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  • Has the US Stimulus had its day?

    rogermontgomeryinsights
    October 6, 2009

    The US stimulus may have been great for global markets, including our own, but have the benefits to the ‘real’ economy been just as dramatic?

    The impact of stimulus packages on the real world appears to be wearing off. By the end of September next year, 70 per cent of the 2009 American Recovery and Reinvestment Act’s $787 billion will have been spent.

    According to economics forecaster Moody’s, US stimulus packages contributed ¼% in the first quarter of calendar 2009, 3% in the second quarter, 3.5% in the third quarter (now), and is forecast to contribute ¾% in the next quarter, 1½% in the first quarter of calendar 2010 and ¾% in the second quarter of 2010.

    Translation? The Obama stimulus package is having its maximum impact on the ‘real’ economy right now. Data showing the recovery taking root is simply a function of this stimulus. According to Moody’s, this quarter is as good as it will get. The bad news is that from here-on-in, the stimulus will start to wear off.

    Now, I am no economist. But there are several prominent experts, like Jim Rogers, who are warning another slowdown is about to occur that will make the recession the US just experienced look like a picnic.

    I am equally poor at forecasting stock markets – you will discover over time that it just hasn’t been an essential ingredient in my own investing. But a friend of mine who picked the last market high and low to within a couple of days (please don’t ask me who he is or how he does it), tells me that markets have just seen their medium term highs and have begun another sell-off. This may or may not transpire of course, but he has always impressed me with his uncanny ability to get it right.

    So we have some economic forecasters saying be careful, we have a market forecaster saying watch out and now here is my contribution…

    I can tell you what a business is worth. I can also tell you that in the short run the stock market is a popularity contest, but in the long run share prices follow values. That’s why it is essential you know the value of the companies you are buying shares in.

    When I aggregate all the company values I have estimated, I arrive at an estimated valuation for the All Ordinaries Index of just under 4000 points. This compares to a market that is 600 points, or 15 per cent, higher. That alone however doesn’t mean the market is going down. Valuing a company is not the same as predicting its price, and the reality is that Australia has over 3000 funds chasing less than 2000 stocks. This has the effect of creating a ‘normal’ state that sees the market above its valuation.

    But above its valuation it is. So while I am very optimistic about Australia’s future and will never let short-term concerns about the economy or the market stop me from buying shares of great businesses when they are offered at attractive prices, right now I can’t find many great companies that are cheap enough to buy. And some people I have great respect for suggest I should be even more cautious in my optimism. Perhaps you should too.

    By Roger Montgomery, 6 October 2009

    by rogermontgomeryinsights Posted in Insightful Insights, Market Valuation.
  • Corbett’s Fairfax still a leaky boat

    Roger Montgomery
    October 1, 2009

    Your performance in the stockmarket is more a function of the boat you get into than who is rowing. Fund manager, Roger Montgomery reveals his thoughts on Fairfax. Read the article.

    by Roger Montgomery Posted in Media Room, On the Internet.
  • Is LMC investment quality?

    rogermontgomeryinsights
    October 1, 2009

    This blog is for viewers of Nina May’s Your Money Your Call program on Sky Business Channel last week who requested a valuation for Lemarne Corporation Limited (LMC).

    LMC’s history is a lumpy one. It is no JB Hi-Fi or The Reject Shop in terms of its economic performance. This makes the process of valuing the company more subjective.

    ROE over the last 10 years has averaged 14%, varying between -1.2% to 25.8%. Since a capital return that reduced equity, and the sale of C10 Communications, ROE has been higher.

    Cash flow is good (exceeds reported profits) and the balance sheet is debt free. Debt free, an attractive ROE and good cash flow are desirable characteristics, particularly when they appear in concert. Management have also shown they are owner-oriented, buying back shares last year at depressed prices equivalent to 10 per cent of today’s market cap, and plan to also provide a capital return through an unfranked dividend of 50c.

    But this a small company, and I have done no work identifying whether any competitive advantages (the ability to regularly raise prices without a loss of sales volume) exist. They often don’t in small businesses. If they do, they tend not to be small for long. The focus is now on one business – Lemtronics. On first impressions, it is not the most memorable of brands.

    My estimate of value is $4.00 – $4.50, but there are plenty of other companies whose businesses I know better.

    By Roger Montgomery, 1 October 2009

    by rogermontgomeryinsights Posted in Companies.
  • ValueLine: The Myer float

    Roger Montgomery
    September 30, 2009

    The enthusiasm surrounding the Myer float is good reason for a value investor to stay clear. So is the expected price.

    by Roger Montgomery Posted in On the Internet.
  • Is the Myer prospectus hot?

    rogermontgomeryinsights
    September 28, 2009

    I’m not talking about the front cover.

    The current owners, including TPG and the Myer family, plan on raising $1.9b to $2.8b to exit the business. (Yes, the Myer family indicate on Page 33 that they may sell 100% of their shares).

    $315 million will be used to pay down debt and $100 million odd are frictional costs associated with the float. The rest will go to Private Equity and the Myer Family.

    Upon listing, the business will trade with a market capitalisation of somewhere between $2,282m and $2,768m.

    What, however, is the business worth?

    With all the relevant data to value the business now available and using the pro-forma accounts supplied in the prospectus, I value the company at between $2.67 and $2.78, substantially below the $3.90 to $4.90 being requested. It appears to me that the float favours existing shareholders rather than new investors.

    Investing safely in the share market requires a wonderful business and a rational price. Myer is arguably now a much better business than it was, but the price being requested is even hotter than the cover.

    By Roger Montgomery, 28 September 2009

    by rogermontgomeryinsights Posted in Consumer discretionary.
  • Does your portfolio have a Competitive Advantage?

    rogermontgomeryinsights
    September 24, 2009

    My portfolio is full of businesses that dominate their market. Is yours?

    Businesses with sustainable competitive advantages not only dominate their market, they are also able to produce significantly better returns using the same amount of capital and effort. Such businesses make great assets if you are trying the build an investment portfolio full of only the best stocks.

    Businesses with a competitive advantage can charge higher prices for their products and services because people are willing to cross the road for them, even though the guy on the other side charges less (think iPhone).

    Why? The service may be so intimately involved with the daily business of another company or the daily lives of consumers that they cannot possibly leave (Reckon or the banks), or it may be that they are the lowest cost provider and competitors simply cannot match their prices (think JB Hi-Fi). What is the competitive advantage of each of the stocks in your portfolio?

    Competitive advantages are a critical recipe for continued high levels of profitability for a business. The next time you are shopping for vitamins, consider why Blackmores products are priced at a premium to their competitors. Maybe its because BKL has a competitive advantage?

    By Roger Montgomery, 24 September 2009

    by rogermontgomeryinsights Posted in Insightful Insights.