and know what they are talking about. Similarly, I’m glad I studied Value.able before I went on to avoid Cochlear, a great company that interests me, but way over intrinsic value. I didn’t buy it (at $75), and am I glad!

        My advice: tell your pals to buy the book and read it before they go any further. It’s brilliant, illuminating, and necessary. And 50 lousy clams.There’s your answer Zoran.

      • David King
        :

        P S I’m going to make my first investment in Cochlear now. Without Roger’s value.able information, I’d have bought much earlier, and been somewhat disappointed. I believe investment in this nervous market justifies great care in the selection of only the very highest quality companies, preferably at very big margins of safety. I will do as I have done with MCE, FGE, MIN, ACR, TGA, ORL :buy about twice what I plan to hold, sell half (or with some of the above, all of them) when the price approaches or exceeds IV, and sit peacefully with the balance of my holdings. With a little more courage, I’d buy MCE again now, but I’m uneasy about this one, as I suspect are others of my peers.All credit goes to Roger for teaching me to understand what I am doing.

      • Scott P
        :

        Hi Zoran and Roger

        I can see Zoran’s point of view but I look at it from a different perspective.

        It may not strictly be the case, but speaking generally the success of the book has contributed significantly to the success of this blog, with it’s many learned and learning contributors giving a vast array of insights into our good & not so good listed companies.

        Many of the questions asked on the blog have been along the lines of “What is your MQR for this?” and “What is your IV for that?” So rather than continue to answer bits & pieces here & there, Roger has very generously poured his IP into this exciting new product so that all of our ratings/IV questions can be answered. Obviously we still have to do the research part but at least we can save some time by choosing to trust his ratings/IV’s.

        Why wouldn’t he want to reward the people who have significantly helped to create the market for Skaffold?

        In any case I don’t think Roger has said Skaffold is limited to those who purchased his book – it’s just that the initial opportunity to join as a founding member (with the accompanying benefits) is limited to his loyal band of Graduates. Which I think is fair enough.

        Thanks again Roger for the past, present & future services!

      • Roger Montgomery
        :

        Hi Scott,

        I thank you for sharing your sentiments. I can’t wait to share it with you and look forward to your feedback. With the help of the community we will keep it beyond the leading edge and well out of reach of anything else.

      • Roger Montgomery
        :

        Unlikely. In fact I can say no. The information Skaffold offers has a value that is very high and so it will only be accessible to its members. We won’t be offering it freely to anyone else.

        The Insights blog will be here and I won’t ever charge for access to the Insights Blog despite the value it too offers to those seeking a good source of ideas to research.

    • Greg Mc
      :

      Blimey, it’s 50 bucks for a book! Might I most respectfully suggest that those who can’t bring themselves to stump up the money for this book (which is outrageously underpriced) probably should not be in the value investing game.

      The fact of the matter is that it’s Roger’s book, Roger’s business, Roger’s valuation service, Roger’s funds management operation so Roger’s rules apply. I might further suggest that Roger may wish to be selective about who has access to his services and that it might be appreciated if people are prepared to demonstrate an interest and at least some committment to his approach, rather than just wanting to make a dollar out of it alone.

      BTW Roger, Gustav says hello.

      • ZORAN
        :

        HI GREG /DAVID KING

        Its not about 50 bucks,its about not being able to buy beer unless you buy tube of toothpaste first.
        By reading book, you David avoided COH,did you avoid MCE by reading the same book?

        I am proud owner of signed copy of Valuable but I would rather have thousands of Scaffold members pushing certain share than fewer(only those that have abook).
        When Scaffold comes out we will need as many members as we can get to have an impact.

        Cheers
        Zoran

      • Roger Montgomery
        :

        Those sentiments (“pushing stocks”) are not shared by me Zoran. Indeed I wouldn’t be the only one to take offence to the implication. Always “do your own research”. Always “seek and take personal professional advice”. They aren’t empty words here at the insights blog. When I say I am under no obligation to keep you informed of any change to my view or opinion, it is nothing less than a Warning! that you cannot rely on the last thing an invited guest says on TV or Radio for your investing strategy.

        Skaffold will be appealing to anyone who upon reading about value investing has had the ‘lightbulb moment’ (remember there is nothing in Value.able that hasn’t already been said by greater investors and thinkers – “standing on the shoulders of giants” etc etc).

        It won’t be for everyone and thats fantastic by me. Indeed we should be discouraging the pursuit of value investing and instead encourage tea-leaf reading…

      • David King
        :

        I think Zoran missed a note by me that I had owned MCE, and in fact I sold it at just under its peak. I would have had no knowledge of this company were it not for Roger’s original inputs, and those of others in this place. If it is the company I thought it was when I first bought, I dare say there will be some happy investors down the road who buy at around this week’s levels. I could be sorry I didn’t join them, but until they announcel some new business, it’s too speculative for me.

      • Chris
        :

        Zoran, then do without.

        Seriously, this is why most Aussies have no money, because they spend it on other stuff. If you are on the poverty line, fair enough, but if you spend money wisely, you will make money off that investment.

        I have books that cost me $100 that have repaid their cover price in full many, many times over.

        Anyone heard the story of the car park man “Earl Crawley” and how he did it ? Maybe find out !

      • Matthew R
        :

        I like it that only reader’s of Value.Able will have access to Skaffold initially. I hope it remains that way.

      • Matthew R
        :

        Sorry, would just like to clarify that comment – I hope that Skaffold will refocus bloggers (including my) focus toward thoughts & discussion of the sources of competitive advantage rather than what is this MQR, what is that IV etc

  39. Alex
    :

    “Go figure”…Common Roger. You know it is more complicated than that. We all new COH was expensive. Way above anyones IV calculation. It remained one of the few stocks on our market that was largely left untouched by the recent market correction over the last couple of years. Of course it was going to be savaged by ANY negative news…no matter how slight. This announcement simply made people question this businesses inherent risks, by focusing their attention on “what could go wrong”…instead of…”what a wonderful successful Australian business story”. Well it sure woke them up. Because guess what. Implanting electrical devices into people is a risky thing to do, electronics will fail, and if they are in people, and they have to be removed (and it still remains unclear if this has to happen), the company will inevitably have to pay something from their bottom line towards this failure. So where was the provision for this “event” in company forecasts? As you are well aware, people need to really understand a business. And in this case it also involves medical risk as well as financial risk. People simply chose to ignore this. But now they have to factor it in. That is why the stock was punished. It is all about reputation.

    • Roger Montgomery
      :

      All good ponts and reflective of a view. I believe we humans have a tendency to make things more complicated than they need to be. In the quest for more information we become more confused. In the quest for funds to do what we are really passionate aboute , we forget the thing we were passionate about and the quest becomes the passion. Curiously the more obfuscating a thing is, the more it is valued and the more simple verion seen as a quaint anachronism.

      We both agree that Cochlear was expensive but not so sure I agree with “Of course it was going to be savaged by ANY negative news”. Not sure thats any more complicating either. Nevertheless from an investing perspective I am glad that it was savaged and we purchased some shares on the day. It may continue to decline, I am no great forecaster of prices, but I cannot think of twenty superior companies listed on our market. One ‘fitting centre’ rep I spoke to today after hearing them chat on the radio about the issue has fitted over 2000 devices and over 520 of the model that is being recalled and they have had just two faulty examples since 2009. That is a very big deal for those two people however it appears the proactive decision by the company is being well received and the recall and subsequent R&D may just save them money and push the competitive advantage and market share even further ahead in years to come. That, I guess is the ‘other’ view and what makes a market.

      • Ian Agamalis
        :

        COH hitting $55 today, unbelievable value in a fantastic company. COH’s price during the last 3 days of trading shows Graham’s Mr Market analogy at it’s best. Typical irrational behaviour by uneducated investors who panic and sell instead of realising the impact of the product recall to the long-term prospects of the company will be minimal at best.

      • matt.
        :

        I,m not surprised at the panic sell but a little surprised at ppl buying. At $50-55 its only about where it should be. Wirh no guidance but some estimates of 20% loss in revenue, thie iv isn,t pretty. Just my thoughts

      • Roger Montgomery
        :

        Keep an eye on the range of possible revenue and profit outcomes from the recall – not known by anyone at the moment, not even Roberts. Will have an effect on the ROE in the short term but not long term. nevertheless the short term impact will mean slower growth in equity/bookvalue and so push out by years what we had for intrinsic value only a few weeks ago.

      • Greg Mc
        :

        Yes, treating what is temporary as though it will be permanent. The timing of Cochlear’s announcement followed by that of its competitor could be the perfect scenario for the investor to buy COH – provided it is a temporary hitch. Inverting the situation is helpful here I think, rather than thinking about what factors would cause it to be temporary, try to work out how it could be a permanent setback. A voluntary recall, no-one injured, small % of units affected, and an easy alternative for replacement – it is hard to see how this will have a long term effect.

        While I am not a hearing specialist, my observation of my fellow health care professionals is that they tend to be fairly ‘sticky’ with their preferred providers and suppliers. My view is that those who are familiar and trust the COH product would be unlikely to be put off by the current issue. It could be argued that if a competitor could produce a unit that is demonstrably superior to anything in the COH range then it could have an impact that would be somewhat greater at the moment than it might normally be. I also think though that a voluntary recall by a smaller manufacturer would impact it more than a similar event by the dominant player.

      • Roger Montgomery
        :

        The issue of course is incumbent shareholders’ prior belief that the company was bullet-proof. Before worrying too much about the competition, keep in mind they too have had recalls.

  41. Colin
    :

    Hi, I have 4 candidates that each have greater than 20% ROE. low debt to
    equity ratio, growth prospects and forecast dividend yield >4% (if it’s
    considered important. Keener on Consolidated Media (CMJ) if Alan Jones is
    not excommunicated, and Carsales (CRZ) forward thinking management. Less
    keen on Hansen Technology (HSN) and RCG Group (RCG). Cheers ColinW

    Thanks and kind regards

    Colin

  42. Doug
    :

    From the reporting season I was attracted by the following three.
    Wellcomm[which has been a favourite of mine for some time] came out with a solid result that re inforced my IV of 2.85 with the prospect of Asian growth providing a “blue sky” impetus.
    Laserbond [LBL] is a small company,tightly held with a large management holding,that specialises in”reclamation and surface engineering of industrial components operating in severe environments” ie: mining equipment.EPS of 2cents on Equity of 10cents;a 25% payout ratio and a positive outlook gives a conservative IV of 23cents.
    Infomedia [IFM] is ignored as forecasts for next year are lower due to an increase in amortisation.Cash Flow is higher than reported profit of 3.3cents on Equity of 11.6cents giving an IV of 38cents on a dividend of 2.4cents fully franked.Not only a sound business but a fantastic yield exceeding 12%.
    Regards Doug.

  43. Dino
    :

    I am starting to feel that the companies that roger believes we should invest in are extinct or have reached maturity. We have a market full of ordinary businesses (take your pick) mature models
    lacking growth prospects (JBH/wow)and overpriced business eg voc.

    Innovation is scare & banks are looking for credit growth.

    Miners are the only ones- commodities – seems the only industry.

    • Roger Montgomery
      :

      Hi Dino,
      ….and then along comes a +20% decline in one day in the worlds biggest manaufacturer/marketer of Cochlear Impants with unit volumes still growing at 17% per annum. Go figure!

      • LukeS
        :

        Did someone just say something? Sorry getting a bit hard of hearing. Did someone just say a wonderful hearing aid company is on special?

      • Simon Anthony
        :

        I’ve been waiting for COH to fall below $60 since Sep 2009! Two years of patience and I finally now have bought back into this wonderful business. I’m sure I’m not the only Value.able Investor that bagged a bargain yesterday.

    • Andrew
      :

      I’ll take a quality mature company any day of the week. I am not too fussed whether they are more on the mature side or not as long as they are still a qualtiy company. They are out there and as we saw with COH yesterday, every now and again something will happen where you can buy these companys at decent prices. It is just a game of patience. Roger himself is mostly in cash.

      Patience and calm temperment is the key to a value investor, if we wait, the opportunities will rpesent themselves.

      • Michael
        :

        When the share price falls out of the sky, it is best not to buy a full position at that time. Check what happened to TRS, LEI & BBG. Big falls, then falls to new lows, and significantly lower. A fall of 20% in one day shakes the confidence of investors, and it is rare for a stock to get off the canvas quickly from such a fall. Buying in about a months time is likely to be the better way to go, as we will likely see prices continue to migrate lower.

      • Parag
        :

        I agree. So many examples of shock drops and the shares have continued to slide like TRS ORL LEI of recent memory. Marcus Padley wrote a piece (RM Note: in the Sydney Morning Herald/The Age?) on this phenominan called shock drop stocks. One reason for the continual slide he suggests is that big instos and holders have to slowly sell out their positions without completely flooding the market. Makes sense and 9/10 I’ve seen big 10-20% drops continue to make new lows during the next few weeks and months.

      • Vishal Hargovan
        :

        So how do we deal with this situation, if we have seen a big fall, but are expecting the stock to go lower? While we can be reasonably confident the stock price will be much higher in 10 years time, the lower the price we pay, the higher the expected return. This is a dilemma that I have faced even when stocks are significantly below estimates of intrinsic value.
        Vishal

      • Roger Montgomery
        :

        You have to follow your own approach. You need a process that explains how you build your position. Is it over time, is it the result of certain margins of safety being triggered. What is your process? Only then will the consternation you display in your various questions be mitigated. Hope that helps even if only a little.

      • Vishal Hargovan
        :

        Yes it does, in highlighting the need for a more systematic approach on my part. thanks Roger.
        Regards, Vishal

  44. Will Carter
    :

    Hi Roger and keen followers,

    I finally got the courage to re-read Value.able and sat through 10 hours of trying to put my brain through it’s paces and I have created an Excel spreadsheet to calculate IV based on pages 183 – 190.

    DTL using current Financial Report 10%RR and using 55% ROE but I am uncertain about Equity Per Share as EPS seems to be interchangeable on this Blog as Equity Per Share as per your book Value.able Ed 1.page 188 Step A. and Earnings per Share and this is confusing for first timers.

    I came up with $15.99 and in 12 mths est $17.34.

    Will someone pls advise if this is close?

    Thanks, Will

  45. Viv
    :

    Sorry to hijack to conversation, but how would one go about finding and accessing reliable analyst forecasts? After searching around on Google, it seems the big international banks only allow account holders access to their research reports. I do get a select number of reports through my broker, Bell Direct. However it is a limited selection. In Value.Able, Roger suggests just Googling a company to find a free report. However, in practice, I have found it very difficult to uncover any free research reports and I’m a very experienced Googler. Any advice on the matter would be greatly appreciated. Thanks.

    • Roger Montgomery
      :

      There’s a mountain of core info (EPS, DPS forecasts) available through the major data vendors via the large online brokers. Interested to find out what everyone else has been using. Many smaller companies put the analyst research of their company up on their own websites too.

      • Ash Little
        :

        Hi Guys,

        Not sure what Bell direct provide but etrade and comsec have analyst consensus forecasts for the analysts that subscribe to the Morningstar thingy. This is not all forecasts though.

        As Roger says the company Websites often have analyst coverage.

        Yahoo Finance also has EPS estimates.

        I have found not very many companies that I can’t get at least something for from these 3 sources

  46. Mark
    :

    Hi Roger and fellow graduates

    I was reading Marus Padbury’s article in the SMH on Saturday and was wondering what your thoughts on his article were.

    He is basically in cash 100 percent as he feels that a GFC2 is on the cards.

    I would be interested in what everyone thinks about this .

    • Roger Montgomery
      :

      Hi Mark,

      I know and like Marcus a lot. I have always thought the Holy Grail was a stop loss that stopped you out before a major catastrophe but kept you in during the smaller declines that ultimately reversed. A consistent ability to identify which type of decline they would transpire to be would be handy. We agree that 2012 could be a shocker for investors in teh stock market. We are still over 62% cash in our fund and haven’t bought anything for a few weeks now – with the exception of a certain CI manufacturer very very recently.

      • Ash Little
        :

        Mmmmm.

        CI Manufacturer,

        Wonder what that was,

        A Classic case of Graham’s Mr Market,

        Looks like he is serving you will Roger?

    • John C
      :

      Hi Mark. I subscribe to Marcus’ newsletter and have watched his income and medium term growth portfolios all hit their stop-losses until he had nothing left except FGL in the income portfolio (and that won’t last long with the current market volatility). I find Marcus’ insights and humour quite educational and entertaining, but I don’t employ stop-losses myself, and remain almost fully invested in Australian listed shares. Marcus could well be right about GFC2 (although he has commented that he regards this current volatility as GFC1 still playing out), and he’s not alone in his predictions.

      An alternate view however would be that shares in Australian companies with limited (or preferably no) exposure to the USA and Europe that are profitable, have healthy cashflows, and pay good dividends, would be a better option than cash, because you’re exposed to the upside risk of possible share price increase, without sacrificing much income (as opposed to a bank term deposit for instance), especially if you take advantage of market volatility to buy quality stocks at healthy discounts to their intrinsic value.

      It depends on your individual appetite for (and tolerance of) risk. I personally am OK with a portfolio of high yielding quality Australian stocks (and even a couple of low yielding ones like ZGL who are very undervalued in my opinion) and I’m not too concerned with a full blown GFC2. If a number of European banks collapse or have to be nationalised or otherwise recapitalised (for instance), it’s going to be a wild ride, but it won’t cause my portfolio to be worth nothing, or my dividend income to reduce to zero. It’s scary, but not fatal. My opinion only. Marcus Padley prefers to be in cash right now. I don’t. Roger’s about 60/40, I think (or thereabouts). Your call.

      • Roger Montgomery
        :

        Hi John and everyone,

        I think it was Munger (or Buffett) who said, “Unless you can watch your stock holding decline by 50% without becoming panic stricken, you should not be in the stock market.”

      • Mark
        :

        My own take is that there is lots of cash on the sidelines.

        Sooner or later that cash will slowly start flowing back into the market. ( if interest rates are cut a few times then this will happen quicker).

        It still may take a year or two.

        So if you have good businesses in your portfolio and are prepared to sit it out then sooner or later that money on the sidelines will find its way back into the market and all things being equal those good businesses should increase in value.

  47. mike
    :

    Hi Roger,

    While this list is not my top 5, these are the stocks that I’m currently spending a bit more time on.
    4 gold stocks
    DRA – Dragon Mining
    KCN – Kingsgate
    RMS – Ramelius
    SAR – Saracen
    and these three
    LYL – Lycopodium
    BKL – Blackmores
    BKW – Brickworks

    Cheers
    Mike

    • Michael
      :

      I am puzzled why value investors would buy gold stocks when the gold price is at all time highs. Seems like the opposite reaction to what should be done. Rest assured, the bubble will pop, and it may not be too far away.

      • Roger Montgomery
        :

        Good to hear a contrary opinion Michael. Thank you. You could be right. While Soros is long gold stocks, Jim Rogers is too but he says even a 40% correction is normal in a bull market for gold. You could all be right at the same time! We have a little exposure to gold but in entities that appear to be very cheap even at much lower gold prices than currently being seen.

      • Greg Mc
        :

        Entities! Plural! That will get the gold bugs revved up.

        I just can’t get excited about gold, it just doesn’t float my boat as an asset class. Maybe there’s something wrong with me.

      • mike
        :

        Just on the gold stocks I mentioned above. Normally I wouldn’t touch resources or gold stocks.
        However, they serve two purposes in my portfolio.
        1. They appear cheap compared to their current prices, have high ROE, very little or no debt, and even if the gold price collapses, they will still make decent profits, because their cash cost of producing gold is way below the current price. Even if gold fell to $1000 an ounce, they’d still be making a profit.
        2. They are a hedge against the markets suffering a major collapse.

        Many gold producers also hedge or partly hedge their expected production, so they aren’t receiving $1700 or $1800 for gold for gold they sell. This means they are still making decent profits despite receiving $1200 per ounce of gold (as an example).

        Cheers
        Mike

      • Liz
        :

        Mike, re cash costs and gold. I read an interesting piece from my broker the other day indicating when the mining costs for deferred waste is included (and it is a cost) then the cost can be significantly higher. On the stock they covered in the report it was, on average, 23% higher. Quite Illuminating!

      • Tony C
        :

        Hi Roger
        Is late but COH still seems expensive
        Equity 503.3
        Shares 56.7
        BV 8.87
        ROE 35.7
        PR 73%
        IV $46.81 using a 10% for a safe stock?
        Maybe i should check my figures tomorrow

      • Roger Montgomery
        :

        Thanks Tony C. Keep an eye on the range of possible impacts from the recall. Will have an effect on the ROE in the short term but not long term. nevertheless the short term impact will mean slower growth in equity/bookvalue and so push out by years what we had for intrinsic value only a few weeks ago.

  49. Scotty G
    :

    Top 5 with my 2012 IV Estimate

    DCG $2.60
    FGE $6.80
    SWL $2.35
    ARP $7.96
    COH $62.44 – Big fall on the recall notice. Possibly an overreaction but if it falls below $50 I’m in.

  50. garry
    :

    My top 5, I have held these for awhile now..Getting a little nervous about WOW and ANZ though recently. WOW because of there growth prospects (hardware) and ANZ because of the cloud hanging over the global financial sector in general. These stocks have been like the tortoise in the hare and the tortoise fabal, they just keep plodding along.
    WOW
    CSL
    SMX
    COH
    ANZ

  51. Andrew
    :

    Typical, something i have been waiting for for a long long time happens when i have no money to get into the market.

    re: COH dropping around 27% (or $57) today where i have a 2011 value of $58.00 and 2012 of $60+

    I know that this event will of course flow through to the resutls by a decrease in forecast profits due to the recall and cause a lower IV but nothing really changes in my opinion in the long term so i think the $60+ one will be accurate at some point in the future.

    Saying all this and taking my value investing hat off and my human hat on, i hope these faulty items that are being recalled don’t do anyone any physical damage.

    • Roger Montgomery
      :

      We are agreed Andrew. There is no impact on health & Safety I am told. The device shuts down. reputationally may be a positive to recall when failure rate is less than 1% but increasing. Market share will be way above competitors for a long time so conversely, reputationally a recall has a bigger impact.

      • Andrew
        :

        reading more about it today, i think it is possible for COH to actually “spin” (for lack of a better word) into a positive for them. It could potentially say a lot when a company decides to recall a bunch of their products due to a 1% failure rate. Makes a big statement about their focus on their products quality. Also, the decision to recall at a hit to their short term profits shows that management are ensuring that any reputational damage to the brand is minimal in the long term. Long term thinking by a companys management is a great thing from this value investors point of view.

        Still wish i had the funds but bought up as many as i can on a newspaper linked online trading game. Although the time frame of this competition is one which places the value investor making this sort of move at a disadvantage from those buying and rapidly selling speculative exploration companys. But i am a value investor so that is what i will do even in a short term trading game.

  52. teddy
    :

    Hello Gang 1st time…Flight Centre is A2 …on a recent trip to Honolulu l stayed at Turtle bay and cruised on the Pride of America…FLT price quote’s were appox plus $100 for Turtle Bay and plus $1200 for the boat….from online direct prices to the venue’s….makes you wonder how they do it ?? Lets know if you have any presentions in Melb..would like to meet you…Teddy

    • PeterB
      :

      Teddy,
      My wife and I have just returned from a 2 week trip around Vietnam and Cambodia, which was organised by Flight Centre. Not one hitch; stayed at 5 star hotels; met at the airport and transported to the hotel; a personal guide at most locations; internal flight tickets delivered to the hotel; etc. We were most impressed. I am not trying to ‘sell’ Flight Centre, I am commenting on what a professional organisation does. Consequently, their shares are now on my watchlist.

      PeterB

  54. Kim Jordan
    :

    Interesting article from Wall Street Journal:
    The Age of ‘Macro’ Investing
    ________________________________
    Sept. 11 Ushered in an Era of Geopolitical Turmoil That Continues to This Day. Here’s How Investors Can Protect Themselves

    Couple of extracts:
    “Two generations ago, the U.S. endured a global conflict that cost 50 million lives,” Mr. Bernstein says. “The next generation faced down the Soviet Union and its 20,000 nuclear warheads. If you had told Americans then that the U.S. should someday be even more afraid of a handful of jihadis from countries that couldn’t even make their own bicycles, they’d have keeled over laughing.”

    Put Fears in Perspective
    So how should investors respond in a world where macro events seem more common—and threatening—than in the past?

    First, put the fears in perspective, taking a cue from the great investor Warren Buffett.

    “We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen,” wrote Mr. Buffett in his 1994 letter to shareholders of Berkshire Hathaway Inc. “Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points or Treasury bill yields fluctuating between 2.8% and 17.4%.”

    Added Mr. Buffett: “We have usually made our best purchases when apprehensions about some macro event were at a peak.…A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results.”

    • Roger Montgomery
      :

      We are similarly ambivalent towards economic forecasters. Someone yesterday quoted this; “if you lined up all the economists end to end, they still wouldn’t reach a conclusion”.

  56. Peter Johns
    :

    Hi Roger

    Mine are a bit different and would love your opinion – I am prepared for the hit my pride will take if you declare them all dogs :)

    NFK (Good ROI and no net debt. MND owns a portion which has to be a decent sign doesn’t it?)

    BSA (Not great ROE but good cashflow and cash positive for first time)

    MIO (I know, I know – too highly geared and capital intensive but good ROE and I do think it is cheap even with the recent spike. It’s a cool industry too – i like the concept of having a share in hundreds of tug boats!).

    DCG (I bought this a few months back at $1.30 and have had a wild ride. I’ve seen your comments on this and you seem to like it? Certainly fits all the criteria of what i look for – although to be the perfect holding it would need to be in a less cyclical industry).

    JIN (This one needs a lot of research and is high risk. It has sold off it’s hopeless subsiduaries over the last 12 months and is now a single business – online lotto tickets. Two massive caches: Firstly it will have more competition this year from Tatts online sales in NSW and secondly, it is in fact only able to trade on a licence from Tatts that is renewed every 5 years. There is no way to telling whether it will be renewed in at the end of FY13. If it is then I think it would be worth around $1 a share. If not then it would not be worth much unless it wins a contract elsewhere. The thing is though, that by the time of the contract renewal it will have generated enough profits over the next 2 years for it to be holding around $0.25/share in cash less dividends in that time. So I see it as a free bet at current prices. The CEO has been buying up over the last year and is the largest shareholder. That may be because he has more faith in the chances of overseas contracts rather than a sign of confidence in the Tatts renewal – something I don’t particularly share).

    Disclaimer: Of these, I own small holdings in DCG, NFK and JIN and MIO.

    Honourable mentions to CDA, MYE, NCK, HII and TFC

    Love the blog – for mine it is one of the best communities on the net in any area of interest

    Cheers

    • Roger Montgomery
      :

      Thanks for the feedback Peter,

      …It might not be enough to help if you have picked bad companies. Norfolk regularly pops up on our lists and Miclyn has recently as well. I will leave it to the community to share with you their thoughts and will put up a post in a few weeks attempting to cover all the stocks that have been mentioned.

    • Vishal Hargovan
      :

      Hi Peter, I have been looking into JIN as well and agree with you that it is high risk. They claim to have a good relationship with tatts that dates back some time, but you never know when tatts may decide to pull the plug. I have emailed Mike Veverka and he been rather vague in his outlook for overseas strategy and the Australian business. He does own approximately 25% of the company so he has a lot of skin in the game. I must admit though that the Jumbo website is fantastic, convenient and provides a great user experience.
      Vishal

      • ron shamgar
        :

        i thought it was clever they setup websites overseas for finding out lotto results. this way they are collecting a large database for the inevitable day when they may launch their online lotteries in these countries.

    • Craig Marsh
      :

      Hi Peter

      great insights into JIN. I have wondered why they rarely rate a mention on the blog. I doubt Tatts wouldn’t renew the licence as JIN is just another agency to them ie source of revenue but you are correct it is a real risk. The cash is piling up though and unless Mike does something silly again shareholders will do ok. The ROE is quite large but will drop as the cash pile grows. I too have bought in and will continue to nibble while the price is this low.
      Another buyback down the track, possibly off market, wouldn’t be out of the question, it would cement Mikes stranglehold on the company also a way to distribute some of those franking credits.
      I am not a lottery player but people I have talked to seem to like the site and it’s functionality. The risk/reward seems to be evenly balanced with this one.

      Craig

  58. bruno
    :

    Hi Roger,
    my top 5, (not necessarily cheap, and taking a bottom draw, long term view) companies are:
    Blackmores (BKL)
    Reece (REH)
    Resource Equipment Ltd (RQL)
    CSL
    1300 Smiles (ONT)

  59. ron shamgar
    :

    edited version.

    VOCUS – How much money did it REALLY make in FY11?

    Hi everyone,

    Sometimes it’s important to look past the results Stated by a company and dig deep into its financial notes to understand the true picture of its earnings and outlook.

    Vocus, one of the blogs and Rogers true favorite companies, has reported recently and I thought I would write an update about it and its outlook as it seems it has been neglected, as all the attention was diverted onto MCE and its disappointing performance.

    So what did Vocus really earn?

    At first glance, management indicates a NPAT of $8.12mil or EPS of 14.97 based on the weighted average number of shares (WANOS).

    But digging deep into its results, note 5 on page 50 indicates that $3.67mil of the results was actually a foreign exchange (FEX) gain rather then a real cash profit. This is because of their US$ exposure and hedging on their IRU liabilities for their undersea cable.

    This FEX gain is really only an accounting profit rather then a real operational or cash profit. I would have prefered to see an underlying or normalized profit figure under their stated results. I think transperancy is important and maybe should be communicated more clearly.

    Ok back to Vocus results.
    So if we were to look at the real operating profit of Vocus, we were to get only 11c EPS figure for FY11. Using this number I get an IV of around $1.33 for FY11.
    Looking ahead for FY12, if we were to assume an optimistic 50% profit growth from higher data demand and the full earning contribution from their recent acquisitions, not forgetting to use a higher WANOS to reflect the share/option issues, I only get about 15c EPS for FY12. which is flat compared to this years stated figure. Using these figures I estimate IV of around $2 for FY12.

    Obviously this company will experience very high demand for its services going forward, but in saying that, it would be interesting to find out at what point will they need to buy more access to additional IRU to support this demand, which will mean higher fixed costs. As Roger said, this company will make more acquisitions and raise more capital as it expands its services and products but for now it is nothing to get excited about.

    If we look at this years IV, Vocus is EXTREMELY expensive! If we look ahead to FY12 then we are presented with a small 10% discount to its IV. You have to ask yourself two questions:

    1. Is this company cheap enough?
    2. Where do you think the Aussie dollar is heading, as it can negatively affect its future earnings if it drops significantly?

    To summarize, the longer term prospects for this company are bright but for the next year or so I don’t see any reason to get excited about.

    On an aside note, BGL current run rate of $9+mil EBITDA for FY12 compared to Vocus current underlying EBITDA of $10.2mil makes you think and ponder, as currently Vocus is capped at $110mil and BGL at $40mil!!

    Enjoy your weekend.

    Disclosure: I own Vocus.

  60. Rod
    :

    Oh well , here goes. Most undervalued on my list (only 80 in all)
    TSM (MOS 106%)
    ZGL (MOS 97%)
    MCE (MOS 69%)
    IDE (MOS 49%)
    CCV (MOS 46%)
    FMG (MOS 44%)

    I left out IDL, a B2. Just on HVN, I saw an interview with Jerry Harvey not all that long after one with Roger and Sally McDonald, and came away with the impression that Jerry was simply seriously out of touch with new developments and, furthermore, very defensive and even patronising about the fact. That interview alone wiped HVN from my list.

    • PeterB
      :

      Rod,
      I absolutely agree with you. I saw the very same interviews as you and came to the same conclusions.
      PeterB

    • Rob S
      :

      Hi Rod,

      I’m not sure it is possible to have a margin of safety greater than 100%? Correct me if I’m wrong, but I thought MOS = (IV-price)/IV, not (IV-price)/price (that would be expected return).

      As for suggestions, the only (not-so) new idea I would like to contribute is Wellcom Group (asx:WLL). It does not show up on the above screen (the only miss is the most recently reported ROE of ~18%), but I would like to present a case for why it should next year (or even by the next reporting season).

      Wellcom group is a digital pre-media design and print-management business. They have long-term contracts (typically >5 year relationships) with many large domestic companies (many retailers) including both Woolworths (a client since 2001) and Coles, Oroton, Westpac, ANZ, Seven, Crown, Optus, BP Australia, and Australia Post, amongst others. Not being involved in marketing or advertising or any of that side of the business world, initially I had a hard time trying to explain what the business does (the annual reports and presentations don’t help too much either), and I think because the business is a bit difficult to understand, it has been largely overlooked by investors.

      Essentially, Wellcom provides the software, contacts and expertise required to manage a corporation’s brand. They do the design work that defines a corporation. Everything from designing the forms you fill out to at Westpac, the internal corporate letterhead, annual reports, and even the weekly printed catalogues from Wollies or coles.

      But isn’t that what advertising or marketing agencies get paid to do? You’d think. Not entirely – agencies are involved in designing the logos, perfecting the strategy of the campaign, manipulating psychologies, filming the ads, a lot of the creative work. That is a highly competitive area where contracts are becoming increasingly short-term (2 years are common). When companies change the agency they work with, the agency takes the IP with them.What Wellcom offers is a comprehensive digital asset and content management system that allows corporations to keep hold of their own IP. Interestingly, this places Wellcom at the interface between the company and the ad agency, competing with neither. In fact, major advertisers like Saatchi and Saatchi are clients themselves of Wellcom.

      The innovative aspect of their business model is the hub model of operations. Essentially, this involves setting up hubs (small groups of Wellcom employees) within the client’s offices. These are the contact points from which most of the work is done, with specialized jobs sent to central Wellcom offices. This leads to a fairly low overhead footprint (think less office space) and increases the workflow efficiency, improves communication with clients (less mistakes) and results in more recurring revenue. Also, once integrated, clients have high switching costs. The domestic market is fairly matured with revenues around $55M, modest organic growth (5%), and pre-tax margins of ~24%.

      In 2008 Wellcom acquired a pre-media firm in the UK (with clients such as Harrods and BBH), which just contributed it’s first year of profitability. In the last year operations have also expanded into Singapore and Malaysia, but this investment is yet to start contributing to earnings. Management have also mentioned current clients with operations in the US and Europe expressing an interest in Wellcom expanding.

      One of the services WLL has provided in the past has been sheet-fed and online printing – a capital intensive, low margin business – but this subsidiary was disposed of in October 2010 (admittedly to a company controlled by Wayne Sidwell, the CEO/Chairman and majority shareholder). The price paid was about net-asset value. This has reduced the capital intensity of the business, and I expect will lead to higher returns on assets in the future. The disposal also reduced PP&E by about 60% (which might lead to increased income tax due to reduced dep/amort charges), and left the firm debt-free.

      Another change that occurred this year was the restructuring of their 50/50 joint venture with Australia Post (iPrint Corporate). The 50% share of the iPrint JV has returned dividends of ~$1M a year since 2007. Interestingly, the remaining 50% was acquired as of the 30th June 2011 for only $375,100 (not a typo). Net-asset value was $300k, composed of ~$5M cash, receivables of ~3.5M, and short term payables and provisions balancing it out. The workforce was essentially free. Had the acquisition occurred at the beginning of the year, NPAT would have been $1M higher than reported ($10.6 vs $9.6M), and the ROE increased to 20%.

      Performing a balance-sheet cashflow analysis, I get a cash increase of $23M (compared to reported earnings of $9.6M), but after accounting for the acquisition and disposal this reduces to $11M ($4.9M net cash acquired via iPrint, and $6M reduction in debt via the printing business sale). This is backed up by net cash flows from operations of $11.6M. I therefore reason that reported earnings underestimate the actual cash flowing to the company, and due to the competitive position of the business I expect to see continued strong cash flows in the future.

      Backed by the iPrint acquisition, I think there is sufficient evidence to expect FY2012 earnings between $10.5-13M. With a consistent dividend payout ratio of 70%, and an equity base of $52.5M, I expect ROEs of 20-25%, giving a conservative valuation of $2.10-2.75 per share for 2012 (and a forward dividend yield of 8.5-11% for those who care). It is hard to see as far as 2013, but with a 10% increase in earnings (keeping in mind recent growth rates of 15-25%), I calculate a 15-16% increase in IV in 2013 to $2.4-3.2. While not explosive growth, I see this as a safer approach to building the long-term prospects of this type of business.

      In terms of risks, I think the greatest risk is the key-man risk. Wayne Sidwell seems to be the man behind it all, and in 2010 the company lost Amanda Brook who was hired as CEO and lasted less than a year. I would like to know more about this departure and what the potential mismatch was about. I’d also like to know more about the future of the iPrint subsidiary and how they acquired it so cheaply. There are operational risks with a slowing global economy (due to the embedded operating leverage and exposure to retailers), and also the risk that future acquisitions will not be as successful, but given the strong cash position (~$17M) and niche competitive position, I see WLL as somewhat less risky than other cyclically exposed businesses (such as Decmil for example).

      WLL is also fairly illiquid with a market cap <$100M and a highly concentrated register, so it could be considered higher risk for those with a shorter investing time-frame.

      disclosure: I own a small position but would add more if prices declined significantly.

      • Ash Little
        :

        Agreed Roger,

        I have looked at this one in the past but you have filled in a few gaps for me.

        Thanks RobS

      • Rob S
        :

        Thanks Roger and Ash,

        I enjoyed the challenge WLL posed, and the education I have received from this blog certainly helped give me the tools I needed.

        The research phase is probably my favourite part of investing, often it’s quite routine, but sometimes you find some interesting situations that take a bit to get your head around. These tend to be where I find the best opportunities too.

        That said, in market declines like what we have experienced, it’s the behavioural side of investing that really comes into play. Making decisions in the face of uncertainty, that’s the challenge…

      • Rod
        :

        Rob, it’s just a quirk of the way I calculate it on Excel. When the MOS = the price it’s 100%, so 100+ is possible. Halve it if it bothers you. I could have done it the other way.

  61. Ken D
    :

    Hi Roger and fellow graduates –

    I thought it might be interesting to filter companies on the stability of ROE over several years and thereby try to bring to light companies with particularly consistent performance which may, in turn, increase confidence in consistent forward performance (further investigation required of course). This wasn’t a particularly easy task and took some time. However I believe it was a worthwhile exercise. It was interesting to find which companies share this performance trait with the likes of ARB, Cochlear and Woolies. I did my best to filter all stocks on the ASX and I can’t promise that the list is exhaustive (quite a few steps involved and ‘manual’ calculations).

    By my figures, each of the following companies has an ROE of greater than 20% based on the last 12 month’s results, an average ROE over the last five years of at least 20% (or very close to) and has a variance in ROE of less than 30% calculated over at least the previous five years. A company was excluded if the payout ratio was greater than 90% averaged over the last 5 years. A company was also excluded if I considered that the current debt to equity ratio was particularly high or if interest coverage particularly low (e.g. TLS has a high and extremely stable ROE but was excluded on debt and payout ratio considerations).

    Here is the list. The figure in brackets indicates for how many past years the ROE stability criterion is met (not testing further back than 10 years) – WOW, BKL, ARP, FLT, FWD, TNE (10 years), COH, RKN (9 years), IRI, LYL (8 years), CSL, MTU (7 years), DTL, SMX, MOC, ONT (6 years), WEB, DWS (5 years).

    The criteria excludes some high performing companies with persistently high but more variable ROE, and also some high performing companies which have been more recently listed. Nonetheless the analysis comes up with what I believe is an interesting list – many of the above companies are ones that Roger has discussed in recent blogs, Eureka reports, Switzer appearances, Money Mag articles etc. I think the above list would represent a very high quality portfolio and, over the long term, a rewarding one if these companies could be purchased at the right price.

    I am wondering Roger whether you could provide some general comments regarding the stability over time of the MQRs for this group and, of course, your current MQR and current/future IV is always of interest. However I apologise that there are 18 companies in the list (I currently hold only four). Any comments or figures would be appreciated in advance of the new A1 service.

    cheers Ken D

    • Andyc
      :

      Excellent work Ken, may I ask which were the businesses you excluded due to higher payout? – personally I have no issue with it (e.g. PTM)

      • Ken D
        :

        As I had some difficulty posting the update to this analysis (below) I will also list here the companies I rejected due to a quick and subjective assessment of debt/equity levels and/or interest coverage (TLS also on payout ratio):

        TLS
        TRS
        CCL
        SIV
        SST
        MMS
        CPU
        IVC
        FXL

        …and ROE lower than 20% over 5 years:

        ORI
        DMP
        (FLT was borderline)

        …with respect to those I did not reject on payout ratio criterion, the following were borderline

        DMP
        IRI
        MND
        FWD

    • Jonesy
      :

      Good work Ken, great way to filter down a list to something more manageable to investigate further. You’ve given me plenty more work to be getting on with over the weekend…

    • Kent Bermingham
      :

      Ken, Can you please let me know how you calculated this?
      Did you use the advanced stock filter in E Trade?
      If so what fields as I have tried and can’t see that it resents info going backwards on ROE.
      Like to know – thanks

      • Roger Montgomery
        :

        I am guessing the answer is not Etrade; As Ken says, “This wasn’t a particularly easy task and took some time.” We’re grateful he chose to post the results of this effort here at the Insights blog. Thanks again Ken!

      • Mal
        :

        Not easy to do Kent, but you can use filters to average out a few things depending on what you are looking for. On CommSec go to News & Research > Company Research > Advanced search tool (Not sure on eTrade). One of the main searches/filters I use are:

        ROE (In performance measures): greater than 0.15 (don’t want to miss good companies, and ROE > 0.2 is very hard to achieve long term. Any number above 0.1 is ok for a filter though. Display only.

        Dividend yield after tax (In income): greater than 0.04. Alternatively you can use a lower number and also put in the payout ratio and do a calculation in your head. Display only.

        You can use any number of measures to then rank, but two of my preferred are operating cashflow/5yr average growth, or dividend per share 5 yr average growth (both under growth). This gives you a pretty nice list of companies worth exploring. The important things to realise is how these filters work- and the big things to look out for are:

        – very large special dividends/ write-downs etc that can impact these figures
        – consistency

        The top investment grade companies have a remarkable consistency in their accounting.

        As an aside my top 5/6 at the moment (of which I personally own most of them) are:
        BHP
        CBA
        MAQ
        DTL
        IDM
        MAD

        COH at today’s price certainly appealed, but I still think it’s too much to pay for this, especially with BHP in the 30s!

        Cheers,

      • Edward
        :

        Roger,

        I look forward to a post on the difference between absolute and relative valuation. My understanding is that if a business is undervalued using both methods then the odds are in the investors favour that the market will correct appropriately.

        Cheers

        Edward.

      • Edward
        :

        Mal,

        If you do not already know, the financial times website (www.ft.com)has a useful stock screening function. You just need to join – it is free. I personally find 5 yr average ROE, 5 yr Revenue Growth, Debt to Capital, Dividend Yield and P/E ratio as a useful screening criteria. Also the website presents 5 years worth of key financial data for any company in a graphical format.

        Cheers

        Edward

    • Roger Montgomery
      :

      Hey Ken, Have you discerned between the good variance in ROE versus the bad variance. If the ROE jumped up significantly from year 1 to year 2, how have you prevented their exclusion? Actually I can see now that you have excluded them. Would be neat to discern between them.

      • Ken D
        :

        I’m glad this exercise generated some interest. I have done a little more work and hope this post answers most questions raised. Roger I agree totally with respect to your above comments. I will work on this. The following addresses most other questions posted here.

        Firstly I should state that the initial analysis (last post) used variance as the criterion – this should not have been expressed as a percent. The following analysis uses Coefficient of Variation (CV) instead – the threshold being CV 20%), I cut and pasted 10 years of historical ROE data (company by company) into a spreadsheet table.
        In the spreadsheet calculate CV in ROE for last 5,6,7,8,9,10 years where information is available (CV=Standard Deviation/average x 100% – in Excell you need to calculate stdev & average separately and then divide). As there is no specific formula for CV in Excell I took a shortcut in the previous analysis and just used ‘variance’)

        First cut analysis I simply made a portfolio of these stocks and listed last years debt, payout measures and culled accordingly
        Then I decided to inspect historical financials for each company for last five years and cut and paste if necessary to do averaging etc

        caveats

        1) The initial criterion (ROE>20% last year) may exclude companies that have a 5yr average ROE>20%
        2) Companies with stable ROE but abnormally high in one year, especially last year (e.g. JBH) may be excluded (Roger, I will try address this by inspecting the table of ROEs I constructed and hope to post findings shortly)
        3) as above, rapid improvement/fluctuation in ROE not necessarily a bad thing – could be a good thing!
        4) Debt criteria are somewhat subjective (I used judgement with respect to debt/equity ratio and interest cover) – I have listed all companies that passed the initial filters to allow those interested to use your own judgement/criteria in regard to further filtering
        3) input data could be wrong
        4) largely manual process therefore error prone

        Results:

        Initial filters: Last year ROE>20% (return and equity measured same year)
        & stable ROE (CV 90%) – TLS,WHS,FPH,IFM,DJS,WTF (borderline – DMP,IRI,MND,FWD)
        Low ROE (5yr average <20%) – ORI,DMP (borderline FLT)

        Final – 21 companies (new from previous post are BHP,MND,NCK)

        10 years – DTL,COH,BKL,WOW,TNE,ARP,FLT,FWD
        9 years – RKN
        8 years – IRI,LYL,BHP
        7 years – SMX,CSL,ONT,MND
        6 years – MOC,DWS,MTU,NCK
        5 years – WEB

        Comments – I wouldn't consider investing without some form of database and search tool and happy to pay for a good one. These tools are limited (see above analysis). In fact it was the limitations of this tool and trying trying to work out how to get more from it that led me to Value.able – specifically to work out how best to relate ROE & payout ratios to get a better measure of value. Value.able had the answer of course plus bucket loads more. When Roger refers to Skaffold as 'next generation' I am quite confident I know what he means – try calculating 10 years of MQRs in a standard database. If I had such a list I may not have been so interested in conducting the above analysis. Even having worked out Roger's IV formula it is still a pain to cut and paste data and calculate 10 years of IVs into a spreadsheet (and knowing that the figures are only updated annually not every time there is change in shareholder equity for example). I hope Skaffold will allow me to ditch my existing database. If the cost isn't much different then I will be laughing. If Skaffold costs a lot more I will still be very happy. If it doesn't adequately replace my current database I will be a little disappointed but will nonetheless subscribe – my time is too limited and, if I put a dollar value on it, then I suspect I will be miles ahead (let alone $ benefit from making more informed investment decisions). When Roger first mentioned this new service, to quote from Jerry McGuire – he 'had me at hello!'

      • Ken D
        :

        Something odd happened here in translation – in the following two statements:

        The following analysis uses Coefficient of Variation (CV) instead – the threshold being CV 20%),

        Initial filters: Last year ROE>20% (return and equity measured same year)
        & stable ROE (CV 90%) – TLS,WHS,FPH,IFM,DJS,WTF (borderline – DMP,IRI,MND,FWD)

        these should read CV less than 25 percent (must be something in translating the less than sign??? – let’s try again here – CV<25%)

      • Ken D
        :

        worked that time – I’ve learnt to cut and paste comments so must be the reason why. I lost a rather longish post on the weekend because my daughter had logged in and I didn’t realise – lost the post due to lack of ‘cookies’. Lesson learnt.

      • Ken D
        :

        OK – it looks like a whole section was lost

        Results:

        Initial filters: Last year ROE>20% (return and equity measured same year)
        & stable ROE (CV 90%) – TLS,WHS,FPH,IFM,DJS,WTF (borderline – DMP,IRI,MND,FWD)
        Low ROE (5yr average <20%) – ORI,DMP (borderline FLT)

      • Ken D
        :

        I’m going to try this one more time….

        Results:

        Initial filters: Last year ROE > 20% (return and equity measured same year)
        & stable ROE (CV 90%) – TLS, WHS, FPH, IFM, DJS, WTF (borderline – DMP, IRI, MND, FWD)
        Low ROE (5yr average <20%) – ORI, DMP (borderline FLT)

        Final – 21 companies (new from previous post are BHP, MND, NCK)

        10 years – DTL, COH, BKL, WOW, TNE, ARP, FLT, FWD
        9 years – RKN
        8 years – IRI, LYL, BHP
        7 years – SMX, CSL, ONT, MND
        6 years – MOC, DWS, MTU, NCK
        5 years – WEB

      • Ken D
        :

        Nope – forget cut and pasting aaaaggghhh!

        Results

        initial filter : last year ROE > 20% & stable ROE ( CV 90%) – TLS, WHS, FPH, IFM, DJS, WTF (borderline – DMP, IRI, MND, FWD)

        ‘Low’ ROE (5yr average< 20%) – ORI, DMP (borderline FLT)

        Final – 21 companies (new from previous post are BHP, MND, NCK)

        10 years – DTL, COH, BKL, WOW, TNE, ARP, FLT, FWD
        9 years – RKN
        8 years – IRI, LYL, BHP
        7 years – SMX, CSL, ONT, MND
        6 years – MOC, DWS, MTU, NCK
        5 years – WEB

        Hope this works finally!

      • Ken D
        :

        nope – and that was fully rewritten. I did post an email with the full post last night – the bit that is getting left out answers some of the above questions. I will do this explicitly

      • Andrew
        :

        Hi Ken,

        I have just read this and you seem to be in a similar type of place i am. I have been doing something similar and looking at fluctuations in ROE over a 10yr, 5yr and 2yr timeframe in regards to various measures. These are both forward and backward looking.

        Your post has itself given me some extra thought to expand upon.

        I place great weight in the stability of a companys performance over a long term time frame. Obviously the more stable the performance the more confidence one can forecast future values where as a widly fluctuating company is more than likely to offer a surpise (whether positive or negative) and would there for need a larger required return and/or margin of safety.

        I am not 100% sure what i will find or even if my various theories will be proved correct but it should be an interesting exercise.

      • Ken D
        :

        Hi Andrew,

        I look forward to hearing further insights and any results of your research. The enticing thing about research, and the very reason for engaging in it, is precisely the fact that you don’t know what you will find! Apart from improved confidence in forecasting, I would add that a high and stable ROE might indicate a sustained competitive advantage, management focused on the things that matter for shareholder value over the long term etc etc.

        The filtering exercise provides a starting point for further investigation. However there are limits to how well we, as individuals (non-professionals) with limited time to devote, can fully come to grips with risk associated with a particular company and on the factors which might impinge on a companies performace going forward. These limitations also exist, perhaps to a lesser extent, for the professional investor. However we can reduce risk by paying attention to a company’s track record, trying to understand that to the best of our ability, drawing on others assessments e.g. MQRs etc etc.

        I found Roger’s recent interview on Switzer, where Roger was asked how he would manage an inherited portfolio, very interesting. A key principle that Roger stressed was diversification – both over time and over companies. It was interesting that Roger’s response seemed to put greater emphasis on diversification rather than strictly quality and margin of safety. Diversification, in itself, is recognition of the fact that there are things we can’t know or do not know and provides a safety net in this respect. Also Roger advocated diversification over time – recognition that he cannot know which way share prices might head and therefore leaving the door open for opportunities as they arise.

        There is a trade-off here though – if diversification across companies is something that is taken on board as an important principle, this reduces our capacity to investigate individual companies as our investment universe has to be larger than half a dozen companies. So we need a strategy to filter the wheat from the chaff, grade the wheat etc and do so in real time.

        To emphasise the importance of diversification, Warren Buffet advocated that those who didn’t understand companies would be better investing in an index fund – and by saying this he was by no means suggesting that this was a bad thing to do. With respect to the opposite end of this spectrum, the most extreme example I have heard about is Philip Fisher, who, according to his son, towards the end of his career only invested in one company (Dow Chemicals).

        We are not WB or Phil Fisher but we can apply a ‘rational framework’ for decision making (Roger’s thesis in Value.able) which affords us the means to confidently go down the road of investing in individual companies rather than index funds. However, that rational framework includes recognition of the fact that this is still a game of chance and managing our investments is about reducing the ‘chance’ or ‘risk’ element (and also creating opportunities to capitalise on this).

        Like a football game, there a many elements at play and the outcome is the net result of defence, attack, reducing the penalty count, fitness etc – these things can all be worked on, but the ‘bounce of the ball’ is always a factor. In the end it is consistent performance over a season that counts. We should apply these principles to our investments. In another sense, if we find companies that exhibit consistency over the long hall, then these companies should be of great interest to us.

  63. Ken D
    :

    Thinking this through, I should really exclude companies on payout ratios and debt over a 5 year period. More number crunching. I would be happy if you witheld this post until I revised on this basis (I have it saved). Should not make much of a difference but…

    • Macca McLennan
      :

      Great work Ken D
      Lets have your new list

      I like to have at least 5 years history
      I usually avoid companies who only been listed for 1 or 2 years
      I notice Roger has named(for our consideration not necessarily to buy)
      SWL & GNG both have only been public for about 12 months
      Both in construction which in itself is risky

      Regards
      Macca

  64. John Palmer
    :

    Hello Roger,

    Nice to see GCS in your list. I bought some a week ago just before they went ex-dividend. Have also taken a stake in BSA. Looks cheap to me (I have IV at about $0.40) and with growing eps, revenue, NPAT and ROE over the last 3 years, looks like management are on the right track.

    Regards
    John

  65. TC
    :

    As a previous owner of SWL shares I am now on the sidelines waiting for the new management changes to keep the projects on time and on budget. I am sure we have all seen good companies stumble after foundation managers leave. Another risk to SWL is a looming skills shortage as the resource projects in QLD are about to start and will be offering even time fly in/out rosters with a 25% to 40% pay rise compared to companies like SWL. With the current Mr market over reactions to any company falling slightly short of meeting its forecast earnings, It may be possible to be buying SWL shares at around $1.25 in the next couple of years. A couple of Cyclones during the next storm season could also put pressure on the earnings forecast.

    • Peter
      :

      Departure(s) ? Garry Whyte has stepped down, and at his age, it is hardly surprising. I think he has earned a rest. The CEO is on leave. I think you are reading way too much into this. Cyclones, by the way, rarely trouble the Brisbane/Gold Coast area, and that is where most of SWL’s work is done.

      Peter

    • Lloyd
      :

      TC,

      Re SWL – all too true. And not to mention the inflated 2012 earnings growth – way above the guidance of management, which to date has a record of over promising and under delivering.

      Management and board appear inexperienced and ill equipped for a public listing and it shows in the disclosure record to date. Similar problems have beset MCE.

      Maybe they will learn, but more often than not in the historical record the company float leadership fails to successfully make the transition from private to public ownership. Turmoil and stakeholder dissatisfaction follow and shareholder value erodes before things are stabilized and lessons learned. This process can take five years and is a major risk in the private company to public listing transition.

      BIG MOS required under these circumstances.

      Regards
      Lloyd

      • Roger Montgomery
        :

        In the year just passed, SWL delivered 24% revenue growth ($53m) on top of what was contracted at the beginning of the year. Their total contract order book is $395 and $283 is already contracted for FY12 delivery. Slower than expected ramp up of flood work in QLD appears to be the case too but second half revenue was up 31% on first half.

      • Brent
        :

        Lloyd,

        When have SWL overpromised & underdelivered?
        Their prospectus forecast for 2010 was Revenue of $193 mil, NPAT of $11 mil, dps of 3.85 cents – they achieve $184 mil revenue, $11.9 mil profit and dps of 4.0cps. They missed their revenue, but exceeded profit substantially over their forecasts.

        They forecast that 2011 profit may be below 2010 profit ($11 mil) due to competition/lower margin projects, they subsequently recorded NPAT of $12.3 mil. This is in spite of dealing with one of the worst floods in Queensland’s history and the associated delays/costs.

        They didn’t provide a forecast for 2012, they indicated improving margins – Which if they achieve $14 mil NPAT off their forecast revenue then that will be an improvement in margins.

        SWL has transitioned very well so far.

        Brent

      • Brad
        :

        I Met Brian Riggall and the CFO and thought they we’re straight up, focused guys. Rigggall is ex Balderstone and has taken two months off long service leave.

        My impression is they have done a good job corporatising the business over the past few years then taking it public.

      • Jeff
        :

        Not quite sure what you mean about over promising and under delivering Lloyd. After the floods in Jan SWL provided updated guidence that profit would be similar to the previous year. They slightly beat this forecast.

        Regarding the management changes, “Management and board appear inexperienced and ill equipped for a public listing and it shows in the disclosure record to date” your comment. Could it be that the new management will do a better job?

        Obviously time will tell.

        jeff

  66. Bryn
    :

    These are 5 business I would ideally like to hear Roger’s thoughts and wisdom upon.

    1. BKL – Blackmores
    2. RHC – Ramsey Healthcare
    3. REH – Reece
    4. ABC – Adelaide Brighton
    5. CPU – Computershare

    I dont currently hold any of these stocks long, so interested in people’s thoughts as to there business. I already hold BHP, WOW and QBE. Looking to diversify my longterm holdings a little more.

  67. Michael
    :

    You can narrow the entire stock market to these companies: ARP, FWD, JBH, WOW, FGE, MND, RKN, MTU, DTL, MMS, MCE & CBA.

    MND & RKN are a bit expensive, the rest are either around IV, or below it.

    The blog favourites that are on my avoid list are CCP, VOC and BGL.

    • Ray H
      :

      Hi Michael,

      No doubt about the quality of the companies you have listed. I would question whether the use of a 10% RoR is appropriate though in this environment. I use a minimum of 12% and on that RoR there are only one or two in the list trading below IV at the moment.

      • Michael
        :

        Hi Ray,

        My first step is to choose the highest quality businesses, and then wait for the right time to buy. I would agree with you that there are not many on my list that have large discounts, and I have not bought them all for this reason.

        In most cases the biggest margin of safety is provided by the quality of the business, not by the size of the discount to IV. I don’t like to buy something just because it is cheap, the same as I don’t buy all my clothes from the $2 shop.

    • Michael
      :

      Andy – I like BHP, but due to a conflict of interest rule, I am not able to buy it. Without this restriction, I would be buying declines.

      Peter – MCE to some extent is a victim of it’s own early share price success. It has still however quadrupled in a year and a half. The hype on the blog was overdone in the past, but this part of the bubble has now burst. I would not weight my list heavily to MCE however.

      MTU has proven its ability to grow in an efficient manner, and has the capacity to continue to do so. It’s not for everyone though.

  68. Macca McLennan
    :

    My Best 5
    Which adhere to Roger’s guide lines above

    TGA ROE 29% MOS 50%
    Thorn Group formerly Radio Rentals
    Retail rentals & credit management
    Good history of rising EPS & ROE

    ORL ROE 85% MOS 25%
    Oroton’s Super Sally has transformed this company in Aust
    Will she do the same in Asia
    Stores have just opened in Singapore(2) KL(2) HK(1)
    The YE11 report could be a turning point
    Another transformation or disaster I eagerly await this report

    MTU ROE 34% MOS 30%
    M2 Telecommunications
    Only listed in 2008 EPS & ROE have every year

    CWP ROE 25% MOS 50%
    Cedarwoods Properties large land ownings in WA & VIc
    Profits are remarkably steady for a developer

    CCP ROE 23% MOS 50%
    Credit Corp Group Operates by purchasing debt legers (PDL’s)
    & then collecting the debts
    Since GFC EPs have steadily grown by better than 20% PA

    The following stocks also have high ratings
    ANG CTN FGE FXL MIN MCE VOS

    Regards
    Macca

  69. Robert Green
    :

    I see no mention of Vocus. In the article on “defensives” Vocus got a mention but no analysis. Has it dropped off the radar as well as off the chart?

    • Ash Little
      :

      Nicw list Anthony,

      Currency issues with 1 and 5 and possibly 2 and 3 …………Nice list though

  71. David V
    :

    Hi All,

    I agree with the listing others have made on SWL and FGE. I would add MCE (IV 2012 $7.90) in this bucket as well, however it does have the cloud of no new recent announcements regarding contracts.

    Others that I would add are

    TRG – Treasury Group – IV 2012 $5.69
    ZGL – Zicom Group – IV 2012 $0.70

  73. Dan S
    :

    GCS is an interesting business that I’ve been following for a while.

    The only issue I have with GCS at the moment is their order book roll-off around 2H12, considering their biggest contract, the Fiona Stanley hospital is due to complete.

    I note they have been acquisitive lately.

    Watch out for the WA effect. Can’t trust those parochial so-and-sos!

    No disclosure of interests?

  74. Kerishd
    :

    I only had CCP on my list because it had a good margin of safety. I dont follow the others. I wonder if they have good margin of safety.

  75. Alan Ferguson
    :

    G’day Monty,

    I think the surprise shown around the 4% yielded filter is that it, not only is not usually a consideration that is given much weight in your Valu.able approach, but that it has acted to remove half of your extremely interesting list of companies that we look forward to perusing and examining further.

    As we are Valu.able Grads here, and not your average Switzer viewers, may you please share the rest of the list with us?

    kind Regards

    Alan

  76. Brad
    :

    SWL and CCP are well run businesses with high ROE and better than average growth prospects, trading well below our valuation, on our model.

    • Will
      :

      Hi Brad,

      On looking at the SWL Annual Report and the graphs on anticipated work looks lean/slow or no growth in the 2 to 3 yr mark. It reads as though current works will finisha and there is little in the way for govt spending so the move into the mining sector may either take up the slack or not…

      Cheers, Will

  77. Andrew
    :

    Most of mine have reported and most of mine are still slightly expensive.

    If i had to choose my top 5 undervalued ones from my list i would have to say in order. CBA, JBH, WOW, FLT, ARP.

    Still waiting on ORL and DJS to release results but not expecting them to be good enough to be added to the list, especially the latter.

    My top 5 companys regardless of discounts would be very different to the above list though.

  79. Gary Craddock
    :

    Hi Roger and Team,
    The single difficult factor to select stocks (that essentially determines how most Australians will spend their retirement) is to decipher the information that the Board and Company Accountants release to the market place.In many cases the information and conduct of Directors, employees and Accountants is potentially misleading,sometimes incorrect and in cases where the ACCC, police or ASIC have proven, criminal.
    It would be beneficial to have a standard format for reporting that all companies must follow as well as a register of all Directors and senior personnels conduct in regard to personal and related party share transactions,statements/utterances, achievements ,track records, known associates, freinds , hobbies annual statements of assets and liabilties etc.
    After all these people are in a position of trust to determine the standard of living of the majority of Australians in their retirement. The stockbrokers and financial advisors rely on the conduct and information given by these people and it should be impeccable.
    I had some shares in Evans &Tate that a high profile businessman was a major shareholder which enhanced the companys credibility. He sold out all of his shares a few days before the receivers moved in. I don’t know if any official questions were asked but in the smaller caps this type of behaviour appears to happen all too frequently. As a consequence I am reluctant to publicly nominate any shares as I have little faith in the information that I have to make a confident decision.Peter you are in a fortunate position where you can gain audience with CEOs and CFOs and look them in the eye and ask the hard questions.
    As a consequence I put a lot of faith in your writings and believe in your financial philosophy. My gut feeling is that you have a large enough following to influence share prices in the smaller caps and put yourself out there that you must feel the pressure to do the research and perform.
    Consequently I am a disciple of yours and will use your guidance ,laced with my prejudices to hopefully make some sound investment choices in the future.

    Regards
    Gary

    • Michael
      :

      I’m not sure I agree with those who assume accountants and directors are not honest, but financial advisors and stockbrokers are. Maybe they have been burned in the past. Stock market investment is not for everyone.

  80. Nick Mason
    :

    Matrix would have to be the most undervalued company in my portfolio at the moment.

    Did someone question earlier whether they had a competitive advantage? Apart from having just moved into the most technologically advanced manufacturing facility of its kind (said by one industry insider to be 10 years ahead of its nearest competitor.)

    The previous 6 months may have been under expectations and a bit disappointing although I doubt whether there has ever been a company in history which has seamlessly moved from strength to strength never experiencing a setback.

    Anyone questioning the company’s prospects should read a little deeper into the opportunities opening up to this company across a range of industries rather than simply comparing their order book from subsequent halves although of course their declining order book is not ideal.

    • Scott W
      :

      I have been doing my best to ignore the market moves at the moment while I allowed myself to remain almost fully invested as the market collapsed I am well under water with FGE and MCE as I came late to the party although still got in under what was then my calculated value (which was pretty much in consensus with the bloggers and Roger.

      I just get a little nervous about what truth is being hidden from the market as I personally know of many instances of large and small companies who present all type of rubbish as fact. Case in point was a paint company where I used to work, while they showed the market a strong face while their Brisbane factory was totally out of action for around 3 months (that facility produces as least 80% of their output), although insured against the risk that shut down could hammer earnings.
      MCE and FGE etc etc can tell us all that things are great, but in my experience a company will never tell you how bad things really are. However for now I am keeping the faith, although not enough to top up my holdings on either. I’d hate to have to be telling myself that old adage of ‘fool me once, shame on you, fool me twice, shame on me…’

      • Roger Montgomery
        :

        G’Day Scott,

        Your post is a good reminder that there are several parts to the investment equation. For a very long time, bloggers here have been warning others to focus less on the calculation and more on the business. Remember the parts of Value.able. A discount to intrinsic value is only one part. Cash flow is also one part and there are several others.

      • Pat Fitzgerald
        :

        Hi Scott W

        I agree that businesses are very slow to tell us about bad news but very quick to inform the market when things are going well. Some people have mentioned that talking to CEO’s gives Roger an advantage but I once had a CEO confirm revenue forecasts and then about two weeks later they announced more than a 60% decrease in revenue forecasts. Poor disclosure is a good reason to limit exposure to a stock and most Australian businesses could improve their disclosure.

      • Roger Montgomery
        :

        Pat,

        It is my preference to avoid discussions with management unless we have specific questions about the business, treatment of an item in teh accounts or its competitive landscape.

      • Michael
        :

        I am puzzled about where the line is drawn between information that can be traded on, and inside information. If an analyst meets with a company and they reveal information not publicly available (which they do), then surely an analyst that then acts on that information is using inside information.

        If I were to contact a company, what material information could be provided to me that would be legal for me to act on?

      • Pat Fitzgerald
        :

        Hi Michael

        I did not expect the company to tell me the truth about their revenue, that was my point, a normal shareholder contacting the company does not help that much. Analysts and the fund managers they share information with are allowed to use inside information, very lucrative for those involved.

      • Roger Montgomery
        :

        Hi Pat,

        This view is a common one but totally misplaced. I can understand the frustration its belief must cause. Dealing is inside information however is unequivocally against the law and no amount of financial gain is worth the consequences. Using inside information is not “allowable” for fund managers or analysts. See the changes made even on ‘selective briefings’.

      • Pat Fitzgerald
        :

        I don’t agree with many ASIC decisions. In my opinion ASIC treats small shareholders as pests and makes decisions accordingly.

    • John C
      :

      Hi Nick. I, for one, did question their competitive advantage in the event that they lost significant market share. I’m not saying they have. But if it eventuates that MCE are losing business to their competitors, then it might appear that the competitors have the advantage, not MCE. It’s not much help having a plant that’s 10 years ahead of it’s time if you can’t sell the product that it produces.

      • Matthew R
        :

        David, you also said today that MCE has been a case study in mass hysteria the last few months

        I can’t help thinking that now everyone has left the party, now may be a good time to go back in

        I still have confidence that MCE will do more than adequately in the next few years to satisfy the patient one’s. It won’t be without it’s up’s and down’s and if you can time those then you’ll no doubt do better, but the patient won’t fair too badly either

      • Nick Mason
        :

        Good to hear Ash although going from your comments you are obviously more mentally equipped to greet any share price declines with a greater degree of equanimity than most.

        Obviously though, if MCE goes bust, I’m going to have to take a very long hard look in the mirror because for me it is still a wonderful business with incredible prospects. If it goes bust some very careful self examination of where I went wrong will be required.

        David, I would agree with you that MCE has been an example of mass hysteria the last year, both up and down! I would say at its highs $10 the company was overvalued and now it is greatly undervalued. And reading the annual report yesterday I learned that,

        “The year has also seen a significant increase in our shareholder numbers from 784 to over 6,000 shareholders.”

        A near 8 fold increase!

        That’s a lot of sheep who perhaps didn’t do the necessary work to understand the company, its prospects or what it’s really worth and bought because of the meteoric continual rise in the SP. If you’re buying because the SP is rising it would make sense that you’d find reason to sell because the SP is falling. How could it be otherwise?
        Is that a rational reason to sell?

        I’m sticking with MCE and best wishes to all holders.

      • Ash Little
        :

        Nick,

        Looking at what is happening in the industry will tell you that their is some huge orders coming but probably not soon enough for 2012 financial year.

        What is happening current in the world may push this out even further.

      • Nick Mason
        :

        True Ash, although I’m focused on where Matrix will be in 10 years time not whether they narrowly miss or exceed forecasts this year. I hope they meet them although it is ultimately irrelevant to me.

      • John C
        :

        Hi Nick. I certainly hope MCE doesn’t go bust, and I think that’s probably unlikely in the near term certainly. I’ve watched a local private Adelaide company called Bianco for a while. They’re into construction and have been highly successful for many years. Their construction supplies, hire, and reinforcing businesses still continue to trade today. However, after their founder Nick Bianco got the finance and built a large “state-of-the-art” new ($50+ million) manufacturing facility at Gepps Cross in Adelaide, and the expected orders (from the mining industry mostly) were not forthcoming, that division of Bianco (Bianco Structural Steel) did go bust recently. That division went into receivership with debts of over $60 million and Nick said in a recent interview that he’s lost everything. He (through “Bianco”) used to be the main sponsors of the Adelaide United Football Club (that’s soccer to many of us), and was very well known for his generosity; he once gave a long serving employee a luxury car as a Christmas bonus.

        Anyway, Bianco isn’t Matrix, but the Bianco story showed that you can build a new state-of-the-art manufacturing facility and still not do well, if your sales forecasts are seriously wrong. I know a number of people on this blog have invested in MCE, and I hope that their sales and order book recover, and that seems like the most likely outcome.

        However, on the offchance that they might be being out-manoevered by competitors (even by simply undercutting them on price, to win back sales), and because I don’t understand the long term implications of that (should it be the case), I won’t be investing in MCE at this time. As often said on this blog, it comes down to understanding the business, and when it comes to Matrix, and their current situation, I clearly don’t.

        Any thoughts anyone on the implications of Matrix’s CFO/Company Secretary Michael Kenyon resigning yesterday (with immediate effect) for “health reasons”?

      • Nick Mason
        :

        Very unfortunate Michael Kenyon resigning and I hope he’s okay and will get better soon. Michael was the former CFO at Forge Group where he did an excellent job as he did at Matrix.

        Your story about Nick Bianco was very interesting, let’s hope that Aaron Begley’s guesses in this instance are better than Nick’s were. Time will tell.

  81. Ron shamgar
    :

    Roger,

    From where did you get “forecast EPS growth” of 26.5% for MTU when management indicated EPS growth of 15% at the most?

      • ron shamgar
        :

        OK.

        But in previous years they were coming off a lower base and in addition they had the benefit of very large acquisitions.

        personally, i prefer to calculate my IV conservatively using management guidance. if they end up beating it, well at least the risk is to the upside!

        just my view. cheers.

  82. Richard C.
    :

    This is my top 6, excluding the ones nominated by Roger above:-
    RCO (ROE 40%; MOS 200%)
    NST (ROE 50%; MOS 31%)
    EZL (ROE 23.6%; MOS 22.6%)
    IRI (ROE 30%; MOS 18.4%)
    FGE (ROE 40%; MOS 16.7%)
    ONT (ROE 35%; MOS 15.1).

    RCO and NST have not reported their results yet. RCO receive royalty income from Gold and NST is junior gold miner with impressive management so far. Don’t have a long history so probably won’t rate A1 or A2 yet.

  83. David
    :

    Wow, notably Forge and a few past favourites don’t make the list. I’m surprised that Roger uses a dividend above 4% as a measure of value. I like the fact that it means you are getting a real monetary return now, but I equally wouldn’t mind it if a high ROE company reinvested earnings into high growth opportunities because returns of 20-30% at relatively low risk are hard to come by in every day life. I love dividends, but I would probably not rule companies out because they do not pay substantial dividends today. Silver Lake is yet to pay any but the business fundamentals are sound even if there is a moderate fall in the gold price. A low payout ratio on a stock that has grown 400% would still bring substantial real dividend return when measured against what you bought it for. At the same time I do understand the concept of capital intensity though – its better if a stock can grow its business substantially for a minimal outlay. Do others rate companies based on dividend yield?

  84. Luca
    :

    Hi Roger and Team,

    Thank you for this interesting post.

    Could you explain why one of the filters used to refine this list from 17 to 9 is a forecast dividend yield of greater than 4%?

    I was under the impression, from value.able, but correct me if I am wrong, that company earnings are more valuable to shareholders when, instead of being paid out as dividend, they are retained by companies and deployed at high rates of return.

    Cheers,
    Luca

    • Roger Montgomery
      :

      Oh please don’t think that I care at all about dividend yields as a measure of value. I do not. I just threw it in for the many Switzer viewers who I have been told do like an income.

  85. Dino
    :

    How do you assess future prospects roger of these companies and others?? In my opinion it is paramount. High roe good cashflows and low debt are objective – health checks if you like – but will not tell me squat about the future prospects are for of a ltd. Your book stresses competitve adv. as correlated to future prospects, Mce and ZGL make me wonder otherwise. How can we identify companies that will be bigger in 5 years time as you say. i can speculate macro speculation- buy shares that sell food gas etc -essentials. Buy companies that are at the forefront of technology eg the mighty obvious apple.

  86. Alex
    :

    Re Flight centre… What does a -ve 118% D/E ratio actually mean?

    My A1 suggestions are:

    CSL..outstanding management. World class products and research. Huge cash cow, without all the exposure to just one product and close to IV (unlike COH)
    QBE… Still one of the most profitable insurers in the world. large exposer to the upside of less insurance risk in the future.
    CPU… Huge economies of scale. Could be run from an imac in a garden shed if you had to..
    PTM.. The best financial manager. ROE and profit margin speak for themselves.
    HVN Beaten down stock, but has huge potential. Sticking to its nitting. ie does what it does well..without all the glamor. Taking this OS…potential growth. Not panicking or consequently making any silly retailing decisions. Great franchise.

    • Andrew
      :

      A negative Debt to equity ratio, well the one i use anyway and would come up with a negative figure, basically means that the company has no net debt.

      You work it out by deducting the total cash at bank from the total borrowings and dividing by equity. 0 or lower means no debt.

      • ben
        :

        You got to watch out for HVN, alot of non core profits in their latest result.. just looking through it, its almost like a REIT! but if you’re a believer in the discount below NTA, HVN would’ve been a nice buy. I would’ve gone long at 1.80 if i had the cash.

    • Froggy
      :

      Interesting point to make about COH (exposure to just one product) given COH have just been whacked as their ‘one product’ has received a voluntary recall. Makes it all the more important to maintain diversity in your own investment if you choose to own companies with an income stream reliant on ‘one product’ (MCE a good example?).

      • Roger Montgomery
        :

        Hey Groggy, you don’t receive a voluntary recall. Do you think we’ll stil be talking about this recall in 2017? What did they say the percentage of failures was? Do you think this could enhance their reputation? I don’t know but I think the market’s reaction, particularly if it continues, may provide a very rare opportunity to get COH at a discount to intrinsic value.

  87. Parag
    :

    My list of 5 undervalued stocks (2011 valuation – 2012 valuation)

    CAB $5.13 – $5.48 ($4.49 current price)
    CWP $5.57 – $6.19 ($3.80 current price)
    FGE $6.77 – $6.24 ($5.14 current price)
    BHP $47.32 – $83.66 (very bullish forecasts!) – ($39.17 current price)
    ANZ 2011 valuation $25.48 ($19.92 current price)

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