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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Peter Switzer asked Roger Montgomery to imagine he was starting is own Self Managed Superannuation Fund today. What stocks would he buy? A vintage Maserati and some artwork would be nice, but when it comes to the stock market, Roger tells investors to treat the stock market like a supermarket — buy the best quality businesses when they are cheap. So what businesses does Roger think will be winning the race in 5, 10, 15 years time? JB Hi-Fi, Oroton, Commonwealth Bank, DWS, Matrix, Forge and MACA are some of Roger’s well-known stocks that says qualifies for his SMSF. Roger also reveals a debt collection, retail, car accessory manufacturer and an IT services business that make his A1 Montgomery Quality Rating. Watch the interview.
Transpacific has a near monopoly – usually a recipe for strong profits – yet its returns are on the nose. Roger Montgomery says TPI is one monopoly business that investors would do well to steer clear of. Read Roger’s article at www.eurekareport.com.au.
I don’t know if you have noticed but some of my recent posts and comments have been getting a little technical. I am sorry about that, I get a bit carried away sometimes.
Of course on this blog, I am not alone. Joab’s brilliant heads-up on the forthcoming changes to the treatment of leases and the impact on the financial statements is exactly the sort of thing that excites those of us who make investing a full time occupation.
In this field it’s easy to want to prove how much detail one can accumulate about a company or what one knows about valuations or credit analysis. Then of course debates and polite but pointed arguments begin about whose mousetrap is better.
Yet for most of us, it’s a storm in a tea cup, and meanwhile someone has made a million dollars quietly accumulating a few shares in the recently listed company XYZ Ltd.
In most cases there is one pearl that counts and the rest is noise. Our job is to find the pearls. Of course with so much rubbish to sift through it can be challenging to pluck up the enthusiasm to even start searching. For many investors, time is of the essence and short cuts are needed.
Well, I am here to deliver. But this not a post about buying the next hot uranium or gold explorer – tips I do receive and some I even regret missing sometimes. Today’s post is about a shortlist of A1 companies, their proximity to intrinsic value, my expected change in those intrinsic values and the associated net debt to equity ratios.
Why? It’s about getting back to basics.
Investing is simple. Not easy, but simple. Much work went into the classification process to come up with my A1, A2, C5, etc Montgomery Quality Ratings using, for example, industry specific KPI’s to ensure that future sweat was reduced.
And recently one Value.able Graduate Ken, reinforced my resolve to keep it all very simple. Ken D wrote:
Hi again Roger,
Out of curiosity, last week I constructed 2 hypothetical portfolios: 1) with your A1 stocks in equal proportion; and 2) the same with your A2 stocks. I have attached some numbers. I was impressed by the average past performance (i.e. investment performance) from both portfolios and also noted quite a difference between the A1 and A2 portfolios (attached). I doubt whether the result is fortuitous. Without asking you to outline your ranking process, I was wondering whether the strong past performance might be expected as a direct result of criteria used in the A1, A2 classification process – e.g. reference to historical earnings growth for instance, or perhaps more interestingly, a product of the inherent quality of the business as measured by current performance measures.
Ken
In answer to Ken’s question and for everyone’s benefit, remember Ben Graham’s quote about short-term voting machines and long-term weighing machine? Over longer periods of time, price follows intrinsic value and because my Value.able method of calculating intrinsic value is related to the performance of the business, one should expect price to follow performance. Over time A1 businesses should do better and a portfolio filled with just A1s purchased at big discounts to intrinsic value, should, in theory, do best.
Ken looked at all the A1s that I had mentioned on the blog and went backwards (I’ll ignore survivor bias for now) to have a look at the annual returns a portfolio of A1s would have produced.
While there is more refinement required, the early results are impressive. Over the last ten years Ken’s portfolio of 16 A1 company stocks returned 24 per cent, per annum. The same 24 per cent per annum result was produced with a portfolio of 23 stocks over five years and there were 31 A1 stocks in the last year that combined, returned 31 per cent.
Thanks for putting in the time Ken.
With all that in mind, here is my latest list of A1 companies, their proximities to intrinsic values and a few other salient stats.
What I would like to see as comments here are your thoughts or insights about any of these companies. Go right ahead and share whatever you know or think. But only about the companies in the list. Keep the comments to the topic set and we will build a useful library of insights. Just click the Leave a Comment link below.
Posted by Roger Montgomery, 3 November 2010.
The jury is still out on whether QR National represents the stock market opportunity of the year or a great train robbery. Roger Montgomery tells ABC Reporter Andrew Robertson he wouldn’t want to own the business. Read the transcript.
Roger Montgomery has his doubts about the upcoming QR National Float, adding that there are many devices being employed by the promoters to make sure its doesn’t slump. Read Roger’s article.
Joab is a regular visitor and commentator on my Insights blog and he’s a Value.able PHD graduate. Joab has put together an elegant summary of the impact – on retailers particularly – from the proposed changes to accounting standards for reporting lease liabilities to better reflect the contingent liability that is an operating lease.
No need to thank Joab. He’s delighted to help and I am delighted he went to the very great effort and time to contribute.
Why are the changes important? The impact of a bigger asset and a bigger liability will have no change on equity, but when you compare a bigger debt to the same equity, you will get a higher Debt to Equity figure. This will impact my Montgomery Quality Rating (MQRs) next year.
So here are Joab’s thoughts (with the community’s thanks):
Current State:
A draft proposal on accounting standard for leases was issued recently. This proposal could still be subjected to change as it is not yet finalised. That said, the principle of what it is trying to achieve is not expected to change.
Estimated timing:
Target date is to issue a finalised standard in 2011.
Key changes:
The information below focuses on the lessee’s perspective and has been simplified to highlight key impacts.
1. Operating leases will be on balance sheet as a lease liability (there will no longer be a distinction between operating and finance leases);
2. A corresponding asset will be recognised, separately on balance sheet, which offsets the operating lease liability;
3. Rent expenses will be replaced with depreciation and interest expenses;
4. Operating cash flow will no longer include cash outflow on rent. Instead, rental cash flow will be in the Financing Activities category as ‘Principal and Interest repayment’.
The table below compares the current and the new accounting rules on the financial statements.
Standard setters are open to feedback before end of this year.
Key Impacts:
– Financial ratios on gearing will suffer with more debt on balance sheet. For example: debt/ equity ratio, gearing ratio, interest cover ratio.
– Cash flow from operating activities will improve because rent will be presented in financing activities
– EBIT or EBITDA will improve as rent expense is replaced with depreciation and interest.
– Operating earnings will have a slightly different profile. Rentals expenses will no longer be a straight line expense.
Using JB Hi-Fi as an example
Note:
– I have excluded discounting on Operating lease commitment to simplify the calculation
– Debt/ Equity = Debt / Equity
– Net Gearing = (Debt – cash) / (Debt + Equity)
Posted by Roger Montgomery, on behalf of Joab, 29 October 2010.
The big end of town has quietly been selling shares during the huge ASX share price spike that has followed the Singapore Exchange’s $8.4 billion takeover offer. Roger Montgomery questions the national interests of the Singapore deal, flagging the possibility of the ASX being onsold by Singapore. Read article.
THE big end of town has quietly been selling shares into the huge rise in ASX Ltd’s share price since Singapore Exchange made its $8.4 billion takeover offer, threatening to leave small investors holding the can should the deal flounder as political opposition to the deal grows. Market experts have questioned the national interest of the Singapore deal, including prominent equities analyst Roger Montgomery, who flagged the possibility of Singapore onselling ASX. Read article.
Roger Montgomery has Value.able intrinsic valuations for every ASX-listed business going back 10 years, and for those with consensus analyst forecasts, going forward three years. So what stock market sectors does Roger see value in right now? IT services, retailers and mining services businesses are at the top of his list. In this appearance on Market Moves Roger Montgomery also reveals which small cap companies achieve his coveted A1 Montgomery Quality Rating. Watch the interview.
Roger Montgomery has said many times that Woolworths scores a very high Montgomery Quality Rating. Whilst the current market price doesn’t offer WOW at a bargain price, it does represent a rare opportunity to buy one of Australia’s highest quality businesses. So what is Roger’s 2010, 2011 and 2012 Value.able intrinsic valuations for Woolworths? In this appearance on Your Money Your Call Roger also shares his insights on the impact of the Mineral Resources Rent Tax on the intrinsic valuations of Australia’s resources companies. Watch the interview.
