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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When it comes to company floats, there’s one piece of information Roger Montgomery looks for above all others. Read Roger’s article at www.eurekareport.com.au.
You can’t buy shares in a business and hold them forever. Business is dynamic and unfortunately many of those listed on the sharemarket are destined to be liquidated, or go into receivership or administration. Companies disappoint operationally, their prospects become less bright, they take on too much debt, pay too much for an acquisition, or their share price simply rallies far above any reasonable estimate of value. How then can you hold these shares and expect to do well? Read Roger’s article.
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.
