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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Whilst Roger Montgomery can’t predict how high the oil price will go nor tell you what kind of trajectory it will take, he does believe, with a considerable degree of certainty, that Australian’s will be paying higher prices for fuel over the next decade. Zicom, a supplier of equipment to service vessels, is just one company set to benefit from our growing need for oil. Read Roger’s article at www.eurekareport.com.au. WARNING: Zicom is a thinly traded microcap in which Roger Montgomery has purchased shares because it meets his investment criteria. It may not meet yours. It is therefore information that is general in nature and NOT a recommendation or a solicitation to deal in any security.
I am deviating from my regular style of post, handing over the stage to Value.able Graduate Scott T. Scott T has taken up a fight with conventional investing by tracking the performance of a typical and published ‘institutional-style’ portfolio against a portfolio of companies that receive my highest Montgomery Quality Ratings. I reckon in the long run the A1/A2 portfolio will win, but let’s not get ahead of ourselves.
Over to you Scott T…
In December 2010, a large international institution released their “Top 10 stockpicks for 2011”. Click here to read the original story.
I thought it would be interesting to compare the performance of these suggestions against an A1 and A2 Montgomery portfolio.
So I imagined this scenario…
Twin brothers in there 30’s each inherited $100,000 from their parent’s estate. One was a conservative middle manager in the public service; he had little interest in the stock market or super funds and the like, so he decided to go to an internationally renowned, well-credentialed and highly respected firm to gain specific advice. Goldman Sachs advised him of their top ten stocks for 2011, so he decided to achieve diversification by investing $10,000 in each of the ten stocks he had been told about.
His twin had a small accounting practice in a regional Queensland and was a keen stock market investor. Specifically he was a student of the Value Investing method, and liked to think of himself as a Value.able Graduate. He too thought diversification would be a suitable strategy so decided to invest $10,000 in each of 10 stocks that were A1 or A2 MQR businesses and that were selling for as big a discount to his estimate of Value.able intrinsic value as he could find.
For this 12-month exercise, running for a calendar year, we shall assume that neither brother is able to trade their position. One brother has no inclination to, and his regional twin is fully invested, and more inclined to hold long anyway.
For the companies who have declared dividends in this quarter, most are now trading ex-dividend, but only 2 or 3 have actually paid. Dividends will be picked up in Q2 and Q4 of this study.
Now after just 3 months let’s look at the how the two portfolios have performed…
Institutional Bank Top 10 Picks for 2011
Montgomery Quality Rated (MQR) A1 and A2 Companies
We will visit the brothers again in 3 months on 30/6/2011 to see how they are fairing.
All the best
Scott T
How has your Value.able portfolio performed compared to the ASX 200 All Ords?
Posted by Roger Montgomery, author and fund manager, 6 April 2011.
In this extended interview with Ross Greenwood, Roger Montgomery shares his concerns about the Singapore Stock Exchange bid for ASX. Roger questions whether the acquisition is in Australia’s best interest. Roger also answers listener questions about Bluescope Steel (ASX:BSL), One Steel (ASX:OST), Atlas Iron (ASX:AGO) and Telstra (ASX:TLS). Listen to Podcast.
Unlike a conventional “Blue Chip” portfolio founded on the principles of diversification in large well-known companies, Roger Montgomery’s Money Value.able portfolio is driven by the pursuit of extraordinary businesses at prices less than they’re worth. In the April 2011 column, Roger diverges slightly from his ‘picks and shovels’ theme to focus on a company that is reaping the benefits of Australia’s exploding internet usage. Read Roger’s article.
ABC Finance Journalist and Eureka Report founder Alan Kohler looks for an upside to world disaster in his latest column for Money magazine. Alan writes “Before I look in detail at the parts of these two icebergs that are under the water, I want to repeat something I heard my friend Roger Montgomery say at a conference the other day. “Vlatility represents opportunity, not risk”. Wise man, Roger”. Read Alan’s article.
The head of Qantas says high fuel costs and a series of natural disasters means the company is facing its most serious challenge since the global financial crisis. Today the airline’s chief executive Alan Joyce announced the company will retire aircraft, reduce flights to Japan and New Zealand, and cut staff. Roger Montgomery said “If they keep going the way they’ve been going – with the amount of planes that they’ve got, the amount of staff that they’ve got, the routes that they’ve got and the prices that they’ve got – then yes they’ll have to keep increasing the amount of money that’s contributed to the business”. Read transcript.
Qantas shares closed 4 cents higher at $2.19 after the company announced it will reduce international and domestic capacity, retire aircraft, reduce management positions and maintain fuel surcharges in an effort to offset soaring fuel prices. Roger Montgomery of Montgomery Investment Management told ABC report Michael Janda the company’s share price is lower than a decade ago for good reason. Read article.
I have prepared a list of companies that achieve extremely high Montgomery Quality Ratings of A1, A2 or B1, with a market capitalisation of greater than $1 billion, returns on equity of more than 10% and historical and forecast intrinsic value increases of more than 10% per annum. I hope you find the list educational and are able to put it to good use. Read Roger’s article at www.eurekareport.com.au.
It’s an amazing story… Man creates computer. Man overcomplicates computer. Man strips back computer and creates a brand that has revolutionised the way we are entertained.
Did you know Apple has sold over 300 million iPods and iPhones over the past decade? That’s 300,000,000 products. According to the World Bank, in 2009 the world’s population stood at 6,775,235,741. The World Bank also notes that 80 per cent of the world’s population lives on less than $10 per day. Of the remainder, every 4th man, woman and child has purchased an Apple products in the last decade. Not a bad competitive advantage, (postscript: but perhaps not a sustainable one?)
Apple is also infiltrating the way we work. The Montgomery office is all Mac (and for your information, we have never had to call an IT professional to fix anything). Our iPhones are synced with our iMacs and our MacBooks synced with our iPhones.
You have heard the stories of Apple fans setting up camp on the footpath outside Apple’s flagship store on Sydney’s George Street. Australians don’t do that for coal or iron ore.
And don’t forget the accessories market. There’s no special concessions for development partners. Privately held companies that manufacture the sleeves, cases and connectivity devices that enhance our Apple experience don’t get hold of new devices until we do – on launch day.
Apple has the X-factor. Its product is unique. Its experience is unique and there is an almost religious fervour toward the brand. Competitors don’t stand a chance. The result? High, durable rates of return on equity and a rising Value.able intrinsic valuation – an A1 business.
Return on Equity is just one of dozens of metrics I uses to produce the Montgomery Quality Rating (MQR). Re-read Chapter Eleven, Step C on page 188 of Value.able for the Value.able ROE calculation.
Who is the Aussie equivalent? The Australian market may be much smaller than the US, but there are a handful of extraordinary businesses, A1 businesses. And its worth finding tem. They may not be listed yet. They may not even have launched yet…
Posted by Roger Montgomery, author and fund manager, 29 March 2011.
Postscript: The data used to calculate intrinsic value is available here: https://www.apple.com/investor/
Time was a rare commodity on Peter’s show last night. Whilst I managed to list a few A1 and A2 small cap stocks that I consider make the Value.able grade, there just wasn’t time for details. So, as promised, I have put together a quick precise of two stocks (in boring businesses) I listed last night.
Remember: DO NOT rush out and buy shares in any company I discuss with Peter or any other media outlet (or here at the blog) without conducting appropriate research and seeking personal and professional advice FIRST!
These insights are not a solicitation to trade any security. I may own shares in the companies mentioned. I cannot predict share price directions – they could all fall by 80% or more after you buy. Finally, I am under no obligation to keep you updated with any change of my view, my estimate of the Value.able value of the company or my Montgomery Quality Ratings (MQRs).
Before I begin, here are the highlights from last night.
Zicom Group (ZGL)
In 2007, the first reported results after purchasing the Zicom Group, the company earned $6 million on equity of $21.6 million (ROE 27.7%). Since then another A$8 million has been raised from owners and profits have risen to A$8 million. Return on additional capital is 25%.
In the HY11 results, the company announced a profit A$7 million. Revenue grew from $47.75 million in the previous corresponding period to $71 million. A buyback of $4 million shares occurred in the half.
Company forecasts are for a full year profit of $12.9 million, which would representing a return on equity of 18%. Growth in equity is exceeding growth in profits, however the ‘growth’ has been through retained earnings.
Zicom has four divisions; Offshore Marine Oil & Gas (43% of revenue, makes winches and ROV’s/oil rig boom to help – think winches on ships that lift ROV’s off deck and into water), Construction Equipment (39%, concrete mixers/marginally profitable & foundation equipment), Precision Engineering & Automation (14% constructs automated production lines, ink cartridges for HP, semi conductor and medical devices and associated components) and Industrial and Mobile Hydraulics (4%).
ZGL’s order book stands at $83.2 million, up from $68.9 million. Cash flow was negative $10 million, however $5 million was spent seeding two start-ups and another $5 million was spent on acquisitions ($700k of PP&E and $4 million on buying back shares).
Click here to read Roger’s latest insights on Zicom, published 6 April 2011 in Alan Kohler’s Eureka Report.
Codan Limited (CDA)
Codan Limited designs and manufactures a diversified products range for the international high-frequency radio, satellite and metal detection markets (think Minelab metal detectors).
Shares on issue are virtually unchanged from a decade ago and borrowings, which surged from $2 million in 2007 to $73 million in 2009, fell to $52 million last year and another million in the latest half year.
CDA’s 2007 profit of $11 million fell to $8 million in 2008, then rose to $24.4 million last year. The company forecasts profit of $20-$22 million in 2011 (optimistic analysts believe this figure will be higher, circa $24 million).
Since 2001, CDA’s profits have increased by 10.13 per cent per annum, from $10.268 million to $24.472 million
To generate this $14.2 million increase in profit, shareholders have put in equity of $21.859 million and left in earnings of $23.150 million (32%). The company has also borrowed $8.615 million net, in addition to the $43.483 million of debt held in 2001, resulting in current debt outstanding of $52.098 million and a net debt to equity ratio of 46.66 per cent.
Return on Equity is the best measure of economic performance, and CDA has averaged 31.02 per cent since 2001. Recently, CDA generated a return on equity of 37.94 per cent.
Finally, I also mentioned a small number of small cap stocks that are high quality and appear to be trading at a discount or close to my estimate of intrinsic value at the moment – Forger Group, ThinkSmart and Matrix Composites and Engineering. Here is my list:
Over at facebook.com/montgomeryroger Unc Dev’s list includes Thorn Group, Reckon, Iress, Nick Scali and Fleetwood. Shuo nominated PFL and Kristian proposed FSA, SWL & RQL. Which stocks make your A1/A2 small cap list?
Posted by Roger Montgomery, author and fund manager, 25 March 2011.
