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When to sell Rule #1 is: No junk policy. In the second part of Roger’s selling mini-series, he identifies Rule #2: Expensive.

While market declines alone don’t prove merit in selling shares, the broad declines do suggest a disciplined approach to shares significantly above an estimate of intrinsic value is necessary. For me, if the businesses are also of a lower quality in terms of our A1-C5 ratings, for example Asciano, Amcor, Westfield or Santos – there is an additional urgency to review.

Three weeks ago these C-rated businesses were all trading at prices significantly higher than an estimate of intrinsic value. Fast-forward to today (19 August 2011) and despite the falls, Safety Margins are are stubbornly high:

Asciano: -75 per cent
Amcor: -39 per cent
Westifeld: -46 per cent
Santos: -76 per cent

For us, it is neither here nor there whether you agree with our valuations and therefore Safety Margins. What is important for us and the portfolio we manage, is the combination of quality and value. In the absence of either trait, we would be unlikely to remain a holder of the shares.

It can be potentially permanent devastating holding shares in poor quality businesses at prices significantly above value.

Imagine you acquired shares in a business today for $2 and estimated those shares to be worth $4, rising to $4.10 the following year. Then suppose after six months the share price rises to $3.00.  What would you do?   Value.able Graduates, are expected to answer that question correctly.  Now imagine the price of those same shares has risen to $6 in the same time frame. Would your answer change?

It may be tempting to set up some hard and fast rules about when to sell. I am not as comfortable with this approach as I am with the idea that the appropriate premium above intrinsic value at which to sell depends on the future prospect for the company and therefore its intrinsic value for the future.

Your response may be that there is greater uncertainty in future valuations. If that is your view, then you should sell.

Whilst we should not try to predict the future, it is important to look through a conservative telescope. What will be the value of each company in your portfolio next year? And the following year? Understanding the business and using that understanding to help establish prospects for intrinsic value appreciation in the future is a vital component of the Value.able approach, we advocate here.

If you are yet to join the Graduate Class, order your copy of Value.able immediately at ‪http://www.rogermontgomery.com/. Once you have 1. read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our soon-to-be-released next-generation A1 service).

Value.able TV #5 was recorded at Montgomery HQ on 19 August 2011.

Posted by Roger Montgomery’s A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 19 August 2011.

Visit ‪‪http://www.rogermontgomery.com/ for Roger Montgomery’s step-by-step guide to valuing the best stocks and buying them for less than they’re worth.

by Roger Montgomery Posted in TV Appearances.

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Qantas is planning to drastically cut costs by forming two new airlines and cutting 1,000 jobs in Australia. Roger Montgomery reveals his thoughts on Qantas. Read the transcript.

by Roger Montgomery Posted in In the Press, Media Room.

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In this appearance on Your Money Your Call, Roger Montgomery answers viewer questions on McMillan Shakespeare (ASX:MMS),  Ansell (ASX:ANN) Think Smart (ASX:TSM), Thorn Group (ASX:TGA), GR Engineering (ASX:GNG) and Technology One (ASX:TNE). Roger also reveals which gold stock continues to attract his Value.able eye? Watch the interview.

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Your teenager wants to invest in the stock market. They have $6000 sitting in an ‘advantage saver’. What should they do? Roger Montgomery suggests this young investor seek out businesses with high rates of return on equity, little or no debt and bright prospects. The final step is to ensure shares in such businesses are acquired at prices less than they’re worth. In this interview Roger also shares his suggested portfolio allocation strategy to minimise risk for this young investor and reveals why he was pleased by Credit Corps (ASX:CCP) full-year results. Watch the interview.

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In this appearance on Your Money Your Call, Roger Montgomery reveals nine extraordinary businesses he recently acquired for The Montgomery [Private] Fund. Roger urges investors not to be fearful of market downturns, but rather embrace the opportunity to acquire extraordinary A1 businesses for prices less than they’re worth. Roger also answers viewers’ questions on Forge (ASX:FGE), Macmahon Holdings (ASX:MAH) and Decmil (ASX:DCG) – whose intrinsic value is forecast to rise to above $8 by 2013? Watch the interview.

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If anyone were to make a second run at Qantas, now would be the time to do it. Read Roger’s article at www.eurekareport.com.au.

by Roger Montgomery Posted in Media Room, On the Internet.

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Following the release of their full year results, Roger spoke with senior management at JB Hi-Fi and discussed their cashflow and working capital.

JB Hi-Fi scores an A3 (down from A1) thanks to a debt-funded buy back of shares. It is nonetheless a company with great cash flow. Value.able Graduates paying close attention to Cashflow in JBH’s latest result may have been concerned by the large jump in inventory, which had a detrimental impact on Cashflow from Operations since last year.

So, what did Roger discover?

In 2010 JBH stores were cycling low inventory numbers. Arguably this resulted in a sell-out of stock, which was due to under-provisioning,

Stepping back and looking over time at a pre-store level, Roger says “If you have a look at the inventory on a per store basis, $2.2m – $2.6m per year, it’s fairly consistent. I’m not concerned.”

Roger suggests the future is interesting for JB Hi-Fi. If store growth continues at the current rate (13-16 stores per year) for the next three to four years, then by the time they reach 214 stores, there will be a lot of free cash. Extra cash from the maturity of existing stores, combined with a reduction in debt, will see a very cash rich JBH.

What will management do with the extra cash?

In Roger’s view, management have three options: increase dividends, buy back more shares or make a [silly] acquisition.

Roger’s estimate of JBH’s Value.able intrinsic value in 2012 is around $17, rising to $20 by 2013.

Will intrinsic value continue to rise after that?

“That will be largely dependent on what management does with that cashflow when it’s freed up” Says Roger, noting; “I think the future for JB Hi-Fi will prove to be a didactic experience for value investors.”

Value.able Graduates: What are your insights on Australia’s embattled retailers?

Value.able TV #4 was recorded at Montgomery HQ on 15 August 2011.

Posted by Roger Montgomery’s A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 15 August 2011.

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The Dow Jones dropped 500 points. The ASX immediately followed. Is this rational investing or just another correction? In this appearance on Switzer TV with Peter Switzer, Roger Montgomery reveals eight extraordinary A1 companies whose shares are trading at prices below his estimate of their Value.able intrinsic value. Roger reveals Flight Centre (ASX:FLT), Data#3 (ASX:DTL), Oroton (ASX:ORL) and Cash Converters (ASX:CCV). What other extraordinary businesses make Roger Montgomery’s A1 grade? Watch the interview.

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There’s an odd whiff about the upcoming float of Australia’s top-selling cheese brand. No matter what the company says, investors will have their shares diluted by Bega’s acquisition of Tatura Milk Industries. Read Roger’s article at www.eurekareport.com.au.

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The Australian share market and dollar have staged spectacular turnarounds, with All ordinaries index rising phoenix-like from falls of more than 5 per cent to finish with a 1 per cent gain. Fund Manager, Roger Montgomery reveals his thoughts following the market turnaround. Read the article.

by Roger Montgomery Posted in In the Press, Media Room.

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