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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Telstra and its 1.4 million shareholders are under pressure and stuck at an anxious crossroads pending the outcome of this election. Roger Montgomery said “10 years ago intrinsic value was $4, but the price was $9. Today the intrinsic value’s closer to $3 and that’s about where the price is. So, the market eventually gets it right. It’s not compelling value right now, but it’s not expensive either, finally.” Read transcript.
We are now two weeks into one of the most important times of the year for investors – reporting season. Eighty companies have reported to date, some good, some not so good – I know this because I track every single one. Yes, I am very busy. Are you wondering which companies are my A1’s now and which stocks I am interested in? In the last two weeks you will have heard me on TV saying I have bought a few things. Well, I don’t buy C5s so read on.
TLS was a clear disappointment, as it has been since it listed. I have been on the front foot for a long time saying that this is a company to avoid, I hope you took notice. My valuation has fallen now from $3.00 to almost $2.50. If anyone can turn it around however I think Thodey can.
Qantas should have come as no surprise. A $300 million cash loss and I wouldn’t be surprised to see another raising of capital or debt.
Personally though I am not interested at all in TLS or QAN as investment candidates. I am only interested in the highest quality best performing businesses available – it’s here that intrinsic value can be created rather than destroyed and with reporting season just about to kick into top gear from this week, to find them, I put each company through the same rigorous process.
My initial screening process is a vital part of the investment process as it allows me to determine those companies that deserve to retain their place in the short list and it also highlights new opportunities as they arise. But to do this for some 2,000 listed Australian companies can be a very burdensome task unless you have a systematic way of analysing and comparing results in a consistent manner.
For me, it involves pulling out some 50-70 profit and loss, balance sheet and cash flow data fields from each annual report to populate my five models. All of these models employ industry specific metrics to calculate my quality and performance scores. This allows me to rank all companies from A1 – C5 to sort the wheat from the chaff.
For those not familiar with my ranking system, A1s are the simply the best businesses and the safest to own, while C5s are the poorest performers and the least safe.
Out of the 80 companies that have reported, only 5 have achieved my coveted A1 status – around 6.25% (the best of the rest).
NVT, JBH and COH had my A1 rating last year and retained it this year and there are 2 new entrants in MCE and RHD, with GCL (it was an A1 last year) having a dramatic rating decline. I tend to shy away from resource companies for obvious reasons.
On my blog I have previously spoken about NVT, JBH and COH and also mentioned ITX, so please revisit those thoughts. itX is under takeover and Navitas, it was recently reported, had been approached some time ago by Kaplan – a company I have done some consulting work for and a subsidiary of Warren Buffett’s Washington Post company – so a big tick for the A1 to C5 Rating system!
That only leaves MCE, an engineering business that currently generates most of its returns from the manufacture of riser buoyancy modules for deep-sea oil rigs. Its order book is already underwriting a doubling of revenue for 2011. The 2010 result revealed profits had almost tripled and significantly exceeded prospectus forecasts and it is producing returns on equity of 49% – a rate that is unavailable generally elsewhere. Borrowings amount to about $8 million compared to equity of about $60 million (of which a little over 10% is capitalised development and goodwill intangibles). Best of all, the share price over the last week is a long way below my estimate of its intrinsic value.
If you have seen me on TV or heard me on radio in the last week or so you would have heard me mention that I had bought something, MCE is it. Please be mindful that if you act rashly and go and push the share price up, you will be helping me perhaps more than yourself. Also remember that I am not recommending the stock to you and that I cannot forecast the share price direction (although I am pleased with its performance since my purchase). The share price, I warn you, could halve, for example if there is a recession and or the oil price plunges – delaying expenditure of the construction of oil rigs globally. I simply am not recommending it to you.
Also remember that I am under no obligation to keep you informed of when I buy or sell nor answer any specific questions, which means 1) you have to do your own research and 2) you have to be responsible for your own decisions. Seek and take personal professional advice BEFORE you do anything.
Moving on, another 13 companies have achieved my second highest rating of A2. They are listed below with their prior years rating so you can compare.
Noteworthy in this list is the excellent performance of the Commonwealth Bank (which I continue to hold in my Eureka Report Value Line portfolio, along with JBH and COH) and those companies I generally classify as being in the Information Technology sector including OKN, ITX, CPU and ASW. Both sectors appear to be doing well in aggregate.
While focus should always be placed on the A1’s (the top 5-7% of the market) at any one point in time, A2’s are still very high quality businesses. The use of the two lists in tandem will therefore provide you with an excellent starting point in isolating those who have reported high quality financials and performance levels above the average business. An important first step in the Value.able Montgomery brand of investing.
It is from here that I will select candidates worthy of further analysis (qualitative and quantitative) and possibly meet with company management, if I have not already done so. Once again I have taken you to the river I fish in, you have my fishing rods and tackle box. Now up to you to catch the right priced fish.
Please use these two lists as a starting point to conduct your own research and use Value.able as a guide to estimate your own valuations. If you don’t yet have a copy you can order one at www.rogermontgomery.com so you too can do your own valuations. Remember to always focus on the highest quality and best performing business available.
If you focus on the best when they are cheap and simply forget the rest, you should avoid more (if not all) of the disasters and should be able to build a portfolio that will give you a greater chance of out-performing the market.
Happy reporting season!
To be continued… Read Part II.
Post by Roger Montgomery, 17 August 2010.
It has been a good ten days since I asked you the question ‘How do your Value.able valuations compare?’ And so the time has come to hand in your exam papers and reveal the results.
Some of you have pointed out that there were both 2009 and 2010 numbers in there. Yes, that is absolutely correct (but you don’t receive extra marks for pointing that out). If a company had announced 2010 results, I used the latest numbers. For this exercise I only wanted you to use the numbers to calculate the Value.able value, based on them.
The next exam is going to be a ‘finding-the-data’ test. I will nominate a company and select an annual report and you will all have to go and download it and dig up the numbers. Expect there to be some red herrings in there too. It is your money you are dealing with so it is reasonable to make sure you are being conservative.
Here are my answers to the samples I listed last week. I hope you had a chance to practice. There will be another set of examples soon so you can have another go.
The recent CFA exam saw only 39% of participants pass, so don’t be too hard on yourself if you are out on your first attempt. As Sir Francis Bacon, the 1st Viscount of St. Alban said: Truth will sooner come out of error than from confusion.
Posted by Roger Montgomery, 17 August 2010.
Based on your emails, blog posts and Facebook comments, I knew my Value.able lesson had spread to Asia, Canada, the UK and the US.
This morning Jesse sent the first photographic evidence of its far-reaching net.
“Becoming a value investor while working offshore!. Love it :)” Jesse works off the coast of WA and as you can see, he has set up the perfect office for analysis and investing. The only concern is that the helmet suggests he’s taking warnings of a Chinese property collapse a little too seriously!
Thank you Jesse and to everyone for the overwhelmingly supportive comments you have posted here at my blog and the positively entertaining comments you have written on my Facebook page.
Please keep adding your thoughts, inights and stories by Leaving a Comment or joining me on Facebook.
Posted by Roger Montgomery, 17 August 2010.
A rational investment approach is the only way to protect your portfolio in times of economic uncertainty. In this appearance on Lunch Money, Roger Montgomery shares with investors his strategy of buying great businesses when they are cheap. Roger also reveals his Value.able intrinsic valuations for Hutchison, ANZ and Woodside. Watch the interview.
Roger Montgomery often says Australia’s big four banks have a wonderful competitive advantage. But which one is his top pick — CBA, ANZ, NAB or WBC? Roger also shares his insights on Forge, Clough and Decmil — do these mining services businesses have the potential to be Australia’s next Worley Parsons? Watch the interview.
Seek and Worley Parsons have a track record of achieving Roger Montgomery’s coveted A1 Montgomery Quality Rating (MQR). The intrinsic value for these businesses is forecast to rise in the coming years, but are they cheap right now? In this appearance on Lunch Money with Brooke Corte, Roger Montgomery also shares his insights on the future prospects for uranium and oil. Watch the interview.
On Lunch Money with Brooke Corte, Roger Montgomery reiterated his long-standing opinion on Telstra, a business whose profits are less today than they were ten years ago and whose intrinsic value has done nothing for years. But following the release of Telstra’s latest results, has Roger’s opinion of Australia’s largest telecommunications provider changed? Watch the interview.
Qantas chief executive Alan Joyce says the company’s profits are poised to take-off, but Roger Montgomery says the whole airline industry is terminally unprofitable. Read article.
For a company so dominant in its market Telstra has been a constant source of disappointment to shareholders. The fixed line rental part of their businesses is in terminal decline it seems. And people are replacing their fixed lines in the home for example with mobile phones, Roger Montgomery says. Listen to interview.
