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.
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ASIC specifies the information that companies seeking to float on the ASX must include in their prospectus. Yet Australia’s corporate landscape has a scattered history of hyped up floats followed by disappointment for many investors — Telstra, Qantas and Cool or Cosy are just a few. In this appearance with Peter on Switzer TV Roger Montgomery tells investors exactly what to look for in a prospectus. Roger’s advice? Go to the second last page – the Pro Forma balance sheet. And Roger’s advice for ASIC? Ensure vendors specify the impact of the float on the post listing balance sheet, write the prospectus in natural English and put the most important page – the Pro Forma balance sheet – on Page One! Watch the interview at youtube.com/rogerjmontgomery.
Roger Montgomery’s ValueLine portfolio for Alan’s Eureka Report rose by 12.79% in its first year of operation (with less than half the portfolio invested), compared to the index gain of 9.69%. This financial year the portfolio has grown by 15.11% compared to the index, which has grown by 12.71%. The invested portion of the portfolio returned 27.6% in year one and 23.4% this year thus far. It goes to show that Roger’s Montgomery’s Value.able strategy of buying the best stocks – those with the higher Montgomery Quality Ratings or MQRs – for less than they’re worth leads to meaningful outperformance over time. How the ‘blue chips’ in your portfolio compare? Compare your portfolio to Roger’s list of 51 companies and their Montgomery Quality Ratings. Read Roger’s article at www.eurekareport.com.au.
My team tell me that this year’s combination of Easter and Anzac Day has produced a once-in-a-lifetime succession of public holidays. I have encouraged them to use the time wisely – practicing Value.able intrinsic value calculations. In addition to spending precious time with family and friends, I encourage you to do the same.
We have an extraordinarily generous community of Value.able Graduates here at the blog and on my Facebook page. Special thanks to Ashley, Kent B, Lloyd, Rob, Matt R, Steve, Andrew, Gavin, Ken, William (Bill), Greg, John M, Ron, Joab (whom we will miss dearly – please keep in touch), Jonesy, Brad, Ann, O’Reilly, James, Trav, Omar, Michael, Costas, Emily and Anthony. If I have left anyone out please let me know. Thank you for sharing your wisdom with our community! I am sure there are many others who are delighted to help recent Graduates.
Before I reveal your Easter homework, here are a couple of links you may find helpful:
Webinar – I guide you, step-by-step, through a valuation
Data sources – The Value.able community’s guide to finding the data you need to calculate your own valuations.
Now to the homework…
I began with 1847 businesses and removed the 1168 that didn’t make any money last year (put $0 into the Value.able formula and you will get $0 out). That cut out 63 per cent of the Australian market… a useful first filter.
Then I applied the following criteria;
1) ROE > 20 per cent: (Chapter 6 – The ABC of Return on Equity)
2) Debt/Equity Ratio < 50 per cent: (Chapter 8 – Debt Is Not Always Good)
And then I refined the list further as follows;
3) 2011 forecast Earnings and Dividends are available: (Chapter 5 – Pick Extraordinary Prospects)
4) Must achieve one of the following Montgomery Quality Rating (MQR) – A1, A2, A3, B1, B2, B3: (Part Two – Identifying Extraordinary Businesses)
That left 255 stocks as the subject of your holiday homework. Using my discretion, I reduced the list to 14: The Reject Shop (ASX:TRS/MQR:A2), West Australian Newspapers (ASX:WAN/MQR:A2), Computershare (ASX:CPU/MQR:A2), Mermaid Marine (ASX:MRM/MQR:A3), Flexigroup Limited (ASX:FXL/MQR:A3), Cedar Woods Properties (ASX:CWP/MQR:A3), SAI Global Limited (ASX:SAI/MQR:B2), Fortescue Metals Group (ASX:FMG/ MQR:B2), Coca-Cola Amatil Limited (ASX:ASX:CCL/ MQR:B2), Retail Food Group (ASX:RFG/ MQR:B3), Telstra (ASX:TLS/ MQR:B3), McMillian Shakesphere (ASX:MMS/ MQR:B3), Bradken Limited (ASX:BKN/ MQR:B3) and Aristocrat Leisure Limited (ASX:ALL/ MQR:B3).
This homework is not about finding cheap stocks – it is about understanding businesses, return on equity, debt, cashflow and identifying extraordinary prospects. Effort calculating intrinsic value should only be exerted once you’re satisfied the business is extraordinary.
If you are keep to improve your investing with some useful examples, your holiday homework is as follows:
1. Download the 2011 Easter holiday homework worksheet – click here.
2. Calculate the 2010 Value.able intrinsic value and 2011 forecast Value.able intrinsic value (populate into the worksheet)
3. Then answer the following questions and perform the following tasks:
A. Of the 14 companies, list those demonstrating a rising value over the next twelve months.
B. The stocks of which companies, if any, are offering a margin of safety?
Important things to note:
If you need some guidance about how to calculate future valuations you can also read this post.
For those seeking a real challenge, re-read Value.able Chapter 9 on Cashflow (from page 152) and analyse the cashflow of each company using the balance sheet method. Click here to download the Cash Flow homework worksheet. At Montgomery Investment Management we only invest in businesses with strong cash flow. I will produce the cash flow analysis for The Reject Shop (TRS), Retail Food Group (RFG) and Aristocrat Leisure (ALL) after Easter.
My team and I wish you a happy Easter. I really do hope you have an enjoyable and rewarding break and that you enjoy the tasks I have set for you. I look forward to reviewing your results after the break.
Posted by Roger Montgomery, author and fund manager, 14 April 2011.
Roger Montgomery has picked some winning A1 stocks over the past twelve months — Forge and Matrix are just two. In this appearance on Your Money Your Call Roger reveals a new small cap stock that makes his Value.able grade. Roger also shares his insights on AMP, Woodside (WPL), Paladin Energy (PDN), TFS Corporation (TFC), and Australia’s big four banks. Is CBA still Roger’s preferred bank stock? Watch the interview.
In this appearance on Your Money Your call Roger Montgomery shares his thoughts about CEOs and founding shareholders selling shares. Does he begrudge Matrix CEO Aaron Begley selling 350,000 recently? Absolutely not! Roger also reveals his Value.able formula for calculating the cash burn rate of mining exporation businesses. Watch the interview.
Roger Montgomery and Ross Greenwood talk gold, commodities, inflation and the US economy on 2GB Money News. Listen to Podcast.
Early this month we hit a milestone worth celebrating. Thanks to your incredible interest in the value investing approach advocated and discussed here we hit 10,000 comments.
Thank you for your interest, your passion and your generosity. It is amazing and I cannot be more proud of the incredibly diverse directions you have all headed with the new found knowledge from Value.able.
Thank you also for your encouragement and taking the time to share with me just how much you have been impacted by Value.able. My team and I are delighted to hear your amazing stories of investing success.
Speaking of stories, here is one of my recent favourites. It’s from Craig, a Graduate from the Value.able Class of 2010. It’s the story of Eddie and his bike…
Twelve year old Eddie has a paper round.
He bought a bike for $10,000 (its a bloody good bike) and earns $1,000 a year, after all expenses (new tyres, chewing gum) and tax (there’s no tax as the bloke who owns the newsagency pays him cash).
Eddie’s happy, but he wants a new playstation, so he offers a 50% share in his operation to family members.
His brother’s keen but the $10 he gets for mowing the front lawn (the backyard is fake grass) means he doesn’t have the money.
His teenage sister is keen but she’s running up huge mobile phone bills which accounts for all of her pay from McDonald’s.
His old girl’s keen but she just bought a new Apple product, so she’s got no money to spare.
His old man however, has squirreled away $5,000 by doing some overtime at work, and had been shopping around for somewhere to put it to work. ING are offering 8% (this is 2013), so the old man says to Eddie: “Look son, I can get 8% at the bank.”
“You can get 10% with me dad, if you hand over that 5 grand.”
“Yeah but you might want to do something else one day, or your bike could need replacing, or you could – god forbid son – have an accident. With all that risk involved, I wan’t 12.5%, so I’ll give you $4,000 for me half share.”
“Four large? You’re killing me dad. Don’t you know banks can go broke?”
“Not in this country son. I want 12.5%.”
“There’ll be another GFC, you wait, but people will still want the paper delivered.”
At that point, the boy’s mother approaches, holding her new iPad.
The husband looks at her, then back to his son: “Make it $2,500… I want 20%.”
What is your funny or amazing Value.able story?
Go ahead, Share, Encourage and Inspire. And thank you for helping so many investors value the best stocks and buy them for less than they are worth!
Did you contribute your photo to the Value.able Graduate Class of 2010? The Class of 2011 is open and accepting Graduates. Email your photo and join Bernie, Martin, Alya and Jim Rogers.
Posted by Roger Montgomery, author and fund manager, 13 April 2011.
Investments are never certain, but avoiding particular sectors and companies can improve your prospects. Extraordinary A1 businesses businesses are not blue-chip. Find a business whose shares are available at prices below intrinsic value and one whose value is expected to rise materially over the next few years, then provided the other characteristics of quality are met you would be unwise to leave your funds parked anywhere else. Read Roger’s article at www.eurekareport.com.au.
Oroton, JB Hi-Fi, The Reject Shop, Woolworths, Nick Scali, Cash Converters. If you have seen me on Sky Business or visited my YouTube channel recently, these names will be familiar. David Jones, Country Road, Harvey Norman, Myer, Super Retail Group (think Super Cheap Auto), Strathfield Group (Strathfield Car Radios), Noni B and Kathmandu also spring to mind, albeit for different reasons.
As a business, retailers are relatively easy to understand. The best managers are easy to spot (think Oroton’s Sally MacDonald) and it is also easy to separate the businesses with earnings power from those without (compare JB Hi-Fi and Harvey Norman).
But generally speaking even the best retailers may not be companies you want to hold forever. Why? Because they quickly reach saturation and so must constantly reinvent themselves.
Barriers to entry are low. There are always new concepts with young, intelligent and energetic entrepreneurs eager to develop a new brand and offering. Big red SALE signs are replacing mannequins as permanent window fixtures in Australian shop fronts, driving down revenue and margins. And for those who choose to defend brand value, sales revenue is also often sacrificed.
Then there’s the twin-speed economy, a string of natural disasters, soaring oil prices, growing personal savings, higher interest rates, Australia’s small population and one that is increasingly adept at shopping online for a getter price. Hands up who wants to be a retailer?
Retailers are attractive businesses – at the right price and the right stage in their life cycle. So, in retailing, who is Australia’s good, bad and just plain ugly?
Remember, these comments are not recommendations. Conduct your own independent research and seek and take professional personal advice.
Harvey Norman
ASX:HVN, MQR: A3, MOS: -19%
A decade ago Gerry’s retail giant earned $105 million profit on $484 of equity that we put in and left in the business. That’s a return of around 19 per cent. Fast-forward to 2010 and we’ve put in another $117 million and retained an additional $1.5 billion. Despite this tripling of our commitment, however, profits have little more than doubled to $236 million. Return on equity has fallen by a third and is now about 12%. One decade of operating and the intrinsic value of Harvey Norman has barely changed. HVN is a mature business, but be warned… Harvey Norman is what JB Hi-Fi and The Reject Shop would see if they used a telescope to look forward through time.
OrotonGroup Limited
ASX:ORL, MQR: A1, MOS: -21%
Sally MacDonald is a brilliant retailer. I highly recommend watching this interview – click here. Sally took over Oroton in 2006. In just five years she has cut loss making stores and brands, sliced overheads, improved both the quality and diversity of the range. The result? Surging revenues and return on equity in 2010 of circa 85 per cent. Try getting that in a bank account or even a term deposit! Asia offers even brighter prospects for Oroton while their product offering is sufficiently attractive and appealing that the company has the ability to weather the retail storm and protect its brand.
Woolworths Limited
ASX: WOW, MQR: B1, MOS: -17%
You don’t get any bigger than Woolworths (its one of the 20 largest retailers on the planet!). It has a utility-like grip on consumers only, with earnings power that would put any utility to shame. The latter can be seen in the near 30% annualised increase in intrinsic value. Competitive position and size means suppliers and customers fund the company’s inventory. Challenges included professed legislative changes to poker machine usage (WOW is the largest owner of poker machines and any drag in revenue will have an exponential impact on profits), and the rollout of a competitor to Bunnings.
David Jones Limited
ASX: DJS, MQR: A2, MOS: -35%
A beautiful shop makes not a beautiful business. I remember when David Jones floated. Shoppers who enjoyed the ‘David Jones’ experience and were loyal to the brand bought shares with the same enthusiasm as scouring the shoe department at the Boxing Day sales. Since 2007 DJS has reduced its Net Debt/Equity ratio from 108 per cent to just under 12 per cent. We are yet to see if Paul Zahra can lead DJs with the same stewardship as former CEO Mark McInnes but as far as department stores can possibly be attractive long-term investments, DJs isn’t it.
Myer
ASX: MYR, MQR: B1, MOS: -27%
In 2009, following the release of that gleaming My Prospectus, I wrote:
“With all the relevant data to value the business now available and using the pro-forma accounts supplied in the prospectus, I value the company at between $2.67 and $2.78, substantially below the $3.90 to $4.90 being requested [by the vendors]. It appears to me that the float favours existing shareholders rather than new investors.”
My 2011 forecast value for Myer is just over $2. According to My Value.able Calculations, Myer will be worth less in 2013 than the price at which it listed in September 2010. If competitors like David Jones, Just Jeans, Kmart, Target, Big W, JB Hi-Fi, Fantastic Furniture, Captain Snooze, Sleep City, Harvey Norman, Nick Scali and Coco Republic were removed, Myer may just do alright.
Noni B
ASX: NBL, MQR: A2, MOS: -51%
Noni B’s intrinsic value is the same as when Alan Kindl floated the company in 2000 (the family retained a 40% shareholding). Return on Equity hasn’t changed either. Shares on issue however have increased 50 per cent yet profits have remained relatively unchanged.
Kathmandu Holdings Limited
ASX: KMD, MQR: A3, MOS: -56%
Sixty per cent of Kathmandu’s revenues are generated in the second half of the year. Will weather patterns continue to feed this trend? I sense premature excitement following the implementation of KMD’s newly installed intranet. The system may streamline store-to-store communications, reducing costs and creating inventory-related efficiencies for the 90-store chain, however what’s stopping a competitor replicating the same out-of-the-box system?
Fantastic Furniture
ASX: FAN, MQR: A3, MOS: -24%
Al-ways Fan-tas-tic! Once upon a time it was. Low barriers to entry are seeing online retro furniture suppliers like Milan Direct and Matt Blatt are forcing Fantastic and other traditional players to reinvent the way they display, price and stock inventory.
Billabong
ASX: BBG, MQR: A3, MOS: -49%
Billabong’s customers are highly fickle, trend conscious and anti-establishment. Like Mambo, as one of my team told me, Billabong is “so 1999 Rog”. Apparently Noosa Longboards t-shirts fall into the “cool” category, now. Groovy!
Eighty per cent of Billabong’s revenues are derived from offshore. Every one-cent rise in the Australian dollar has a half percent negative impact on net profits. Fans of the trader Jim Rogers believe the AUD could rise to USD$1.40! Then there’s the 44 stores affected by Japan’s earthquake (18 remain closed) and another three in the Christchurch earthquake.
Country Road
ASX: CTY, MQR: A3, MOS: -63%).
Like the quality of their clothing, Country Road’s MQR has been erratic. So too has its value. Debt is low however cash flow is not attractive. Very expensive.
Cash Convertors
ASX: CCV, MQR: A2, MOS: +26%.
Value.able Graduates Manny and Ray H nominated CCV as their A1 stock to watch in 2011. Whilst its not yet an A1, Cash Convertors is a niche business with bight prospects for intrinsic value growth.
Other retailers to watch
I have spoken about JB Hi-Fi, Nick Scali and The Reject Shop many times on Peter Switzer’s Switzer TV and Your Money Your Call on the Sky Business Channel. Go to youtube.com/rogerjmontgomery and type “retail”, “JBH”, “TRS” or “reject” into the Search box to watch the latest videos.
In October 2009 the RBA released the following statistics:
16 million. The number of credit cards in circulation in Australia;
$3,141. The average monthly Australian credit card account balance;
US$56,000. The average mortgage, credit card and personal loan debt of every man, woman and child in Australia;
$1.2 trillion. The total Australian mortgage, credit card and personal loan debt;
$19.189 billion. The amount spent on credit and charge cards in October 2009.
Clearly we are all shoppers… what are your experiences? Who do you see as the next king of Australia’s retail landscape?
Posted by Roger Montgomery, author and fund manager, 12 April 2011.
I’ve been following and chatting to Jim Rogers for many, many years. And, if your pockets are deep enough to ride out the inevitable bumps (“nothing goes up in a straight line Roger”), his commodity calls have been on the money.
Last night I was delighted to catch up with him again, after being invited by CBA to celebrate the first birthday of their Institutional Equities business (the invitation (picture below) read “If you were smart in 1807 you moved to London, if you were smart in 1907 you moved to New York City, and if you were smart in 2007 you moved to Asia“, Jim Rogers 2007). I was impressed by how many of my friends in the funds management industry have employed the Institutional Equities desk of CBA. They are obviously not restricting their excellent service to me!
Jim arrived and I had the opportunity to catch up before he went on to speak to the audience. For those who missed it, he remains extremely bullish on commodities and in particular Cotton, Sugar, Oil and Gold. The audience were perhaps most in agreement with a bullish view on wheat and while this wasn’t discussed, I can tell you the expansion of deserts in China and the depletion of water reserves there will cause a fundamental step-change in the world’s agricultural markets and the price of food.
But if you really want to get a sense of how bullish Jim is try this on for size: Oil = $200/barrel or more (see my January 2011 Post), Gold $2000/ounce (January 2011 Post) sometime in the next decade and the Aussie dollar? Wait for it…..US$1.40!!!! Jim didin’t say it in so many words, but it was being whispered between the salt and pepper prawns, lime and coconut marshmallows, and for the late night revellers, a 2001 Noble One.
As you can see Jim was delighted to receive a personally dedicated copy of Value.able to read on the flight back to Singapore. I hope that he gets as much out of it as I have from his.
Posted by Roger Montgomery, author and fund manager, 8 April 2011.
