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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The techniques of value investing prove it’s possible to beat the market as long as you remain disciplined. Read Roger’s article at www.eurekareport.com.au.
As my last official day at the office draws near, I am delighted with the results we have achieved from combining my approach to quality (The Montgomery Quality Ratings “MQRs”) with Value.able‘s method of calculating intrinsic value. There will always be conjecture and disagreement with these, but that doesn’t matter to me and it shouldn’t bother you either. The market is wide enough and deep enough to cater for us all.
I am very proud of how far you – the Value.able Graduate Class of 2010 – have come and encourage you to continue questioning and challenging the things you read and learn. It was Elbert Hubbard who said “The recipe for perpetual ignorance is: Be satisfied with your opinion and content with your knowledge.”
Some of the most memorable results of 2010 for me where the gains in Matrix, Decmil and Forge, as well as the gains in Acrux, Thorn, Fleetwood, MMS, Data#3, and Oroton. I was also delighted to have left QR National alone – missing out on an 11.8% return, but selecting MACA instead, which has produced a 70 per cent return.
Elsewhere, fund managers have reported good results. But as one Graduate noted via email, when some portfolios, filled with debt-laden, low ROE businesses, rise, it is generally a function of a rising tide rather than sound investing principles. Of course when investing the Value.able way, it matters not what anyone else is doing. All that matters is that your analysis is right and that you are consistent.
There have been plenty of questions about the Value.able valuation formula this year and perhaps even a little obsession over the source of, reason for and disagreement with the formula/tables. If that resonates with you, I urge you to re-read pages 193 and 194 and consider the following parallel; In the sport of mountain biking, some riders obsess with the weight of their bicycles. Many shop around for a ceramic or titanium rear derailleur pulley so that they might save as few as 5 grams! Paying thousands for their obsession, they fail to realise that the weight of their fettucini carbonara the night before, the water bottle they carry with them and the mud that sticks to their tyres is far greater than the savings they make and that strength, fitness, endurance and momentum are all far more important. Don’t become too obsessed by the math when its the competitive advantage that is more important and, in any case, value slaps you in the face when it is obvious.
There are very good reasons why my valuations have differed from those you have produced, and I explain a major source of the difference on pages 193 and 194.
Far more important is that you are now carrying out your own analysis and focusing your attention on high quality companies, sustainable competitive advantages and intrinsic value. I believe you will continue to do well – as so many of you have shared with our community – if you stick to the disciplines outlined in Value.able. And if you haven’t purchased your copy yet, do it now!
Before I leave for the annual Montgomery family holiday, I promised to give you some homework. There are three tasks with a total of two challenges. You can choose those you’d like to complete. You are under no pressure to complete them all. It is the holidays after all!
Challenge 1, Task 1
The first task is to print out the Notes to the Financial Statements: Contributed Equity for the number of shares on issue, Balance Sheet, Profit and Loss statement and Statement of Changes in Equity for The Reject Shop for 2010. Links to the statements are below:
Notes to the Financial Reports: Contributed Equity for the Number of Shares on Issue – click here
Balance Sheet – click here
Profit and Loss – click here
Statement of Change in Equity (Dividends) – click here
Using the numbers circled on each of the statements and a Required Return of 11%, try your hand at calculating The Reject Shop’s 2010 Value.able Intrinsic Value. Follow Steps A through D on page 195 of Value.able. Be sure to list your outputs for Equity per Share, Return on Equity and Payout Ratio. Click here to download my Value.able Valuation Worksheet. Ken has also provided a great list of guidelines – click here.
Challenge 1, Task 2
If you want to obtain extra marks you can have a go at also calculating the 2010 cash flow for The Reject Shop using the method I outline in Value.able on page 152.
If you haven’t purchased Value.able, don’t worry. My website will continue to accept your orders and my distribution house is working through the holiday season.
Challenge 1, Task 3
The final task involves completing one or both challenges on the Christmas Holiday Spreadsheet. The first challenge is for Value.able Undergrads. Use the worksheet to fill out the spreadsheet, then rank the companies by their Safety Margin. The spreadsheet will download automatically to your computer. When I return in late January I will publish my table and we can compare results.
Challenge 2
The second challenge is for the Value.able Graduate Class of 2010 (and any Undergrads that fancy a challenge). Your task is to calculate the historical change in intrinsic value and price over the last ten years.
Don’t worry. You don’t have to calculate ten intrinsic values, just two. Estimate the intrinsic value a decade ago (2001) and compare it to the 2011 intrinsic value. To make things a little less onerous, maintain the same RR for a company for the two years. You can then rank the five companies by their rate of change and you can use the following formula in excel if you like:
((IVn/IVn-10)^(1/10))-1
Where, IVn is Intrinsic value for 2011 and IVn-10 is Intrinsic Value for 2001 and ^(1/10) is ‘to the power of 1/10’.
I expect it will take a few weeks for you to get all the your submissions and I will consider some form of recognition for the winners. In the meantime enjoy a peaceful and Value.able Christmas and all the very best to you and your loved ones.
Posted by Roger Montgomery, 22 December 2010
It is my great pleasure to present a very special tribute (thank you to my team) for the Value.able Graduate Class of 2010.
Thank you Jesse, Michael (Bali), Young Les, Michael (Aussie Battler), Matthew, Justin, Lior, John, Rad, Gary in Paris, George, Dan’s Mum, Steven & Sophie, the Master Chefs, John and Paul for sharing your Value.able journey with our community. And a second thank you to Steven for posting his Value.able 12 Days of Christmas at Facebook!
Thank you for your support this year. We have created an incredibly valuable community of investors that share sound ideas and mentor those just beginning their value investing journey.
Thanks to you – the Value.able community – 2010 year has been a year of firsts…
The First Edition of Value.able was released, went global and sold out in just 14 weeks.
– My value investing YouTube channel hit #2 Most Viewed in Australia.
– In aggregate, the companies I listed at my Insights blog, which met all the Value.able criteria, outperformed the market by a satisfactory margin.
Most excitingly, Value.able Graduates have applied their new skills and produced over 6,000 extraordinarily insightful comments here at the blog!
And one more thing… for those who have requested holiday homework, my soon-to-be-released blog post will most certainly provide a challenge.
Thank you once again for joining the Value.able community. I wish you and your family a safe and peaceful Christmas and a prosperous 2011.
Posted by Roger Montgomery, 21 December 2010
A large portion of Australian share portfolios include shares in one of the ‘big four’ banks. Does Roger Montgomery prefer CBA, ANZ, NAB or has his focus shifted to smaller credit unions? In this appearance on Market Moves with James Dagger-Nixon, Roger reveals his Montgomery Quality Rating (MQR) for Santos (STO) and shares his insights on oil and coal. Read more of Roger’s predictions for oil, coal, uranium, rubber, inflation, interest rates and changing weather patterns at his blog. Watch the interview.
Roger Montgomery was invited to share his top A1 stock for 2011 with viewers of the Sky Business channel. Roger decided to ask the Value.able Graduate class of 2010 to nominate the A1 stock that investors should include in their 2011 watchlist. Which stock made Roger’s A1 Montgomery Quality Rating (MQR)? The stand out company is trading at a discount to its intrinsic value, has bright long-term prospects, a sustainable competitive advantage, high ROE, little or no debt and fantastic cash flow. It is the leading supplier of buoyancy devices for deep-sea oil rigs and is an A1 business that Roger has mentioned many times at his Insights stock market blog. Watch the interview.
The Value.able class of 2010 is indeed all class.
Your nominations for the A1 stocks to watch in 2011 are fine examples of the sorts of companies that I eagerly seek for my own portfolio (with the exception of the odd recalcitrant student who diverged from the lessons learned).
I haven’t yet decided which will be revealed on Sky’s Twelve Shares of Christmas special tonight at 7pm, although the shortlist may be obvious from the numbers presented in the table below.
If we presume that all A1s have equally bright prospects – they don’t – then the job of picking the top stock comes down to the one that offers the highest return when combining the discount to intrinsic value and the prospective change to intrinsic value over the next two or three years.
One difficulty with such a simplistic approach is that firstly, varying degrees of certainty about the future cloud the picture. I have also used consensus numbers to produce the valuation changes and these are notorious for being optimistic at precisely the wrong points in the business cycle.
To avoid this dilemma for the purposes of the exercise (but perhaps not for the purposes of investing), I could elect to go with the choice that received the most recommendations. The winner of that contest would be a tie between Matrix Composite & Engineering (MCE) and Forge Group (FGE) and the equal runners up would be Oroton (ORL), ARB Corp (ARP), Cash Convertors (CCV), Cellestis (CST) and CSL (CSL). The remaining contributions include Acrux (ACR), BHP (BHP), Bradken (BKN), Centrebet (CIL), Coca Cola (CCL), Decmil (DCG), Euroz (EZL), Fleetwood (FWD), Focus Minerals (FML), FSA Group (FSA), Hunter Hall (HHL), iCash Payment Systems (ICP), Industrea (IDL), JB Hi-Fi (JBH), QBE (QBE), REA Group (REA), Resource Equipment (RQL), Seek (SEK), Seymour White (SWL), Sirtex (SRX), Speciality Fashion Group (SFH), The Reject Shop (TRS), ThinkSmart (TSM), Thorn Group (TGA) and Woolworths (WOW).
Whilst I have identified a universe of A1 companies trading at discounts to intrinsic value that have slipped under your radar, the objective of the exercise was to ask for your picks and now that I have the list, choose a winner I must.
On tonight’s Summer Money program on Sky Business at 7pm I will reveal the ONE stock that you have selected as the relatively best prospect for 2011. It won’t be Roger Montgomery’s pick. It will be the top pick by the Insights Blog Community – the Value.able Graduate Class of 2010!
Posted by Roger Montgomery, 16 December 2010.
The sharp fall in The Reject Shop’s shares might be an opportunity in disguise. Roger Montgomery thinks it will a stock to watch in 2011. Read Roger’s article at www.eurekareport.com.au.
Roger says good value companies tend to hit you in the face – their value is obvious. This engaging presentation has lots of questions from the floor as Roger lists ways of assessing the value of companies. He lists companies he regards as good value and those that are poor value and gives his reasons. View the presentation.
CONTRIBUTIONS ARE NOW CLOSED.
I have an assignment for you.
Before we start, two things…
1. If you are looking for a gift that keeps on giving in 2011, give your loved ones a copy of Value.able. To guarantee your gift makes it into Santa’s sleigh, you must order before 5pm next Monday, 13 December.
2. Put Thursday 16 December @ 7pm in your diary. Sky Business has invited me to appear on their Summer Money program.
Within Summer Money, Sky is running a series called The Twelve Stocks of Christmas and I have been asked to present one of the twelve stocks. What I would like to do is let everyone on Sky Business know about you – the Value.able Graduate class of 2010!
You have been instrumental in contributing to the knowledge and awareness of value investing and I would like to say thank you by reviewing your suggestions on air.
So, what will it be? You can nominate one of the companies we have already discussed. More points can be earned by contributing a company of which you have industry-level knowledge. Think about your industry or business:
– Who is the strongest [listed] competitor in your industry?
– Who would you like to see out of business because they are an emerging threat?
– What are their competitive advantages, their opportunities for growth and why do you think they will sell more of their product or services in the future or at higher prices?
– Perhaps they are out of favour in the share market, but you believe it’s a case of a temporary set back being treated like a permanent impairment?
I encourage you all to post your contribution. There are just two rules:
1. One stock (your best pick) per Value.able Graduate. The more detailed your information, the better; and
2. Ideas must be submitted by Wednesday 15 December
Before the live show at 7pm next Thursday, 16 December, I will run my valuation eye over every suggestion and give each my Montgomery Quality Rating (MQR). But the list will be yours – a contribution from the Value.able Class of 2010.
Whilst only one stock will make it to the show, EVERY SINGLE STOCK contributed on this post with sufficient supporting detail will be subsequently listed in my final pre-Christmas post for 2010, complete with MQRs, current valuations and prospective valuations (I have decided to called these MVEs – see below).
Embrace this opportunity to practice what you have learned over the past twelve months, and get the official Montgomery Quality Rating (MQR) and Montgomery Value Estimate (MVE) for your favourite stock. You never know, your stock may just be the one I contribute on national television to The Twelve Stocks of Christmas.
Post your suggestion here at the blog by Wednesday 15 December 2010.
I look forward to reviewing your insights and hearing what you think of your classmates’ suggestions. Simply click the Leave a Comment button below.
Posted by Roger Montgomery, 9 December 2010.
Postscript: thank you for your kind words and birthday wishes. I’m thoroughly enjoying my time away and am very much looking forward to reading and replying to your comments when I return to the office next Monday.
Postscript #2: Steven posted his own Value.able 12 Days of Christmas at my Facebook page last Friday – brilliant!
On the twelfth day of Christmas,
My independent analyst’s blog gave to me
12 A1s humming
11 valuations piping
10 C5s a-sleeping
9 forecasts prancing
8 capital raisings milking
7 floats a-sinking
6 CEOs praying
5 golden A1s!!
4 C5 turds
3 emerging bubbles,
2 editions of Value.able
And a market leader with a high ROE!
Here is Steven with his daughter Sophie.
Roger, you were good enough to sign my book…
“To Steven, Your guide to avoiding the dogs you told me you were so worried about, RM”.
Here I am reading Value.able to my little two year old Sophie at bedtime, holding her toy dogs. The moral of the story for Sophie? Roger shows dogs make fun toys and pets but must be avoided at all costs when investing in great businesses!”
Steven
Shareholders must be certain that any business they own has strong competitive advantages. Pfizer’s decision to bypass Australian distributors bites deep into revenues to two pharmaceutical wholesalers is a lesson to investors. Read Roger’s article at www.eurekareport.com.au.
