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Last week the retail fund, The Montgomery Fund, celebrated its two-month birthday and thanks to some canny timing of the launch (rather than any skill, which cannot be attributed to a fund that is 8 weeks old) it has recorded a return of approximately 10.2% against its benchmark’s return of 5.75%. While we all have to crawl before we walk, I am pleased with the fund’s first steps.

Investors in the fund can look forward to receiving their first bi-monthly update in early November detailing the performance, major holdings, and the composition of the portfolio.

Over recent weeks we have received a number of questions about The Montgomery Fund and I thought it would be a good idea to try and answer some of those questions here.

If you have any more, feel free to post them and we will endeavor to answer them.

The first thing to point out is that Montgomery Investment Management is now the investment manager for two products. They are, The Montgomery [Private] Fund, and The Montgomery Fund.

The Montgomery [Private] Fund, a fund for wholesale investors with a minimum initial investment of $1,000,000, had its inception on 23 December 2010. In the 21-month period to 30 September 2012 it has pleasingly out-performed its benchmark, the ASX200 Industrials Accumulation Index, by 17.47%.

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by Roger Montgomery Posted in Value.able.

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News of a new debt facility of $400 million for Qantas should send investors zipping up their wallets. Qantas Group is Australia’s largest domestic and international airline.

Back in 2000 the balance sheet of Qantas comprised:

›  $2.8 billion of shareholders equity

›  $3.1 billion of bank debt

For financial year 2000, Qantas reported earnings of $517 million giving an ROE of 17.45%.

But more recently, Qantas recorded a normalised loss of $16.3 million. The 2012 loss follows the $317 million profit of 2011, the $175.2 million profit of 2010 and the $164.6 million profit of 2009.  All of these were lower than what the business reported its earnings to be in 2000 – eleven years ago.

The company however has seen its debt balloon in that time to $6.5 billion and shareholders equity is at $5.9 billion. Meanwhile any simple bank account, with an additional $12.4 billion of capital injected, would be earning more than it did a dozen years ago.

Owners have put in another $3 billion of equity on top of the $2.8 billion injected by 2000. But despite the life support, the company still lost $16 million in 2012.

Even with the very best management running the show and the most generous bankers, there’s no escaping these economics.

by Roger Montgomery Posted in Airlines, Value.able.

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If you think the declines so far in iron ore are significant, you ain’t seen nothing yet.

I think the declines we have seen in commodity prices still have a long way to go.

We’ve long argued that a classic supply response would follow the massive investment in exploration and production that itself followed a surge in demand from China that caused prices to reach historic highs.

But China’s demand – itself was based on unsustainable growth in fixed investment spending – is now fading. China represents less than 11% of the global economy, but it commanded 30% to 40% of total global demand for copper and 60% of total global demand for cement and iron ore thanks to the massive social modification projects that required bridges, roads, ports, cities, subways and skyscrapers.

This is not sustainable and so demand for the raw ingredients will decline. Additionally, the nature of future growth will change and more consumer driven growth will again demand less materials.

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by Roger Montgomery Posted in Energy / Resources, Insightful Insights, Value.able.

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Chalk up another win for Skaffold members.

Substantial capital losses are difficult to make back and irrespective of whether you are still in accumulation mode, retiring or retired it is essential to avoid major losses. One way to do this of course is to diversify and ensure that losses are mitigated through position sizing. Another technique and the one we will discuss here, is to simply avoid the companies most likely to collapse.

This week Gunns (ASX:GNS), was placed into voluntary administration and happily for Skaffold members it is unlikely that anyone owned shares.

Gunn’s was never investment grade. Anyone who purchased the stock from 2003 onwards were taking a massive risk and Skaffold can explain why.

Skaffold’s Verdict (Figure. 1) is a picture of danger.

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by Roger Montgomery Posted in Companies, Insightful Insights, Market Valuation, Skaffold, Value.able.

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After jumping nearly 20% over the September 2012 Quarter, Wednesday saw the leading 50 European blue chip stocks from 12 Eurozone countries, as measured by the STOXX, decline by 2.7%. The Spanish market, which had rebounded 35% from its low point in early July, fell 3.9%. On Thursday, Spanish Prime Minister Rajoy announced his fifth austerity package in nine months of Government. The target is to cut the budget deficit from 6.3 percent in 2012 to 4.5 percent in 2013.

Economists responded by saying “they’ve increased the taxes for next year and cut spending but they didn’t change the growth forecast”. Economists expect the Spanish economy to contract around 1.5%, while the Government is forecasting a contraction of only 0.5%. With their ten year bonds selling above 6%, Spain will likely need to raise the white flag and go “cap in hand” to the European Central Bank for another bail-out. Spain’s declining property market and 25% unemployment is causing a significant solvency issues for their banking system, as the contraction of private sector lending continues.
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by David Buckland Posted in Insightful Insights, Market Valuation, Value.able.

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Fred Smith, CEO of FedEx, the express parcel and logistics operator, said that over the last 25 years global trade had generally grown at a faster rate than the world economy, but over recent months that process had broken down. “That’s what is really going on – that exports and trade have gone down at a faster rate than GDP”. Although Fed Ex announced its revenue for the three months to 31 August 2012 was up 3% to $10.8 billion, it guided down its net earnings for the year to 31 May 2013 to around $6.40 per share. At the current $87, FedEx is on a prospective PE of 13.6X.

by David Buckland Posted in Value.able.

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Roger Montgomery discusses the new Qld Government levies on mining, and the likely impact on mining stocks with Ross Greenwood on Radio 2GB. Listen here.

This program was broadcast on 12 September 2012.

by Roger Montgomery Posted in Companies, Insightful Insights, Radio, Value.able.

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Did you know that the market capitalisation of Apple Inc. is now more than the entire equity markets of Spain, Portugal, Ireland and Greece combined? Its stunning. Surely Forrest Gump from Greenbow Alabama would be writing to Jenny with much enthusiasm. But what about its intrinsic value? Back in 2010 (http://rogermontgomery.com/is-apple-an-a1/) I wrote that Apple’s intrinsic value was higher than the share price at the time. The table below first published in July 2010 reveals the company’s pattern of rising intrinsic values. back then the price was indeed showing a small margin of safety.

A couple of blog readers have subsequently told me they purchased Apple shares and obviously they have done nicely. But what about today?

Only last year, when the share price hit $600 I wrote that I thought price had run ahead of intrinsic value (but not forecast intrinsic value) and the share price subsequently fell slightly. We also noted declining margins and market shares losses. But improving quarterly results and rising forecasts means revisions have resulted in IV estimates continuing their stellar rise so a revisit of our assumptions might be worth our time.

The graph below reveals that our ‘revised’ back-of-the-envelope intrinsic value estimate for Apple is forging ahead. If you are confident that Apple’s pipeline of products will usurp the competition, take back market share and fill Apple’s coffers towards 1000 billion dollars and that the iPhone 5 – expected to be revealed this week – will knock everyone’s socks off, then the massive rises in intrinsic value, might not seem so extreme.

Of course all intrinsic values are just estimates and while our haven’t done too badly for us – we’ve been spot on with BHP at $30 and done well on others – the reality is they can change dramatically as new information comes to hand.

So lets keep an eye on whether Apple impresses this week with its new release.

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

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Computershare’s court victory allows it to proceed with its digital post business – and Roger Montgomery discusses its potential in this edition of ABC1’s Inside Business broadcast 2 September 2012 . Watch here.

by Roger Montgomery Posted in Insightful Insights, TV Appearances, Value.able.

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I’d like to offer the opportunity to invest in my new business. No not the new Montgomery retail fund (although I’d be delighted to welcome you as an investor) but an operating company. Like many of the companies reporting earnings this reporting season I will guarantee it will report to you record earnings every year.

This promise is easier to keep than you might initially realise. If companies making such headline-grabbing announcements impress you, then you might be interested to know its not that hard to achieve.

All you need is a bank account and a rocking chair. Lets start with a million dollars in a bank account earning five per cent. First year earnings will equal fifty thousand dollars. Now let’s reinvest all of the interest. Now we have $1.05 million earning five per cent. Year two’s earnings would be $52,500. And there you have it, record earnings! Magic.

When a company reports record earnings, there is nothing more miraculous than the power of compounding. Indeed, if a company cannot increase its earnings, then perhaps a bank account is better.

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by Roger Montgomery Posted in Value.able.

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