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Best-value shares

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Best-value shares

Roger Montgomery teaches investors how to spot the difference between outstanding value and ‘value traps: low or negative ROE, negative cash flow, high debt and share prices far higher than a company’s intrinsic value. Read Roger’s ASX Investor Update article at asx.com.au.

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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.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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31 Comments

  1. bruce parker
    :

    hi Roger,
    I missed the value trap table , are you able to send me a copy ? I would appreciate it ,
    cheers

  2. bruce parker
    :

    hi Roger,
    could you confirm if I am on track with my i.v. calcs please- using info from the commsec site I have come up with an i v for COH of $87.23,I got an roe of 42.58% ,payout ratio of 25.57% using an RR of 10% ?
    And moving off the subject of shares for a moment , what are your views on bonds in this current economic environment ?
    cheers
    Bruce

  3. Nigel
    :

    Roger, LLyod and Greg,
    I have been pondering Count vs Fiducian as well. Like Lloyd i have concerns with the near tern downside regulatory risk with Count, particularly the potentional abolishion of volume rebates which made up a large chunk of 2010 revenue. I have an IV for Count of $1.39 (ROE 60%, RR15%) and Fiducian of 1.71 (ROE34%, RR 15%).

    Nigel

      • Greg Mc
        :

        I think that to get an IV remotely near what KKR are indicating they might offer, PPT would need their ROE to return to the good old GFC days – which I don’t expect for the forseeable future. In other words, I think they’re worth half of what KKR is offering and if I owned some PPT I’d be happy to take the money and run (or since the proposal is indicative and non-binding, I’d sell here and now….but that’s just me).

  4. Ed
    :

    Hi Roger,

    Thank you for the book – it’s been a wake up call to get rid of bad habits for me.

    One valuation has gotten me stumped and I’m not sure where I’m going… Either my calculations aren’t correct or the stock is 50% overvalued at the moment? If you could assist please, Roger…

    On evaluating the intrinsic value for Platinum Asset Mgmt: Do you take into account the substantial holdings that are not regularly traded, in this case the co-founder Kerr Neilsen owning 85%+ of all shares? With only 15% of the shares outstanding actually being traded regularly, does this affect the intrinsic value?

    I have calculated on an equity per share of 0.40c, ROE 60%, payout ratio 90% – the numbers come up with an intrinsic value of about 3.15.

    Any thoughts on PTM value would be appreciated.

    Thanks
    Ed

    • Andrew
      :

      Hi Ed,

      I have ran the numbers over PTM. I came up with $3.79. I used a RR of 10% and 65.24% ROE which means i used the 60% ROE amount in the tables.

      My EQPS was the same as you at 0.40 so i guess the difference between mine and yours could come down to the Pay out Ratio or the discount rate as mentioned i used 10%.

      I used a payout ration of 81.99%. I got this due to using a NPAT figure of 136852 and dividends paid figure of 112200 which i got from the annual report in both the changes in equity figures and in note 11 on page 54.

      The difference however is nothing to worry about and you will regularly see peoplle using the exact same method to value the company coming up with various differences. As we want to buy well below IV the margin of safety would more than make up for any difference in the inputs.

  5. Henry
    :

    Dear Roger,

    If you published your Value able book 5 years ago, I ‘d have been retired in Mahama beach now . I made $25K in less than 2 months since I bought and follow your book. That is %20 of the investment capital in less than 2 months. I combine the knowledge of the IV with the trend trading to ride the price wave in order to compound the profit. When the price goes up I sell, when the price pull back I buy. And my buying price must be always 15% below the IV. I used to sleep less every time US market take a hit. Now, I make money regardless of how US market behave, I even make more money when US market tumble over night. Thank a million Roger.

    • Roger Montgomery
      :

      Delighted to hear that Henry. Thank you for sharing your success with me. Please be sure to seek and take personal professional advice and be sure to fully understand all of the risks.

  6. Lloyd Taylor
    :

    Roger,

    You continually advise readers to (and wisely so) … “Seek and take personal professional advice”.

    Now this brings us to COU. Trading slightly above IV (at least on my view) and facing some regulatory change headwinds and uncertainty. How about an update on your views of this company and any other of the businesses in the game of providing the professional financial advice you urge readers to seek?

    For my part I take my own counsel, but it appears that a lot of people are not so self reliant and that there is more than a few dollars to be made by those with an AFSL on the shingle.

    So who is the best of the best in this category in the publicly listed space and what do the pending regulatory changes do for their profitability?

    As always, I look forward to your views and thanks in advance.

    Regards
    Lloyd

      • Greg Mc
        :

        Ah, Fiducian, one of my little favourites (as a financial services company which I have held in my SMSF for some time, I’ve never been a client). I have respect for Indy Singh, I like their business model and the way they go about their business. They managed to maintain quite good ROE even through the events of 2008-9. From a shareholder perspective, they treat their owners with due respect and go to some lengths to provide transparency – even down to publishing quarterly cashflow statements when there is no obligation for them to do so. I imagine that given the ethical way that they run their business, people seeking financial advice from them would get if not high quality advice, at least honest and ethical advice.

        For what it is worth, I value them at $1.56, and track record and the confidence I have that management aren’t going to do something stupid or screw me over makes me happy to hold on to them.

      • Lloyd Taylor
        :

        Roger & Greg,

        Sounds interesting. I’ll have a good look at the aptly tickered FPS. Micro cap and limited liquidity pose some issues, but the integrity of leadership you describe would be a big offsetting plus.

        At this stage, my difficulty is seeing how the reform and regulatory headwinds will play out in terms of the quantified impact on the financial planners over the long haul. That said, I guess that if any group is equipped to deal with headwinds it should be the financial planners. I’d still welcome Roger’s thoughts on this.

        Similar challenges emerge for other parts of the financial services sector in reading the current political environment and the Government’s predilection to return to the issue of tax reform and the Henry Report recommendations, which further cloud the outlook (at least in my mind) for MMS on top of its changing business model (refer the recent leveraged diversification acquisition).

        Reading tea leaves and consulting the Oracle at Delphi would seem easier and more reliable in the current political environment with all its spin, back flipping and flip flopping.

        Regards
        Lloyd

      • Roger Montgomery
        :

        Hi Lloyd and Greg,

        Meetings with ASIC over the last two days reported to have reached no consensus either. Perhaps suggests industry consultation over and regulator top make a decision.

      • Peter Kruckow
        :

        Hi Roger
        Just wondering what your 2011 iv for FPS might be.I have them at 2.18,taking into account all of their buybacks, I see Greg Mc ,above, has them at 1.56 and Ashley in another post with his ‘rough and ready’ has them at 1.65. I’ve been tracking and studying them since this little titbit was posted. Still at a discount to iv but not as cheap as I’d like.

        Cheers
        Pete

  7. Scott
    :

    Thanks for the article Roger, I like the disciplined approach of filtering the non-ideal businesses.

    I’m interested in your valuation of WTF. According to my calcs, you appear to have assigned a discount rate of 8% to this company. To me this indicates you are very confident of its sustainable competitive advantage and future prospects – hence the A1 rating I guess. To me 8% sounds like a low number, especially compared to virtually risk free savings accounts which are returning 6.5%. Do you look for range of businesses with different risk profiles in your portfolios or do you just concentrate on the WTFs – solid shops with modest returns?

  8. John M
    :

    Hi Roger,

    Thanks for printing the value trap table – it will come in very handy.

    I was contemplating the competitive advantage of WTF that you previously described as the Network effect. It seems that between this and the other four value trap tests that you used with WTF, I have chosen a Discount rate of 8% in calculating intrinsic value because each of these 5 factors would have a reason.able effect on value. Is this a reason.able assumption? I

    Another quick question. Do you regularly increase the Intrinsic value (eg monthly) of companies to factor in the time elapsed between 1 July to 30 June of the next year? 102 days elapsed this financial year so 102/365 * (Future IV – Current IV) + Current IV; or do you leave this out of the picture?

    One last question, how often do you update future Intrinsic value?

    The best of good buys

    John M

    • Roger Montgomery
      :

      Hi John M,

      I keep it simple. And it works pretty well. Update forecast intrinsic values whenever there is a change in the outlook or prospects for the business. I am not sure that the way you link the tests to the discount rate is replicable.

      • John M
        :

        Thanks for IV update info. I tend to agree with the lack of replicability of my fuzzy logic discount rate selection. I still am in the early stages of working out how to select the RR in the calculations. Maybe the discount rate selection might be a good future topic for this blog.

        I have noticed that Sally Macdonald has recently sold down her shareholding in ORL from 948570 to 795570 shares on the 6,11,12 October 2010. I know you only know publicly listed information like the rest of us, but I was wondering what your thoughts are on directors and CEO’s selling stock in companies that they have interest in. Is this something to be concerned about in your opinion?

      • Roger Montgomery
        :

        Hi John M,

        I wrote the following earlier: Perhaps there will be an announcement. As you know I do become cautious when the key man or woman sells shares but in the case of Realestate.com.au and McMillan Shakespeare prices have continued upwards after the event as long as intrinsic value continues to rise. Remember some people here at the blog have correctly expressed caution because of the high price to book ratio.

  9. scott cantwell
    :

    i have no clue about shares and the market but i know a lot about transport and think the qr shares will be a good investment .
    if the price is around the 2 dollar mark
    am i right to think this or are they crap ???
    please advise me of which way i should go . to buy or not ??

    • Roger Montgomery
      :

      Hi Scott C,

      No advice available here. You will find general comments about what companies I like and what I think they are worth ( as well as what others like and their values too) but because your personal financial circumstances and needs are unknown to me (and I don’t want to know), you need to obtain personal professional advice before buying or selling anything. The other important things to keep in mind is that I am under no obligation to keep this blog or my comments about a company up to date so you mustn’t rely on any information presented here for your investing. Seek and take personal professional advice.

  10. bruce parker
    :

    hi roger,can you tell me where I can find the total shares on issue for Australian companies so I can work out their value using the calculations in your book.
    cheers

  11. Rob Walker
    :

    Well done Roger, for some people a table presented like this is
    Value.able, It can also be used as a tool, I wonder how many people will use your table in a notepad and go off looking for their own Trap free stocks. The table would not have been out of place in your book. A second point I have now investigated all of the a1 and a2 stocks, could we please have a list of the A3’s. Thanks

    Regards
    Rob Walker

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