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ValueLine: Fifteen stocks to watch

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ValueLine: Fifteen stocks to watch

I have prepared a list of companies that achieve extremely high Montgomery Quality Ratings of A1, A2 or B1, with a market capitalisation of greater than $1 billion, returns on equity of more than 10% and historical and forecast intrinsic value increases of more than 10% per annum. I hope you find the list educational and are able to put it to good use. Read Roger’s article at www.eurekareport.com.au.

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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81 Comments

  1. JustinP
    :

    Excellent article Roger! Actually since it seems most of your A1’s and A2’s are at or above IV it might be timely to do an article on ‘FIfteen stocks to watch take a dive’ ? :)

      • JustinP
        :

        Actually I should add I’m not referring to the A1’s and A2’s as likely to take a dive,
        but other stocks with poor fundamentals (any other ABC Learning’s out there?) Of course it may not be the best time to short anything at the moment, as even bad stocks can run well for a long time in a bull market.

  2. Tony
    :

    Hi Roger,

    As a newly joined member of the value.able community I was a little surprised to see NWS on your quality watchlist. I was happy to see my IV wasn’t far from yours. Print media and cable TV appear to be under threat from the internet. From what I can find, ROE over the last 5 years has hovered around 10%, from the broker notes I’ve read I cannot see forecasts for big NPAT increases unless I’ve missed something, so not sure what is driving your forecast value change? Its leverage to the improving US economy? Equity/share has been flat over the last 3 years and payout is very low. Can you give us a little colour on why you include it?
    Cheers
    Tony

    • Roger Montgomery
      :

      Hi Tony,

      I was asked to put together a list of quality companies (low risk of catastrophe) that are expensive. Please remember that an A1 doesn’t mean I would buy the stock. They just have the lowest relative risk of catastrophe. A portfolio of A1’s offers a better chance of sleep than a portfolio of C5s. News has all sorts of issues such as agency risk (paying too much for Myspace?), succession risk, risk from competition and alternative delivery platforms etc.

  3. Brad
    :

    Hi Ash,

    Two posts, one crystal ball.

    It’s sitting on our receptionist’s desk. Unfortunately it didn’t come with an instruction manual.

    As an aside, I have 4 stocks on my “buy” list following the massive rally of certain stocks written about in this blog (9 months ago there was 10 at least).

    They are:

    ZGL
    SWL
    MCE
    AIR

    BTW my val for VOC is $3.30 (adjusted for the new issue) – took placement / SPP at $2.

    Interestingly, had a look at AUN last year. Can’t be valued using a multiple of book value due to retained losses. One way we looked at was PE using return on incremental equity to determine the ratio. Hard to estimate but I got 17.5x valuing the stock at $1.40. Great toll bridge business, lots of debt thought. ROC 26% last year.

    Cheers

    Brad

  4. Ash Lillte
    :

    Hi Brad,

    Given two posts about crystal balls …………I ask how many did you buy?

    Looks like it is working a treat lol

  5. Lester
    :

    Hi Roger – recently bought your book – read it, loved it – now practicing to see if I have understood the interpretations correctly. I have studied a few recent annual reports of companies in the O&G Utilities sector and would appreciate anyone confirming if I have got the following IV’s correct.
    WPL – $21.87
    STO – $7.21
    AGK – $9.30
    ORG – $6.71

      • Ash Lillte
        :

        Hi Lester,

        These are not ones I check often but your are approximattely right and that is the important thing.

        Yes they are expensive. Last time I looked STO it was even lower BTW but have not looked at that for awhile.

        Well done Lester

  6. Gareth Cottam
    :

    I’m curious to hear your thoughts about Lemarne Corporation. What MQR would you assign it? If you have time, I’d like to compare valuations.

    The management seems to be focused on improving shareholder value.

    Using data from their annual reports, the Value.able method, and a RR of 10%, I calcuate the 2010 intrinsic value around $6.55. Their current share price is about hovering around the $4.10 mark. leaving a margin of safety.

  7. Brad
    :

    I bought a crystal ball on eBay 2 years ago: still can’t get the darn thing to work !

  8. Jason
    :

    Hey Roger and room,
    On a completely different topic, I was wondering how do you think about Oroton’s expansion into Asia?

    I did some brief research into other luxury/”affordable luxury” brands that already have a presence in Asia and found the following:

    Ralph Lauren:
    Japan/Asia sales in 2006 = $44.3m
    Japan/Asia sales in 2010 = $459.7m
    Difference = 934%

    Hugo Boss:
    Asia Pacific sales in 2006 = $122.5m
    Asia Pacific sales in 2010 = $230.4m
    Difference = 88.1%

    (And there’s also Prada’s rumoured IPO on the Hong Kong exchange to focus on its fastest growing market – Asia.)

    One interesting note I picked up from the HB 2010 AR is that sales in Japan and China accounted for 70% of the $230m (161m). These are two very well establish brands in a “similar” market to ORL and both have a focus on mainly China and Japan.

    Given this is the case, why do you think ORL decided to move into Singapore and Malaysia first? I understand the Marina Bay Sands store would have to be in a very good location to maximise revenue but are they missing out on the bigger markets?
    My other thought was that they are trying to slowly develop a brand presence in Asia by targeting some of the smaller markets and getting into local editions of Vogue etc before setting up a niche in the larger markets focusing on their bags and jewellery rather than complete wardrobes.

    Also, how do you go about valuing the purely Oroton stores when the revenue data is presented as a group sum?
    I had been using a bad approximation of Revenue/Total number of stores which would give you a rough rev per store figure (which has decreased from about $2.2m in 07 to 1.91m in 2010 as expected) but this assumes that the concession stores generate the same as the 1st retail stores which is clearly wrong. I think it’s important because they’re trying to establish more 1st retail stores in Asia so I think this is the most critical comparison.

    Thanks for any thoughts

    • Jason
      :

      Thinking about the issue more, I think these existing big brands have been able to expand their brands in Asia so quickly because their existing positions in Western markets are so strong. You often hear news stories about people in China/India aspiring to have a lifestyle similar to what they see in Western movies/magazines etc. Therefore, I don’t think a large launch in China/Japan would work for Oroton because they don’t have the brand recognition yet. IF their strategy is to develop a niche in the smaller markets and then extend this into the larger markets I think this would be the best approach.

      Is this what you noticed when you were in China?

      Going back to the competitive advantage topic, it is interesting to compare how “brands” in fashion compare to those that manufacture something – WD-40, Coca-cola etc. From the brands I have looked at (Ralph Lauren, Hugo Boss, Hermes, Burberry) most of them are average businesses. This must be one industry where you need to have something more than a brand name which is so stressed in other industries.

      • Andrew
        :

        I have not looked at the annual reports from fashion companies but aside from the ones you mentioned i wouldn’t mind seeing the reports for Chanel and Dior. These two companies tend to be seen frequently as the high pedestal companies in fashion. Although with the forced discplinary measure on John galliano, it will be interesting to see where Dior goes from here.

        The brand name is probably more important for a fashion company than in other markets, the need to differentiate themselves in a market where there are thousands of imitators (sometimes making/copying the exact same designs ) makes it so.

        The big brand names are strong becasue behind them they have big competitive advantages and image strengths that strengthen the brand and make it mean something.

        Chanel has the some of the best people in the world making their products, patented designs and a head designer in Karl Lagerfeld who is seen as one of the fashion industrys equivalents to Steve jobs.

        I know in chanels case the costs of doing business would be high, the material they use is not cheap, they have to use lots of it, they are mostly hand made so they need to employ a large number of people.

        Without these competitive advantages, brand equity, brand reputation etc they wouldn’t be able to charge thousands of dollars for shoes, clothes and handbags and hundres to thousands of dollars when it comes to cosmetics and acessories

      • Anders
        :

        my brother recently visited the Oraton store in HK. No customers in the store and he asked staff how things were going? They said mainly expats visit, the brand isn’t known locally yet. Yes, he’s a shareholder.

    • Roger Montgomery
      :

      This is truly excellent scuttlebutt. Well done and plaudits to you Jason! The company may have mentioned some concession numbers from which you could reverse engineer. Its possible you don’t need to it get a more-than-general sense of the direction of intrinsic value.

      • Jason
        :

        Hey Roger,
        That’s true. I guess there was a couple reasons for doing it:
        I wanted to see if the analyst forecasts for future EPS were reasonable. If one analyst thought that ORL could go into Asia and replicate the growth of Ralph Lauren etc. they might come out with a very bullish future EPS forecast which may create a false sense of a 2012 valuation. (I only have the comsec numbers)

        The other thought was (Pure hypothetical) the company came out tomorrow and said they wanted 5 shops in China by the end of 2012. I would wonder about how much capital expenditure this would take and the ultimate success it would generate without the brand recognition/cultural understanding (Although how does one judge that from a computer in Perth…)
        It’s been really interesting to come up with a hypothesis at least, I wish I could jump to 2015 already and see how it all plays out.

    • Andrew
      :

      I would probably be looking more to a Guess, Micheal Kors or Coach asian sales as a guide to what could potentially be in store for Oroton. The above are probably more on the clothig side and are still probably a bit more in the luxury field than Orotons niche.

      I think you are spot on with your idea as to what ORL are trying to do by developing a niche and using that to try and increase its brand following. they need to try and be a niche player, i am still not 100% as to whether they will be a success or not, we’ll wait and see.

      My observations is that the asian market are more likely to be less concerned about price and will happily go to the large french and italian design powerhouses so i will be interested to see if the low cost quality/luxury accessories gets a following. if it does, i think Oroton will do really well. Fingers crossed.

      • Jason
        :

        Hey Andrew,

        Thanks for the thoughts.

        My guess is that what we’re seeing in China is the early adoption of western style from the highest 2% or whatever it is of the population which are the millionaires at the moment (This is also why price is less of an issue to this market). I think ORL’s development in the market will depend on actually how many 5-year plans it takes to develop a significant middle class in China because this is where Oroton’s market is.
        Thinking about this makes me appreciate how clever the move into KL and Singapore has been by management. They have found 2 Asian economies which have an existing middle class where they are able to learn what works best for the brand there.

        Thanks for the suggestions of Kors and Guess, I will look into them. Finding a listed direct competitor to make a logical comparison with was one of the hardest parts! Hermes is probably the closet is a business sense because they make ~50% of their income from leather goods but the average Hermes back is $3500 AUD compared to about $550 for Oroton.

      • Andrew
        :

        No worries jason, not sure if Michael Kors or Guess is listed but you never know what you might find out there article wise etc. Guess especially i think would be a more direct competitor as they sell lots of bags at a similar price point and probably target the same market.

        I think Singapore was a good starting point, for a start at worse it has a lot of Aussie tourists who use it as a stopover onto other areas and seems to be an affluent place. I am trying to work out whether the location is actually good. When i was there the Sands wasn’t built, all the shopping was done on Orchid Ave and i thought this would be the best place to open the store. I know the casino is now a huge attraction so maybe this has changed things a bit in Singapore from a retailing point of view.

      • Roger Montgomery
        :

        Hi Andrew,

        I actually question the Singapore decision. I believe it is much more competitive than elsewhere. There may of course be a very logical reason such as footprint…

  9. John M
    :

    Thanks Roger for the wonderful presentation at Mingara the other night.

    I really enjoyed the Telstra debate. You are a wonderful communicator. I bet you have won a good number of debates in your time.

    Do you have any ideas about what the Matrix trading halt is about?

      • John M
        :

        Thanks, found it on the other post. Have been so busy with work that I missed it.

        The asx announcement didn’t seem to mention the insto cap. raising. I thought that all of the market had to find out at the same time. I don’t know any of the rules concerning instutional investors. Something else to put on my “list” to learn.

        I personally see MCE’s prospects staying very bright. Like I said before, their futures so bright, we’ve gotta wear shades. I still believe in the peak oil story and matrix appears to be in a massive expansion phase. Unless they somehow stuff up their cashflow, MCE should have a great future.

      • Marion
        :

        I see this type of question quite a bit and was guilty of it myself before I was set straight, but quite a few people just read the first page of the trading halt announcement. if you go to the second page you will find the letter from said company outlining Why they have requested a trading halt.

  10. Kent Bermingham
    :

    Roger please assist:-
    required Return is established by :-
    Risk Free Rate
    Plus Inflation
    divided by (1 minus the tax rate)
    eg (6% + 3.5%) / .(1 – 0.3) = 14%

    You quote ” Investing through a family company, my after tax performance is 10%”?

    My Question is:-
    As I am over 60, and everything is tax free should I discount the tax part of the calculation?

  11. Ian Bowditch
    :

    Roger, Dean and all,
    The MOS also depends on when the article was written. JBH today is $19.36 but on 17 March I added to my holding at $17.56. The MOS between 17/3 and today when they are $20.15 is considerable.

    • Mike Hall
      :

      A hint as to when the article was written is in the dividend yield stated of 4.16% for JBH. So it was written BEFORE the price spike on Tuesday 29th.

  12. Gavin
    :

    The JBH buyback does not change the economics of the business because ROIC does not change.

    ROE does change because financial structure changes.

    A company should repurchase its shares only when its stock is trading below its expected value and when no better investment opportunities are available.

    Lets say you are applying a 12% required return to JBH. You are inferring that that this is a reasonable cost of equity.

    So does the buyback add value?

    If using your 12% RR and a 60% payout ratio you come up with a valuation of say $20 and the company buys back at $17.80 everything looks O.K

    Here’s the possible rub though. The shareholder yield on the buyback is 20/17.8 * 12% = 13.5%. which would indicate (if the company is acting in shareholders interests) that they have no better investment opportunity for the funds than obtaining a 13.5% return.

    What does this say about the ROE and payout ratios that you use in your initial expected valuation? If you adjust them to reflect what the economics of the buyback are saying. Ie reduce ROE or increase payout, than your valuation may drop below the buyback price in which case the merit of the buyback changes.

    If you add the buyback to JBH’s historical dividends than they have returned something like 90% of profits to shareholders. Is managements projected payout ratio of 60% realistic? If they retain cash in the future to pay down debt than it will lower future ROE.

      • Paul
        :

        Hi Guys (long time reader but limited contributions)

        A commentator on Your Money Your Call asked why didn’t JBH simply pay a FF special dividend if it had no better use for the money. The suggested reason being that the management team had a large amount of options and would have got no value from the dividend but will from the buyback given it props up the share price. Whether the management team are focussed on shareholders or their own pockets was implied.

        Also the buyback announcement with the profit downgrade was somewhat devious and probably saved the share price from a big fall (especially given the shorting – see below).

        For my part the buyback gave me a nice “get out of jail free” card to sell into whilst the shorters (it is one of the most shorted stocks in the market) got caught “short”.

        I still believe it is a good company and will continue to deliver credible results but there would need to be a significant margin of safety and the massive growth party is over.
        Paul

      • Roger Montgomery
        :

        Hi Paul,

        It would have been interesting to see that commentator sitting next to Warren Buffett and ask him why Buffett suggested to the board of Coca Cola that they begin the mother of all buybacks so many years ago.

      • Ash Lillte
        :

        Hi Roger and all,

        You have repeated said in the past that running a business and allocating capital are vastly different and not many companies have both.

        The share buyback is suggests that JBH are a rare breed showing both ATM

        Just my view

  13. Gavin
    :

    Hi Roger

    A question using the most extreme example from your table.

    MIN has a Safety Margin of -27.7% so based on a closing of $12.37 it would appear your 2011 IV is $8.94. Forecast Value Change (%pa) is 37.7% so your 2012 would appear to be $12.32.

    Dividend yield is 2.98% = 36 cents

    Assuming you require a return of 14% for your valuations. If your 2012 valuation is correct why would $11.16 not be a fair valuation for 2011?

    $11.16 – dividend of 36cents = $10.80 * required return of 14% = 2012 IV of $12.32

    • Mike Hall
      :

      I think Mondays prices were used. That means $11.74 divided by 127.7% = Current IV of around $9.19. So twelve months hence would be around $12.65

    • Michael
      :

      Great question. I think Roger changes the ROE each year, and therefore gets IV’s that change at a different amount to the required return. Conceptually, I also struggle with this a little. I can see your point that the 2011 IV should be the 2012 valuation, discounted to present value using the required rate of return.

  14. John B
    :

    I saw that some subscribers showed interest in Brickworks (BKW) not long ago. As a holder of Soul Patterson (SOL) I thought I would do some calculations to see how BKW has performed relative to SOL. The two companies are very closely locked together with the Millner family chairing both boards and each company the largest shareholder in the other. Here are my calculations of the relative historical performance:

    Over the past year (at 30 March):

    BKW shows a capital loss of 17.58%, with dividends representing 4.33% gain (franking credits included) for an overall loss of 13.25%.

    SOL shows a capital loss of 11.96%, with dividends representing a 4.65% gain for an overall loss of 7.31%.

    ***

    Over the past 2 years the picture is different:

    BKW shows a capital gain of 5.17% p.a., dividends representing a further 5.72% p.a. gain for an overall gain of 10.90% p.a.

    SOL shows a capital gain of 12.95% p.a., dividends representing a further 7.39% p.a. for an overall gain of 20.34% p.a.

    ***

    Performances over the past 5 years are different again:

    BKW shows an overall gain of 0.96% p.a.

    SOL shows an overall gain of 13.89% p.a.

    Conclusion: SOL has been the best vehicle for investors to ride in to follow the Millner wagon in recent years. What might happen in coming years is of course a different question.

  15. Brendan
    :

    Roger, I find this type of list very useful, one to put on the pinboard for refernce. Ill admit its a shortcut to identify potential targets but is worth parting with some hard earned just for the ideas and commentary that comes with them. I take comfort that i have some of these, but the road to wisdom is far from over, not all purchases were below IV.
    I was surprised at the last company NWS. Its often spruiked about as a blue chip, but every time I look at it Im detered by its ROE. I find the large increase in forecast IV interesing, it suggests ROE might be improving. Something to look into perhaps. I also added ‘which bank’ to the list for my own benefit.

    Nice work as always.
    Regards Brendan

  16. Ash Lillte
    :

    Hi Roger,

    For the last 3 years I wake up every morning and cross my fingers and say a short prayer.

    “COH will half in price today”

    Has not worked yet.

    Maybe tomorrow

    • Marion
      :

      maybe not quite 50% discount Ash, but COH DID reach $45 odd during the height of the GFC – I know because I had a parcel which had decreased 45% odd in value (Yikes).

    • Stephen
      :

      Ash,

      That’s funny. I was talking with a friend last night and said during the conversation that I wanted COH so badly in my portfolio, but just couldn’t pay the asking price.

      I didn’t know that the price only dropped to mid $40’s during the GFC which actually begs the following question.

      Is COH a company you can consider buying even though it’s at a premium to IV?

      Now before I get jumped on and howled down, it’s not an unreasonable question. We all want COH to halve in price, not because the business model has failed or there’s a new item on the market that supercedes theirs and renders it useless technology etc, but for reasons linked to market sentiment/irrationality etc.

      If at the height of the GFC the stock only lost 40% of its value and therefore didn’t trade at a meaningful discount to its IV, how should we view it?

      We all want COH to trade at a meaningful discount to IV. That would mean we want it down around the $35 to $40 dollar mark. The GFC didn’t drive it down that far on earnings that are 3 years past, so short of a disaster to the company what are the chances of that happening now. And if you rate those chances are extremely low, do you sideline them and continue to wish, or do you ever consider that you may need to pay a premium for the company.

      Yes I know there are other companies out there to invest in, but my comment is more about whether or not there is a case to invest over the IV.

      For comments.

      • Jonesy
        :

        Hi Stephen

        This is the problem with this list of A1 companies. They’re great, stable, well managed companies that have been proven to make money over a number of years. As a result, everyone wants a piece of the pie which has the effect of pushing the price up. I did get my hands on some Cochlear in 2009 when it was $53, but sold it last year once it hit $80 (having applied the value.able formula). I was lucky, I bought it at a premium and sold it at a higher premium, but that can’t continue to happen. Remember Ben Graham’s quote: “short term the market is a voting machine, long term it’s a weighing machine”, there’s only so long that a company can remain at such a premium before it does finally drift back to be priced around it’s intrinsic value.

        I think as value investors, we have to be zen masters when it comes to patience, and wait for those opportunities to come along, which they will once in a while (for the record you could buy cochlear shares for $18.90 in March 2004), and not get caught paying a premium for a company which then stagnates at your buying price for several years until it comes to more resemble it’s intrinsic value.

      • Ash Lillte
        :

        Hi Stephen,

        We wont howl you down. Opinions and questions are what sets this outstanding bog apart from anything else in the world. I am constantly amazed by the depth of knowledge from and grads and undergrads. The diversity of backgrounds and opinions are second to none. We have Oil & Gas experts, Mining experts, IT experts, Retail experts, experts in competivitive advantage, experts in Medical & Biotech, Manufacturing experts, Economic experts and even Accountant & Lawyers,

        All that said all your answers are in value.able. I cant tell you what chapters because once again my 3 copies are out on loan again. This time I have strategically kept my collectors edition dust jacket just in case.

        I remember Roger taking about MIN back in August and even though it was not cheap it looked very tempting given IV was rising at such a nice rate. This is second prize or maybe third prize. I can’t remember.

        First prize is A1 businesses at big discounts and IV rising at a nice clip. FGE and MCE have proven this.

        To finish I will just give you a quotes to think about.

        The more you pay the worse your return will be.

        Hope this helps

    • Punchy
      :

      Ash COH will be worth even more if they get their receivable days down from 89 days back to 60 days as in 2005. They are very generous with payment terms to their customers. I have them on my watch list but I am not optimistic! Cheers Punchy

    • Gavin
      :

      Are you using the right model for COH?

      The growth period for a valuation model should take into account the competitive advantage period for the company being valued.

      If you use the Value.able formula or the Walter Dividend model than you are implying a growth period. In Value.ables case, using a combination of 10% required return and 35% ROE the implied growth period is about 11 years.

      COH has a strong competitive advantage in the form of customer captivity through their relationships with both end users and the medical profession. They also have Economies of scale in their niche. This means they can spread their R&D, marketing, distribution etc over more units and obtain a cost advantage. Put the two together and you have a fairly sustainable competitive advantage. Competitor R&D efforts are not even a great threat because their sticky customers will wait for them to catch up – much like Intel retains its dominant market share whilst it plays leapfrog with AMD.

      So the question is does COH have a competitive advantage period longer than 11 years. If you think so than the Value.able model is probably undervaluing them. On the upside if you ever do get a MOS on your Value.able valuation it will be a terrific bargain – unless of course the price has fallen because the competitive advantage period has shrunk.

      • Greg
        :

        Hi Gavin,

        What do you mean by “using a combination of 10% required return and 35% ROE the implied growth period is about 11 years” .
        This is a new concept to me (implied growth period).
        Many Thanks
        Greg

      • Gavin
        :

        $1 worth of equity today which grows at 35% p.a will be worth $27.14 in 11 Years. Discount that back to present at 10% gives you $9.51.

        Roughly equivalent to the multiple that Value.able produces for the retained component.

        For growth to stop dead at the end of 11 years, one of two things need to occur.

        1) Competitive advantage has disappeared and ROE = cost of capital meaning growth has no value.

        2) Competitive advantage remains allowing high ROE but there are no earnings retained to generate growth.

        The dividend component of the Value.able model implies a fixed ROE and a fixed payout ratio.

        A model is just a tool. Not all companies should be valued with the same tool. The right model will match your underlying assumptions about the business with any assumptions embedded in the model.

        In COH’s case. My expectations around their competitive advantage period do not align with those embedded in the Value.able formula. Hence I use a different model and get a different valuation, one I’m happy with though because the model takes into account my best guess estimations about the business. Of course those estimates may be wrong in which case my valuation will be wrong. I look for a Margin of Safety on my valuations (regardless of which model I use) as a form of insurance against my inability to guess the future accurately.

      • Greg
        :

        Hi Roger,
        I love this blog, all the varied approaches and knowledgable folk, who are happy to share there wisdom and ways.
        But
        I find it impossible to keep up with some debade on the blog. Yesterday their are 65 comments, today there are 73. There are eight new comments somewhere on the page, which I have in the past spent hours searching for. And this happens on all blogs all the time. In fact, on my computer, this comment will be in the bottom quarter on a week old blog with half a dozen newer blogs talking the attention of our group value.ablers. Very few will see it.
        As you know, each new blog starts on topic but tend to free flow on to just about any current subject.
        With no suggestion of hendering value.ablers dicussions, may I suggest that you close a blog to new comments when you open each new blog topic. This will have the effect of being able to read ALL comments on all closed blogs and never missing any diamond of information.
        Thankyou for your consideration,
        Regards Greg

      • Greg
        :

        Hi Roger,

        I have another good idea to refer to the IT gurus.
        I think the Search feature at the top right of each blog only searches through your writings not the blog comments.
        So if I wish to study all the early Ken M comments, its not possible to locate them easly.
        Please ask the gurus to include the comments in the searching feature.
        Thankyou for your consideration,
        Regards Greg

      • Rob
        :

        Hi Greg,
        LukeS made a great suggestion bre this. To find a list of all his comments try enetering this in google.
        lukeS site:http://rogermontgomery.com
        Roger, it may be a good one for the FAQ or as Luke suggested a google search this site option should be pretty easy to install.
        Cheers
        Rob

      • Rob
        :

        Editing your own comments, before moderation, would also be great.
        I’m sure Typo Ash would love this.
        Cheers
        Rob

      • Greg
        :

        Hi Rob,

        How did you find my comments?
        Do you scan all blogs looking for new entries, or do you use Lukes google method but with a new date?

        When you say “should be pretty easy to install” do you mean me (my computer) or Roger (website)?

        Thanks Greg

    • Brad J
      :

      Maybe you know something I don’t Ron and you could be right. There are many possible reasons for a trading halt and the suspense is killing me. Anyone else got any ideas. I would find it hard to imagine it could be for a negative reason as the company is so well run and is and incredible business. Always interesting to see all the job vacancies on their site as a company that is continually hiring new staff is obviously growing.

  18. David King
    :

    Excellent stocks, each and every one. Only problem seems to be that it will take another GFC to be able to buy most at the right price. What do others think are the odds of such an event looming right now? One in 100, one in ten, 50/50? What is your mood just now? Assume for this purpose that QE2 is not extended beyond 30 June 2011.

  19. Peter
    :

    Hi Roger,

    I note that you list Margin of Safety of 1.39% for JB Hi Fi in this article, whereas last week’s article (“Your Retail Form Guide”) listed JB Hi Fi with a Margin of Safety of 20%, Is that change due to the buy-back?

    NB: As at yesterday, my MOS for JB Hi Fi was 3%, so I feel comfortable with the number in today’s article. I am at least approximately right.

    Disclaimer: I don’t own JB Hi Fi as I haven’t yet been able to buy them for a cheap enough price …

  21. Jonesy
    :

    Thanks for this post Roger – I already had all of these stocks on my watchlist but it was good to see what your valuations were. The one stock that has caused me some difficulty recently was News Corp.
    I also subscribe to identify “investment grade” stocks which would comprise most of your A1 list ie competitive advantage, good management, stable earnings, good prospects etc. All these stocks would certainly be ideal companies to have in your portfolio at the right price. For example, they identified News Corp as a great company – no arguments there, but the current BUY recommendation would value the company around $17. This brings up the issue I have with their valuations of companies, as there is a big emphasis on PE and EBIT multiples. I did my own calculations using the value.able formula and came out with IV around $10.70. This just highlights the difference in peoples opinions in company valuation, even coming from the same “value investing” standpoint, and the traps you can fall into by using PE multiples.
    Either way, I’m keeping my subscription, I find the qualitative analysis invaluable (pardon the pun) as a good starting point to do my own further research.

    • Jonesy
      :

      Sorry you have to keep editing my posts Rog, I’ll try to be less judgmental in future posts!

  22. Jim
    :

    Hi Roger

    Thanks for a great presentation at Mingara last night. Looking forward to the lunch I owe you soon.
    Read your article on ValueLine and am hoping to read your impressions on JBH announcements especially the profit write-down and increasing debt for the buy-back. I note a reduced recent intrinsic value estimate and wondered if it was due to one or both the above

    Thanks so much again
    Jim

  23. Dean
    :

    Hi Roger,

    I just read your latest Eureka article “Fifteen stocks to watch” and in it you mention the MOS of JB-HIFI is 1.39% but in the previous weeks article “Your retail form guide” you gave JB-HIFI a MOS of 20%.

    I take it this change in MOS is a result of the capital management update sent out by the company this week or is it in relation to the current share price ($20.03 last time I checked) or both.

    Can you give us an update on your thoughts of JB-HIFI and their capital management review.

    Personally I like the fact they are buying back shares now while the share price is below intrinsic value but I don’t like the fact they are using their debt facility to do it when they have just paid out a dividend and plan to pay another dividend at the end of the year based on the expected full year earnings.

    Why would they not just keep the dividend and use cash on hand to buy back shares?

    Interested in your thoughts.

    Cheers,
    Dean

    • Roger Montgomery
      :

      Hi Dean,

      JBH has taken the best option available with its excess cash. The buy back – albeit debt funded – has the effect of reducing equity and raising return on equity. 2011 beginning equity was $293 million. Add on the expected profit of $137m take off about $82m in dividends and you would normally have ending 2011 equity of $347m. If the company pays $17.80 for the shares it is buying back and it spends $169.6m it will purchase and cancel about 9.5m shares. It is borrowing the money to do this so the first transaction is to increase loans and increase cash (no impact on equity). Then, when it uses the cash to buy back the shares, the cash will fall and so will the equity (second transaction). The equity will fall from $347m to $178.8m. Assuming the company earns $168m in 2012 and pays $100m in divs (60% por), the ending equity for 2012 will be $234mln. Return on equity for 2011 will be $137/$293 =46.5% (the buy back occurs now so average equity is less reliable). Return on equity for 2012 will be $168 / $206 = 81.5%. The debt side of things is not as worrying as might first appear. Cash flow from operations remember last year was $152m. Perhaps the idea of suspending dividends is anathema to Australian companies and their shareholders?

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