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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There is little evidence that Healthscope is worth anything near the private equity bid of $5.50 a share. Read Roger’s article at www.eurekareport.com.au.
It was as a young boy that I became enamoured with the outdoors and the unique landscape of Australia. I discovered the easiest way for me to experience it was by participating in cubs and scouts. I will never forget the motto “be prepared”. It has served me well in many ways, and while nothing is ever failsafe, it is sound advice when it comes to investing.
The market and its associated commentary is on tenterhooks. You can attribute that to the supertax’s contribution to a foreign investing exodus, nerves surrounding the property bubble in China, rising interest rates, or whatever else seems to be fashionable on the day with which to attribute the market’s conniptions to. I believe however, quite simply, that prices are generally expensive compared to my estimates of intrinsic value. That means that the performances of the underlying businesses do not justify current prices.
Of course if you are a trader of stocks valuations don’t matter. You will sell on the emergence of the Greek storm-in-a-teacup and buy the day after, when another bail-out package is revealed. Alternatively, you will buy when one newsletter says the coast is clear and sell when yet another contradicts it. The people pointing out worries about China today are those that said the banks would rise to $100 before the GFC hit. One of the easiest things to observe in the markets is that predictions of a change in direction are far more frequent than they are accurate. And anyone can explain what has happened, but few seem to be able to look far enough ahead to be positioned well.
With arguably the exception of my warnings earlier this year about the impact of a decline in infrastructure spending in China (thanks to an unsustainable commercial property and capital investment scenario) on the demand for Australian resources, I don’t try to predict the direction of markets or the macro economic determinants. I simply look at whether there are many or any good quality businesses available to purchase below intrinsic value. If there aren’t many or any great businesses to buy cheaply, the only conclusion must be that the market is not cheap.
I cannot predict what the market will do next, but its worth being prepared. When the market is expensive compared to my valuations, one of two things can happen. On the one hand, share prices can drop. That is more likeley to be the case if values don’t rise – which of course is the second scenario. Valuations could rise and make current prices represent fair values (or even cheap if values rise substantially).
In the event that prices fall (remember I am NOT making any predictions), I thought its worth looking at some of the big cap stocks (not necessarily A1’s) and how much their current intrinsic values are expected to rise over the next two years. These estimates of course can change, and its worth noting that none of the companies are trading at a discount to their current intrinsic value.
| Company Name | Current Margin of Safety | Estimated change in intrinsic value 2010-2012 |
| RIO Tinto | No | 8% p.a. |
| Commonwealth Bank | No | 16% p.a. |
| National Aust. Bank | No | 22% p.a. |
| Telstra | No | 2% p.a. |
| Woolworths | No | 7% p.a. |
| QBE | No | 10% p.a. |
| AMP | No | 9% p.a. |
| Computershare | No | 5% p.a. |
| GPT | No | 3% p.a. |
| Leightons | No | 13% p.a. |
My estimates of intrinsic value don’t change anywhere nearly as frequently as share prices, but they do change. I expect some adjustments to start flowing through as companies begin what is called ‘confession season’ – that period just ahead of the end of year and the release of full year results, when companies either upgrade or downgrade their guidance to analysts for revenues, market shares and profits. These adjustments could, in aggregate, make the market look cheap, but that will require 2011 valuations to rise significantly.
If prices fall (I am not predicting anything), and one is not overly concerned about quality, then one strategy (not mine) may be to buy the large cap companies expected to lead any subsequent recovery. Many investors and their advisers still subscribe to the idea that ‘blue chips’ exist and are safe. They tend to think of the largest companies as blue chips (I don’t) and if they are going to buy any after a correction, we might expect they will buy those whose values are going to rise the most. Of course, they may not know nor care about my valuations, nor do they know which companies are going to rise the most (in intrinsic value terms), but over the long term, the market is a weighing machine and prices tend to follow values. It follows on this basis then that Telstra’s value increase of just a couple of percent per year over the next two years may not put it in an as attractive a light as, say NAB.
I think you get the idea. To share your thoughts click “Leave a Comment”.
Posted by Roger Montgomery, 15 May 2010
Asiano’s $1.1 billion writedown should have investors looking hard at other stocks, particularly where goodwill dominates balance sheets. Read Roger’s article at www.eurekareport.com.au.
Calculating cash flow is crucial to telling a good investment from a bad one. Independent investment expert Roger Montgomery reveals his formulae to value stocks. Plus, find out why he’s steering clear of the market – for the meanwhile. Read article.
This is the one you have been waiting for – Roger Montgomery’s step-by-step guide for calculating cash flow. Make sure you have a pen and paper handy when watching this interview! Watch the interview.
The sharp fall in CSL’s share price represents a good opportunity for investors with the courage to swim against the tide. Read Roger’s article at www.eurekareport.com.au.
Roger Montgomery talks with Oriel Morrision on CNBC Trading Matters about the government’s proposed tax reforms and the consequences of rising interest rates on JB Hi-Fi and Oroton’s intrinsic value. Watch the interview.
Fifteen months ago I was shouting it from the rooftops; “we will look back on this time as one of rare opportunity”. Since then, and as the All Ordinaries Accumulation Index rallied 61 per cent, there has been a fall in my enthusiasm for the acquisition of stocks.
Now, let me make it very clear that I have no idea where the market is going, nor the economy. I have always said you should never forego the opportunity to buy great businesses because of short-term concerns about those things. Even my posts earlier this year about concerns of a property bubble in China need to be read in conjunction with more recent reports by the IMF that there is no bubble in China. Take your pick!
My reluctance to buy shares today in any serious volume comes not from concerns about the market falling, or that China will cause an almighty slump in the values (and prices) of our mining giants. It comes from the fact that there is simply not that many great A1 businesses left that are cheap.
So here’s a quick list of companies that do make the grade for you to go and research, seek advice on, and on which to obtain 2nd, 3rd and 7th opinions.
* Note: Valuations shown are those based on analyst forecasts and a continuation of the average performance of the past.
In addition to these companies, investors keen to have a look at some lesser-known businesses, that on first blush present some attractive numbers, could research the list below. I have not conducted any in-depth analysis of these companies, but my initial searches and scans are suggesting at least a second look (I have put any warnings or special considerations in parentheses).
What are some of the things to look at and questions to ask?
Of course I invite you again – as I did in last week’s post entitled “What do you know?” – to offer any insights (good, bad or in-between) that you have about these or any other company you know something about, or even about the industry you work in.
Posted by Roger Montgomery, 4 May 2010
I have discovered through the book publishing process that being a perfectionist is costly. I have also discovered that being reasonably adept at investing does not make one even remotely adept at being the foreman of a book publishing project.
I pulled the book out of the jaws of the printer when a few typos were spotted. Correcting the text of course threw the alignment out so it was back to the typesetters. The typesetters are an impressive group of designers and proofreaders and from them I learned that hyphenated sentences aren’t acceptable, and the top of a page can’t begin with the last word of the last sentence from the previous page. Who would have known?
The changes impacted the index so the book couldn’t go to the indexer until every word was in its final resting place. I didn’t even know there were “indexers”, let alone final resting places and even ‘widows and orphans’. Investing it seems is not the sole domain of jargon and lingo.
Happily my work is done and Value.able will be with the printer next week.
Patience is the hallmark of the world’s best investors. It appears patience is also the hallmark of every investor who has visited my blog or written me an email. Thank you.
Good things come to those who wait, and provided you have pre-registered with me you will soon receive an email announcing the opening of the ordering window and inviting you to claim your reserved copy of Value.able for $49.95, including GST and shipping anywhere in Australia.
If you are ordering from overseas, that’s no problem; country-specific delivery rates will be available. Finally, for those who have reserved multiple copies, as gifts for family and friends, don’t worry, your additional copies have been registered along with your copy.
I am only printing First Editions for those who have pre-registered at www.rogermontgomery.com so be sure to register. I look forward to your thoughts after you have read Value.able.
Posted by Roger Montgomery, 4 May 2010
Roger Montgomery says that he is looking for great businesses at cheap prices. He shares his views on Oroton and JB Hi-Fi with Oriel Morrison. Watch the interview.
