Insightful Insights

At Montgomery Investment Management we don’t claim any special ability to predict where equity markets will go next, but we do know that buying equities when they are relatively inexpensive is a reliable path to better than average long-term returns. One simple way of gauging relative value is to compare the dividend yield for the market as a whole with its historical average (although we don’t advocate valuing individual companies in this way). It’s worth noting that the current dividend yield on the ASX All Ordinaries is around 4.65%, vs an average of 3.84% for the last 20 years (Source: IRESS).

by Tim Kelley Posted in Insightful Insights, Investing Education.

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Data released yesterday from “worldsteel” on global iron and steel production confirmed slowing output. Global steel production for August 2012 was down 1% year on year. Steel production from the European Union for August was down 15% year on year, taking annual output to 144 million tonnes, or 9.6% of the 1.5 billion tonnes per annum of global production. Chinese steel production has slipped in recent months from an annualised 750 million tonnes to 700 million tonnes, or 47% of global production.
For 2013, Australia’s Bureau of Resources and Energy have recently cut their iron-ore forecast to US$101/ tonne, while many brokers are still assuming a price of at least US130/tonne. We continue to watch the steel numbers closely.

by David Buckland Posted in Energy / Resources, Insightful Insights, Manufacturing.

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Recently the media cottoned onto the fact that the Australian stock market, as measured by the major indices, has not kept pace with the US market, which is now hitting all time highs (on a total return basis). You can see from Chart 1 that the US market is most certainly outperforming the Aussie market and it seems all the ‘Go Australia’ cries are falling on deaf ears. Indeed, Australia really needs to be shouting ‘Go China’ but more on that in a minute.  Since June 2011 the US market has been pulling away. The reports did not go on to explain the reason for the divergence however we have previously explained that with credit growth virtually non existent the banks would not be able to justify sustained substantial gains and with our thesis on iron ore calling for much lower prices, we couldn’t see how the big material stocks were going to rise.  Combined the banks and materials stocks account for a significant portion of the index weighting and without those sectors running, there is no way the All Ords can.  We also think China has a little to do with it all.

Chart 1

Take a look at Chart 2, which plots the Aussie market against the Chinese Shanghai index. Since about the same time last year, the Chinese market has been falling and given that are large part of our economy is tied to the fortunes of China, it makes sense that the prices of those companies with direct (and indirect through consumer sentiment) exposure and a significant weighting to the index locally, would have an adverse influence on the Australian market.

What is also clear is that our strong Australian dollar is not reflecting foreign demand for our shares.  And what does that tell you?

Chart 2

by Roger Montgomery Posted in Insightful Insights, Market Valuation.

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This week David Jones announced their 2012 results and reported a 40% decline in profit. The only positive was that 4th quarter sales fell by just 1% on pcp whereas 1st quarter sales had fallen 11% on pcp. Actually there was another positive; the 35% decline in earnings per share was inline with expectations.

Separately the company also provided an update to its property strategy. Investors should understand that anything DJS does with its properties is simply a takeover defence against private equity (or Premier Investments perhaps) pulling off the same stunt that was done on Myer. That is; launch a takeover, succeed, sell off the property portfolio and get the business cheaper. if DJS shows it is proactive in this area it becomes much harder from Private Equity to argue that they are “adding value”.

DJS intrinsic value (see Fig. 1) has now not increased since 2004 and according to Skaffold.com DJS’s intrinsic value is not expected to rise at all over the next two years.

continue…

by Roger Montgomery Posted in Companies, Insightful Insights, Intrinsic Value, Takeovers.

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Notch up another win for investors who use Skaffold. Back in August last year I was asked by a viewer on Sky Business what I thought of MacMahon Holdings (ASX:MAH).

You can watch the video here at 5 mins 20 seconds.

When asked the question, I looked at Skaffold.com and noting the very small change in intrinsic value over many years I said “This business is not going to deliver sustainable long-term outperformance”.

Today’s near-40% share price decline, announcement of a cost blowout, a downgrade to previous earnings guidance and the immediate resignation of the CEO Nick Bowen is a blow to those investors who own the shares of MacMahon and do not own Skaffold.

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by Roger Montgomery Posted in Companies, Insightful Insights, Investing Education, Skaffold.

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Roger Montgomery discusses his insights into how to view takeover offers, and in particular he discusses the Sundance Resources (SDL) takeover bid with Ross Greenwood on Radio 2GB.  Listen here.

This program was broadcast 19 September 2012.

by Roger Montgomery Posted in Insightful Insights, Investing Education, Radio.

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Yesterday’s Australian Financial Review highlighted comments from Mark Williams, Shell’s global downstream director.

“The global economy seems weaker to me than the numbers indicate”, said Mr Williams. “I still expected more suction out of China than we’re getting. I’m just a bit uneasy with what we are seeing in terms of fuel demand and chemical demand”.

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by David Buckland Posted in Companies, Insightful Insights.

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Its no news we have been warning investors about the risk of declining iron ore prices since late calendar 2011. Most recently we have been warning of a bear trap – the risk associated with buying stocks when they appear to be ‘cheap’ because they have fallen a long way but poor fundamentals are likely to see prices even lower.

Figure 1 outlines how The Montgomery Funds have been thinking about China, Iron Ore and our big miners.

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by Roger Montgomery Posted in Energy / Resources, Insightful Insights, Market Valuation.

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Roger Montgomery discusses why investing in heavily leveraged companies is a risky pursuit in this Australian article published 15 September 2012. Read here.

by Roger Montgomery Posted in Energy / Resources, In the Press, Insightful Insights.

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Join Roger as he explains how the long-standing principles of value investing can be applied so that you too can identify A1 businesses for your portfolio and beat the index. Watch here.

by Roger Montgomery Posted in Insightful Insights, Intrinsic Value, Investing Education, Market Valuation.

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