The Top 10: What is possibly cheap right now

Insightful Insights, Investing Education | Comments (25)

The Top 10: What is possibly cheap right now

Each week, we scan the market for fresh opportunities. If you’re doing the same – only to come up with a very small handful of desirable candidates (many of which you probably own already) – then you’re in good company. We can’t find a plethora of opportunities either.

More important than the below list is the observation that there are enough high quality candidates to at least fill part of a portfolio. That suggests we need to question the argument that markets are fully valued and due for an imminent correction.

As an aside, it’s important to understand that the valuations we present here are based on our own assumptions. We may be too optimistic and wrong, or the market is in fact on the cusp of a correction. Either way, lower returns (or even losses) would ensue and investors might be better off relying on valuations based on consensus analyst forecasts, which currently produce more conservative valuations.

So here is a list of companies that might currently appear to represent some value. The list is ordered from those with the highest margin of safety, to those with the lowest.

 

1)         McMillan Shakespeare (ASX:MMS)
Salary packaging expanding into the UK

2)         Vocus Communications (VOC)
Telecommunications network provider

3)         Veda Group (VED)
Dominant credit reporting agency

4)         Ainsworth Game Technology (AGI)
Gaming machine innovator and manufacturer

5)         Bentham IMF (IMF)
Class action litigation funder, 96-98 per cent success rate

6)         Amcom Telecommunications (AMM)
Data network and cloud services provider to mid-sized businesses

7)         CSL Limited (CSL)
Life-saving blood plasma derived therapies, vaccines such as Gardasil, antivenom and others.

8)         Cover-More (CVO)
Provider of specialist and integrated travel insurance, 24/7 medical assistance and corporate employee assistance.

9)         Burson Group (BAP)
Largest distributor (behind Repco) of trade-focused after-market automotive parts

10)      Carsales.com (CRZ)
Online automotive advertising

 

The list is certainly not exhaustive, and there are other companies we also believe represent possible value. These are simply the ten that we believe currently display the highest estimated margin of safety.

If you’d like to add to the list, and receive a comment or insight from our team be sure to leave a comment.

INVEST WITH MONTGOMERY

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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25 Comments

  2. Jim Hasn
    :

    Hi Roger

    I have enjoyed this article and reading the responses very much. Maybe repeating this list every 3-6 months is a possibility

  3. Sam
    :

    Will be interesting to see the upcoming results from ARB, 1300 Smiles, Silver Chef and Nick Scali

  4. Scott T
    :

    Hi Roger, any view on 3PLearning (TPN) The float was a bit of a fizzer, but does it now offer value? Skaffold hasn’t yet got enough data to be used as a guide.

    All the best
    Scott T

    • Roger Montgomery
      :

      SOme of our friends at other fund managers have moved to substantial shareholder status and really like it. Our thoughts on desirability are dependent on their ability to grow and minimize churn. This is true of all SaaS businesses – Value will determined by how successful they are. We are shareholders currently.

  5. Anil Janmohammad
    :

    Hi Roger,

    Thanks for the post. I was surprised to see JB Hi-Fi absent from the list. Has your view on JBH changed?

    Thanks

    • Roger Montgomery
      :

      Hi Anil, We haven’t owned JBH for a while. A month or so ago we determined that to justify the then share price, the company needs to grow its top-line sales at +9% per annum while maintaining ROIICs of at least 22% post-tax. In order to achieve these required targets, JBH needs to achieve its full revised 75 HOME store roll-out over the next two years with incremental revenue higher than what has been achieved to date; as well as add at least 10 new JB Hi-Fi stores per year over the next three years – all with economics at least as attractive as what has been achieved historically. And this is just to meet the then share price.

      • Anil Janmohammad
        :

        Hi Roger,

        For about 2 years now, I have been reading your posts, watching you and the team on Money News/YMYC etc., doing a bit of my own research and trying to invest my Super in direct equities. Over that time, I have achieved market beating returns but I have always been wondering whether I have just been lucky or if my research is paying off.

        This has led to me constantly ponder whether I should just put my investments in TMF.

        Thanks to the post above, I sold out of JBH. As you know, JBH shares have suffered since, making me realise that luck has been a factor in my success to date.

        This incident (on top of all of yours and your team’s other great calls) has finally convinced me that the small fees of TMF are worth it. My adviser in the process of moving my super into TMF.

        Keep up the great work!

        Thanks,

        Anil

      • Roger Montgomery
        :

        Well Anil, we are delighted to be working for you. I have recently begun to realise it takes enormous maturity to hand over the investing to another, but I have seen many investors liberated by the decision. As one investor asked me rhetorically some years ago, “what’s the point of being wealthy if I am tied to my computer?”

  6. john.pike.1044
    :

    Very hard to find any value in this market.Praemium Limited (PPS) is a small cap in the right arena as a provider of investment platforms, financial planning and portfolio management with Offices in Australia, UK and Hong Kong.
    Just starting to get some good volume traction and still looks value at the current price.

  7. LUCAS
    :

    Editor –
    CoverMore – Interesting, I thought that it was fairly valued at float but what I am concerned is with the ability for others to just hop on in the booking process. For example with CVO – Malaysian Airlines is a customer, now you’ll see that markets like Malaysia are interesting to competitors, but it’s about deal flow and depending on how competitive the companies are, others are getting involved.

    In similar comparative markets –
    Lion Air Indonesia has SinarMas insurance on their flights.
    AirAsia has ACE insurance

    Now – the reality is that as an agent CVO connecting bookings through to the underwriters is helpful if you are an airline but the reality is that as a customer being a captive person isn’t particularly helpful. Most frequent flyers already have a Platinum or Gold CC that they use to make bookings, so it’s more likely to be the leisure traveller. Then on the other side of the equation these companies are obviously hungry for ancillary revenue so you’d think that at first glace if someone was willing to connect Malaysian Airlines (which has its own commercial issues) thru to CVO, then i’d expect that someone that’s larger or is willing to pay a higher fee would probably get re-tendered.

    I think Burson is interesting also but I think that they dont have an appropriate understanding of hedging or how to minimize trade finance risk etc.

  8. Jim Hasn
    :

    Hi Roger

    Titan Energy Services (TTN), an A1 on Skaffold, seems to be well below intrinsic value at this time. Agree with some of the suggestions above like MNF, CCP and MMS, but think they are currently not on sale unless you are looking a couple of years ahead.

    Cheers
    Jim

  9. komal.pandya.940
    :

    I was keen on knowing your view on “JIN”. Can you or any of your team member share your views?

  10. david klumpp
    :

    Thank you Roger for sharing this list. Pleased to see most were in my watch list, but I only had MMS as showing any value now. I am waiting for it to halt its downward slide before I buy. I hold MTU and CCP which were mentioned, and I like their good management and excellent record. Though both have issues to resolve based on analyst reports (slowing growth rate and negative cash flow for CCP; cash flow gap and debt in MTU). The small companies that I hold and assess as being well run and not expensive are ONT, EAX, SWL, TTN.

  11. Anil Janmohammad
    :

    Hi Roger,

    Thanks for the post. I was surprised to not see JB Hi-Fi absent from the list. Has your view changed on JBH changed?

    Thanks

  12. Phil Crossan
    :

    Sunbridge Group (SBB). This company listed on the ASX last year, but it’s operations are entirely in China through it’s 100% ownership of a holding company in Hong Kong. The metrics as measured by Skaffold, such as quality, business performance, ROE etc are strong. To me it represented a sufficient margin of safety to take a small holding despite the risks that come with the ownership structure and operating in an emerging economy such as China.

    • Roger Montgomery
      :

      Always be sure to understand the prospects too. That is something you simply need to do the work on and cannot automate. ALso be sure to seek and take personal professional advice.

  13. Pat Greenfield
    :

    Hi Roger
    Thanks for the insight
    I’ve also been searching the market for companies involved in agriculture as Australia is deemed to be the next world food bowl .What are your thoughts on this issue ?
    Have a great day
    Pat

  14. zoran arnautovic
    :

    Hi Roger ,FXL
    Have been “loading” on on FXL all the way from $3.00 to $3.50
    Had I not reached my 5% limit of investment in one share would have bought all the way to $ 4.00-$4.20.
    Quite a few commentators on YMYC do not agree with this but I am positive that FXL will surprise them.
    Cheers and good work on the “Top 10” as usual .

  15. Rajnay Padarath
    :

    MGM Wireless (MWR) – Provision of automated SMS communication to parents on behalf of over 1000 schools and childcare centres, expanding to other cloud-based school services.

  16. Daniel Rosenthal
    :

    CREDIT CORP GROUP LIMITED (CCP.ASX) – Good value, Good Yield & Great Management

  17. Michael Shapiro
    :

    Thanks for this list Roger. MMS is indeed on my watch list as well. I am waiting for the shares to come out of the bear market and transition into a trading range before I pull the trigger. One company that ticked my boxes and I bought both for myself and for my super fund today is Cardno Limited (CDD). It looks like a well diversified quality company with fully franked dividends payable in October with stability of 100% and earnings stability of 85%. It earns more then 50% of revenue in Americas, which is a nice hedge if as predicted $US starts to appreciate soon. Share price plunged today almost 5%, which took it below 10 year PE average, which is a value territory as far as fundamental analysis is concerned. From the technical analysis CDD is sitting on the lower Bolinger Band in the trading range. I would very much be interested in your opinion on CDD.

    Thanks you,

    Michael

  18. Sammy Giunta
    :

    Hi Roger
    Thanks for the post.
    Others that I believe still represent some value include Nick Scali (NCK) and My Net Fone (MNF).
    I’ve also been in a little one over the last couple of years called Objective Corp (OCL). Hard to say whether it’s fully valued since there’s isn’t much coverage but, based on the recent preliminary result, could still have some way to run. No debt and ROE now over 40%.
    M2 Group (MTU) may also have some value depending on one’s take on the amortisation associated with old M&A contracts.
    Finally, I’m also in a little one called Academies Australasia (AKG). Not very liquid, but certainly kicking some goals.

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