ValueLine holiday homework for investors: how many of these ‘blue chips’ do you own?
Roger Montgomery’s ValueLine portfolio for Alan’s Eureka Report rose by 12.79% in its first year of operation (with less than half the portfolio invested), compared to the index gain of 9.69%. This financial year the portfolio has grown by 15.11% compared to the index, which has grown by 12.71%. The invested portion of the portfolio returned 27.6% in year one and 23.4% this year thus far. It goes to show that Roger’s Montgomery’s Value.able strategy of buying the best stocks – those with the higher Montgomery Quality Ratings or MQRs – for less than they’re worth leads to meaningful outperformance over time. How the ‘blue chips’ in your portfolio compare? Compare your portfolio to Roger’s list of 51 companies and their Montgomery Quality Ratings. Read Roger’s article at www.eurekareport.com.au.
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.
ron shamgar
:
hi,
in relation to recent discussion about the property market in this country. i found an interesting article by Soul Eslake in the SMH (link below) this is an extract of an interesting statistic which proves property investment is pure speculation based on the hope prices only go up with no regard to whether there is a positive yield to the investment:
“The Howard government’s decision in 1999 to tax capital gains at half the rate applicable to wage and salary income, converted negative gearing from a vehicle allowing taxpayers to defer tax on their wage and salary income (until they sold the property or shares which they had purchased with borrowed money), into one allowing taxpayers to reduce their tax obligations (by, in effect, converting wage and salary income into capital gains taxed at half the normal rate) as well as deferring them.
As a result, ”negative gearing” has become much more widespread over the past decade, and much more costly in terms of the revenue thereby foregone. In 1998-99, when capital gains were last taxed at the same rate as other types of income (less an allowance for inflation), Australia had 1.3 million tax-paying landlords who in total made a taxable profit of almost $700 million.
By 2008-09, the latest year for which statistics are available, the number of landlords had risen to just under 1.7 million: but they collectively lost $6.5 billion, largely because the amount they paid out in interest rose almost fourfold (from just over $5 billion to almost $20 billion over this period), while the amount they collected in rent only slightly more than doubled (from $11 billion to $26 billion), as did other (non-interest) expenses. If all of the 1.1 million landlords who in total reported net losses in 2008-09 were in the 38 per cent income tax bracket, their ability to offset those losses against their other taxable income would have cost over $4.3 billion in revenue foregone; if, say, one fifth of them had been in the top tax bracket then the cost to revenue would have been over $4.6 billion.
This is a pretty large subsidy from people who are working and saving to people who are borrowing and speculating. And it’s hard to think of any worthwhile public policy purpose which is served by it. It certainly does nothing to increase the supply of housing, since the vast majority of landlords buy established properties: 92 per cent of all borrowing by residential property investors over the past decade has been for the purchase of established dwellings, as against 82 per cent of all borrowing by owner-occupiers.”
Read more: http://www.smh.com.au/business/time-to-axe-negative-gearing-20110424-1dsxs.html#ixzz1KaVMgsBZ
Mike
:
Hi Ron,
In my honest opinion, dumping property investors into a single bucket is like saying all stock market investors are the same. We clearly know that is not the case!
And comparing the totals for losses, capital gains, taxes etc is like comparing the total losses, gains and taxes paid by stock market investors. The only problem is that data is not readily available (or not released by the ATO).
One thing many people forget is that without property investors, someone (i.e. the government) would have to provide accomodation for all those people who cant or choose not to buy their own house. Think what effect that would have on property prices, rents, and how much that would cost us tax payers.
ron shamgar
:
hi Mike,
i know this is a sensitive topic in this country and im sensing u might be a property investor yourself maybe.
but in my opinion property in general and residential property specifically should not be allowed to have negative gearing and should represent investments only as measured by its return and capital appreciation over time and not as a tax deduction.
i doubt there would be such demand and high prices if this were to occur.
cheers.
Steve I
:
This is a very emotional topic for those who are beholden to the current system. Emotion and investments are not a productive mix!
Ron shamgar
:
Hi, a recent interview with Marc faber:
in a recent interview with ET Now Dr Marc Faber gives his view on the Inflation in China : There are some question marks about the data published by China. My view would be that inflation in China is just about the same level as in India. In other words, it is much higher than what the government is publishing. So, real growth and inflation-adjusted growth is probably much lower than what they published. If you look at the bank lending rate and the deposit rate, we have a very negative real interest rate, in other words, interest rate adjusted for inflation. That leads inevitably to some kind of a bubble and every bubble bursts. Now, if you ask me when will the bubble burst, tomorrow or in three years, I do not know. I just say that it is a dangerous situation. Moreover, if you have very strong economic growth and the stock market does not perform well and China has been a really bad performer in 2010, then I would be a little bit careful about making large commitments to China.
In my opinion we have a bit longer to go but know when to take some profits…
Steve I
:
China is not immune to high inflation. We have a global problem. How many countries in the world currency have positive real interest rates? (using headline inflation rates).
Ash Little
:
Very true Steve
As China keep their currency artificially low, Inflation will be a big threat.
They are no longer exporting deflation to the west but are now importing inflation from the west.
Remember that the wages to commodity component of a manufactured product in china is vastly different ratio to Australia, USA or Europe.
Steve I
:
Ash,
Not content only to import inflation, they are now exporting it! Who would have thought they would have wanted to retain positive margins or that workers would demand pay increases? Check out recent comments from Wal Marts CEO.
Ash Little
:
Yep Steve
If they import it and also print money they have to export it.
Not looking forward to the next few years
Steve I
:
Check out writings from FOFOA and you’ll have an interesting read Ash.
Paul T
:
AJJ has a sustainable ungeared ROE >100%
Ron shamgar
:
Could u please expand on why do u think that? Thanks
ron shamgar
:
Hi All,
recently i’ve noticed several questions in regards to what required return (RR) to use and how big a margin of safety (MOS) should be?
as a general guide, i suggest using RR 12% to calculate the IV of a company (some may be higher and some lower in specific cases). and when deciding to buy, i prefer buying at a large discount to that IV.
How big? preferably at half price!
but, its not often we get a 50% discount to an A1 company. the strategy i am suggesting is, once u decide on the amount u wish to allocate to one particular company, u can begin accumulating in increments as the bigger the MOS gets . so u can start buying at a 20% discount to IV, and if the share price drops further u keep buying until u r fully allocated at a substantial MOS to IV.
if u only managed to buy some and the share price has rocketed (maybe because Roger has been mentioning it :-) ) then at least u have some exposure.
again this is a win win situation, because if share price drops ur happy as u buy more at a larger MOS and if the share price goes up ur happy since u have some exposure!
hope that helps. happy Easter!
Kerry P
:
Great post Ron,
I have been thinking a lot about MOS and what an acceptable margin would be in relation to the stock.
The conclusion I had come up with was, the acceptable MOS depends on the prospects of the stock in question. Very bright prospects 15%, fair 40%.
If I add your buying strategy this should equal a great method of buying good stock.
Jason
:
Kerry, I think you’re spot-on in that MoS is relative to the company. That’s where the art comes into value investing. I can point out a company that is in profit and has made profits year on year for a long time. It is at a 96.4% discount to it’s intrinsic value based on last year’s earnings and 90% on this year’s expected earnings. Pretty cheap hey! Furthermore, it hasn’t just dived, the share price has been an enormous discount to intrinsic value, based on earnings, for a few years.
Problem is its business model is under pressure and that’s an understatement.
Cheers
John M
:
Hi Roger,
Wishing you, your wonderful Value.able team and and the bloggers a very happy Easter break.
It is getting very exciting watching your Valueline portfolio now a bit of time has passed. You have done very well, congratulations on consistently outperforming the index.
Thankyou again for posting Easter homework. I am looking forward to getting into the homework, always a very educational process.
Roger Montgomery
:
Thank you John, A safe, peaceful and happy Easter to you too.
Stephen
:
Hi all and Happy Easter.
Roger, thanks for your most recent post as it allows me to seek advice from fellow bloggers on a current blog topic.
I’m looking for exposure to the financial market in a slightly non traditional way as I already own banking stocks. I’ve been interested in Iress (IRE) for sometime now and have started my usual company analysis to get an understanding of the business, it’s competitive advantage, and future prospects. I’m not after advice on IV here. It’s currently too expensive, that I know. I am looking to know it, calculate it, and then put it away in the nice to have basket on the off chance it comes back to reasonable value.
What I need though is some advice from my fellow bloggers who are traders (including yourself Roger) that use Iress as their trading platform.
My understanding is that Iress is the preeminent trading platform in Australia, and that the vast majority of traders and brokers use it. It is a sticky stock with most who use it, sticking with it. Much in the same way as a MYOB user stays with their platform.
It has low capex and reasonably low overheads, but is required to continually develop its software. It generates quite good ROE and has no debt, and is rated anA1.
My questions to those who are in the trading know are these:
Do you know Iress and use it?
Are their alternatives that are viable?
Is it a must have for you as a trader?
With the advent of Chi X later this year, will they bring their own trading platform, or will you simply use your Iress platform to access Chi X?
I know this is a lot to ask but really, this is the perfect place to discuss the stock and get some input.
Stephen
Roger Montgomery
:
Hi Stephen,
Yes, I use Iress and IOS – its order routing system. It is simply THE way we trade and the way allocate trades that our full service brokers execute on our behalf. In setting up our systems, there was not a comprehensive alternative. It has a current monopoly and its an A1. Its just a little expensive.
Stephen
:
Roger,
Thank you for your reply. In this case, knowing someone who uses the product adds another dimension to the research. Have a safe Easter.
Mike
:
Hi Stephen,
I work for a stock broker, and I would say IRESS is essential for most direct participants in the stock market (stock brokers, super funds etc).
As far as I am aware, there are no competitors to IRESS. I was given a prototype of a “proposed” IRESS competitor to trial and give feedback on about 8 years ago, but it was so inferior to IRESS, there was no way our company would’ve switched to it, even it was offered free.
Just to give you an idea of cost, a subscription to IRESS costs about $2,000 a month, depending on which additional “add-ons” you get.
Bloomberg and Reuters provide some of the market info that IRESS provides, but they can cost 10 times as much as IRESS and dont provide the order processing that IRESS can. A single Bloomberg licence went for around $50,000 a year, the last time I was signing off on IT purchases.
William Gill
:
Hi Stephen, Roger
My opinion only but I think Chi X would use their own trading platform, IRE and ChiX operate out of the same data centre in Canada, you will notice that the Gross Profit margins from the Canadian operation are down more than 20% compared to their Australian NZ operations.
(Competition) They are also expanding into Asia, I presume this will also bring smaller Gross Profit margins. I think it is a great company and I have ROE increasing slightly next year.
I will not value for 2013 until I see next years financials.
Currently expensive.
Stephen
:
Hi William,
Thanks for your comments. Like you, I expect Chi X will have some sort of platform add on, although as I understand it, Iress will develop a crossover whereby current users will be able to use them to settle Chi X trades.
I noted the reduced profit margins in Asia, and I also noted that Iress in their last report described the challenges they have as a mature business. They also commented on the need to try and develop growth opportunities both organically and in other markets. Something that will be difficult.
As a business however they are well run and consistent earners so I would like them in my portfolio. I have their IV in the mid $5 range, so I’ll add them to the watch list and do a more detailed analysis if they get down near that range.
Stephen
Steve I
:
I have IRE growing IV very consistently since 2004 and current price is around my 2013 forecast value. If the price drops to $5, I think it would present great value. I would suspect that the price will continue to trend above IV. The only way for a buying opportunity to exist (that I can think of), would be a significant market down-turn as this is a very stable business.
If Chi-X results in significant reduction in ROE, $5 should still be a decent price because if ROE dropped to 25% IRE should have a 2013 IV of around $5.
Joe
:
Roger SUN is rated as A5 in last nights Eureka Report and as B1 on this mornings Facebook.
Roger Montgomery
:
A5 Joe. Good pick-up. I’ll correct on Facebook.
ron shamgar
:
Hi everyone,
Now that we are all excited about gold mining stocks. I think it’s important to think of portfolio allocation and how you would want to position yourself to the themes and trends that are happening.
If we subscribe to the following themes:
Long term oil price is rising
Gold price will rise as fiat money is debased/loss of confidence
Internet/data use will exponentially increase over time
Consumer debt de-leveraging
Then our typical portfolio should reflect these in its allocation to quality businesses purchased at large discounts to IV.
With this in mind these are my top picks for each theme:
Energy – oil – MCE,ZGL
Mining – gold – GDO,NST,RMS,SAR
Mining services – FGE,DCG,MLD,MIN
IT/Data – VOC,MTU,DTL,???(my mystery company)
Consumer/debt – TGA,CCP,TSM
I am quite certain that this selection of stocks over a period of time will beat the All Ords/ASX200 hands down.
Good luck!
Andrew
:
As a counter-point, stay open to trends and thinking about how they will impact business but at the core just make sure you simply focus on quality businesses and hold them for as long as they are quality.
Lets not make a simple thing difficult.
Trying to predict how the world will be in x years time is great, but i would prefer to buy a great company i understand than one i don’t but is positioned in the next big boom area.
The more i have been reading this blog lately, the more i think i will be presented with some great opportunities as very few others seem to be looking at the types of companys i like.
I can, with great cvonfidence, say that my portfolio will be entirley different to Rons one above. Not saying its not for everyone or its not a good selection (i wouldn’t know, haven’t looked) but it is not a good fit for me.
Michael
:
Good points Andrew. I don’t think everyones investment style is to identify the big trends in the future and then bet the ranch on it.
Paul Rehill
:
If the US decides to inflate its way out of debt, gold and oil price returns can still be smashed in real terms. Future real returns will depend on how commodity prices in USD respond to the extra USD in circulation. It’s very possible that the USD will devalue at a faster rate than gold inflates. The only two commodity stocks I would consider holding over a long time horizon are BHP and RIO as they generate enough throughput on long-life, Tier 1 assets to generate a high return on equity whilst reinvesting in new projects that don’t earn a cent in the short-term, and they have little debt in relation to NPAT. I haven’t found a gold stock that can consistently generate 20%+ ROE over long-periods of time so if anyone does, please let me know and I’ll take a look at it. They just don’t achieve the throughput.
Microsoft would be a better choice than the IT/data companies listed. To borrow from Charlie Munger, they benefit from the ‘lollapalooza’ effect as Internet and computer use in general grows, with the widespread use of their operating systems both on Internet servers and computers, both Windows and Intel Macs. DTL has a 1.8% net profit margin reselling Microsoft and other software. Microsoft has a 30.8% net profit margin selling Microsoft software and other services and is investing 90% of its $9.6bn R & D budget on cloud computing initiatives. That’s a big number.
I own some RIO shares but not MSFT or BHP. I should buy some MSFT but am waiting for AUD to hit Jim Rogers’ $1.40 USD.
Steve I
:
Paul,
First of all, your assertion that gold can be smashed on real terms is not founded. You will need to have some evidence as to why this is the case. Oil is not a perfect hedge to currency debasement as there are many other issues and factors to consider.
Gold stocks have not generated consistent high return on equity for a long time as the prices have been suppressed. There amount of new production is only around 2.5% annually. There just hasn’t been the prices available to merit a boost in production.
As we are in the process of a re-rating of the USD and reserve currency, I’d suggest that you are looking in the rear view mirror. Will iron ore prices be high forever? You are looking at the past ten years. It is my contention that the next ten years will be dramatically different.
Therefore you won’t find gold stocks that have achieved those sorts of results because the economics have not existed as the gold price was artificially low. Just because the economics did not apply in a few recent years does not mean that they will necessarily not apply in the coming years. You can apply this to all business types – it is a dynamic world.
With regards to Microsoft, you might actually be applying the same form of bias. If we assume that technology demand and trends don’t change, then I would agree that MSFT looks fantastic and cheap.
However, I think they are failing to adapt. More businesses and individuals are moving to cloud computing. I love excel and spreadsheets. However, I find myself using Google docs increasingly over time as it is more convenient and they continue to add functionality. Once Google docs has full functionality (I think it will), then I will cease to use Microsoft Office.
Microsoft has an old business model that has worked for a while. The problem is that they are trying to adapt and are failing. Whilst the returns on equity have been high, they now seem to be falling. I have IV for MSFT going from $5 in 2003 to $38 in 2011. However, 2013 forecast is $40.
With Apple, I have $1.40 IV in 2003 growing to $475 in 2013. I’d suggest if you recognise that the trend was changing that Apple was innovating and economic then it was a much much better business to own.
From 2003 to 2013 (forecast):
AAPL has grown its value 339 times.
MSFT has grown its value 7.5 times.
Paul Rehill
:
Hi Steve
Maybe a rephrase is in order. There is a good chance that gold will provide less than smashing returns in real terms for Australian investors with reasonable expectations of the AUD continuing to rise against the USD due to increasing US debt over the coming years (10% budget deficits etc). Quoting figures from Saturday’s Age Business section, in AUD terms the price of gold was $1401 an ounce compared with a record $1562 in Feb 2009. Going forward, the AUD MAY appreciate faster in the coming years against the USD than gold appreciates in USD and on an opportunity cost investing basis, by not allocating capital to the gold space, I simply have the luxury of avoiding this risk.
Whilst it seems you have placed commodities within your circle of investing competence and I wish you well with your positions and investing success, the vast majority of Value.Able graduates don’t need to position themselves in this space to achieve satisfactory returns with lower risk (by avoiding commodities) so I’ll try to push them in the other direction from time to time. Keep your convictions but if I accidentally slip with colourful wording like “smashed in real terms”, you’ll know where I’m coming from.
My RIO valuation calcs have total EPS of $25 for the next 3 years compared to analysts’ forecasts of approx. $30. At RIO’s current price, I expect it to generate a 15% return going forward on my assumptions. If the analysts are right, all the better. Your prediction may be right but I am content with the outlook going forward with iron ore production set to increase from 220m to 330m tonnes and if my assumptions are incorrect and adverse, then I simply allocate my capital elsewhere and will do so quickly.
Rather than speculate about how things will change, I believe you can generate better returns by observing how companies are benefiting or not from present conditions. On gold stocks producing ROEs of <20%, this may change but they need to achieve the throughput (and must not have a short mine life). Unless they do, most value investors can put gold stocks aside AND look in the rear-view mirror and wait until investment profitability improves with increased throughput and if it does, check to see if purchases can be made below IV. Otherwise there are plenty of other capital allocation opportunities available. Berkshire Hathwaway has over $55bn USD invested in just 14 securities so for most value.able graduates, diversifying into single commodity gold, oil etc. stocks is best avoided. They can still have a diversified exposure through the likes of BHP.
For Apple and MSFT, your 2013 IVs provided a much greater margin of safety for MSFT.
Apple has made some clever decisions in recent years. The decision to move away from PowerPC processors to an Intel processor was a masterstroke in combination with Boot Camp which means Windows can be installed on a Mac. I've purchased 6 Macs in recent years and more recently, an iPhone so I've added to its growth. But MSFT benefits from this as most users would use Boot Camp or virtualisation software to run a WIndows OS to have the best of both worlds. So MSFT benefits from Apple's success in the home computer market.
We all know the Internet is growing and will continue to grow exponentially. What is less than intuitive is how Microsoft benefits from this huge network effect. As ISPs roll out more hosting services, virtual private servers and dedicated servers, it is very unusual for a ISP not to offer a Microsoft based operating system alongside Linux variants for customers, especially for custom based cloud computing application services. $5.5bn of Microsoft's $24bn operating income comes from its Servers and Tools division which includes its Windows Server operating system, Windows Azure, Microsoft SQL Server, SQL Azure and Visual Studio. That's a substantial and growing number that will benefit from Internet growth. MSFT is spending 90% of $9.6bn on cloud computing R & D so it is a very brave call to say their underlying profits will not grow at a reasonable pace. Return on equity has only been increasing in recent years (i.e shareholder equity up from $40bn to $46bn and NPAT increasing by $6bn. That's a 100% incremental return on equity over the last four years. As I don't like to overpay for growth, I would be far more comfortable owning MSFT over Apple but would hope most investors would share your enthusiasm for Apple over MSFT. MSFT's operating cash flow is $24bn, substantially higher than NPAT of $18.8bn, so it should be able to support future buybacks beyond the first $80bn that's due to end around Sep 2013 and continue to invest in R & D at the same time. Apple's shares outstanding have increased from 702m in 2001 to 916m in 2010 which is a negative. Its performance pre-2005 was ordinary but it is in much better shape now. I think both companies can generate good profitability for investors going forward.
Steve I
:
Paul,
Thanks for your comprehensive response.
I can see that we look at things in a similar way, although at a different tangent.
You said:
“Rather than speculate about how things will change, I believe you can generate better returns by observing how companies are benefiting or not from present conditions.”
I agree with this statement completely, however my conclusions differ to yours. For me, present conditions cause me to be very concerned with iron ore and feel much safer with gold, both on supply/demand and macro-economic dynamics. You seem to imply that gold is risky and iron ore is safe. (Current ROEs available in some gold stocks are already at 50%, with the potential to be much higher).
I agree with what you have to say with MSFT. However, my contention is that the situation is very uncertain and as you say, observing present conditions, AAPL continues to be in a strong position right now. However, given the MOS and the uncertainty, I would personally feel uncomfortable investing in AAPL at current prices (if I were inclined to invest in the US) and MSFT does have a greater MOS at the moment. MSFT also has not had much love in recent years.
I guess it will depend on if AAPL can continue to innovate and grow its market. If it can, I don’t see why it couldn’t continue. However it is getting terribly big and can it continue to get bigger?
My conclusion: current conditions are important but having a high degree of confidence in your expectations of future conditions is vital. You have demonstrated this with your understanding of MSFT and this is key in knowing where future value is headed. Different people can look at the same conditions and reach completely different conclusions.
Paul Rehill
:
Hi Steve
I had a quick look at Apple’s half-year results and their growth is certainly tremendous (although benefiting from USD depreciation which boosts their export revenue) so overpaying for growth appears to be less of a concern now.
2011H1 net sales of $51bn up from $29bn on pcp.
2011H1 iPhone sales of $22.7bn up from $11bn on pcp.
2011H1 iPhone, iPod and iPad hardware sales of $35bn (approx. 68% of net sales).
2011H1 diluted EPS of $12.83 up from $7 on pcp. Up 83%.
Diluted 2010 EPS was $15.15 for the full year up from $9.08 on pcp. Up 66%.
They are impressive figures. Using a lower full year growth figure of 60% to estimate 2011EPS, that is approx. $24 which means the forward PE (I know how much Roger hates this) is <15 with the share price around $350. On that basis, overpaying for growth is not an issue. 2010 return on initial equity and contributed equity during the year was 41%. Net Profit Margin is above 20% and is increasing as is ROE. If Apple maintains its 0% POR and you expect it to grow EPS by at least 20% p.a. over the longer term, you don't really need to calculate IV, it looks good. A couple of more years of this super-charged growth would come really come in handy even if sales growth flattens off.
Rob
:
Paul,
while I agree with much of what you say I disagree that “most users would use bootcamp”. The move for many to Macs has been prompted by their introduction through other Apple products. It’s really only proprietry products that won’t run on the Mac. Even Microsoft’s Office now runs in compatibility mode so documents created on one now retain their formatting on the other. This used to be a real problem. The only programme that we used in the past that didn’t run on the Mac was Publisher. We learnt to do without it.
I have been moving my work computers across to Mac, mainly to avoid the problems we’ve had with malware crippling some machines. Although I’ve provided Windows though Fusion and bootcamp, noone is using it.
So far everyone’s happy using Office for Mac 2011. And. ..once they’ve gotten used to a different operating system they’ve been inclined to buy Macs themselves at home.
Microsoft is doing well having a foot (boot) in both camps. Vista and cloud based computing has certainly taken their toll but I’m sure they will fair well but will need to keep their products across all platforms, cloud, pc and Mac.
Just my thhoughts.
Cheers
Rob
Paul Rehill
:
Hi Rob
I’ve developed a habit of telling new PC purchasers to buy a Mac and use boot camp to install Windows to get the best of both worlds. Fair enough if you have moved on from the old world. But again, it’s a masterstroke to encourage Windows users to migrate to a Mac on their next PC purchase.
Steve I
:
Microsoft Windows Misses Estimates as Consumers Pick IPad
http://www.bloomberg.com/news/2011-04-28/microsoft-meets-analysts-estimates-as-consumers-shift-to-ipad-tablet-pcs.html
Paul Rehill
:
MSFT’s overall numbers still look good. Apple will grow faster as you pointed out.
MatthewR
:
Thanks Ron
I was just thinking about asset allocation and what would be the value investors sector picks, and voila! there you go and post it. Time for more research…
Thanks, I enjoy your posts
Matt
darrin
:
Hi Ron
Thankyou for your top picks for each theme.
Gives us all a good guide to rejig our portfolios to follow the trends.
cheers
darrin
Ron shamgar
:
Just remmember the emphasis is on BIG MARGIN OF SAFETY!!!!!!
darrin wong
:
HI Ron
what is a big margin of safety?
darrin
ron shamgar
:
Darrin please read my comment above. cheers.
Steve
:
Thanks Ron. And in your opinion, I’d be interested to know which of those stocks you listed above currently offer a big margin of safety. I think some of them might be expensive but others do offer some level of discount. Would like to hear your thoughts
Ron shamgar
:
The only stocks with a BIG MOS are the gold stocks. GDO has already gone up 20% since mentioning it here on the blog, but since it’s in play, I would hold and wait on this one for now.
Again you should diversify with these stocks as they have no competitive advantage and live and die by the gold price, which In my opinion will go higher.
The other ones with a smaller MOS to fy11 IV are MCE,FGE,MTU,TGA,???
Please do ur own research and seek independent advice etc..
Brad J
:
Hi Ron,
Thanks for your picks, I have some of them but wouldn’t have as many stocks in my portfolio. Mainly because I am only prepared to invest in the business unless I fully understand it. I do have MCE, FGE and VOC and believe these to be the absolute standouts.
You could also throw ZGL and CCV in there and are both below their IV. I have ZGL but not CCV.
Brad J
:
Sorry Ron, noticed you do have ZGL but you haven’t nominated it at a discount to IV. For what it’s worth I think it is at a discount currently and Roger has it at a 19% discount currently as well.
Steve
:
Brad J – are you sure about ZGL being at a discount to IV? I thought Roger last had a value of 52 cents – but rising at a good pace over the next few years. Did I miss something?
Brad J
:
Steve in Valueline in the Eureka report Roger has ZGL at $0.71
Ron shamgar
:
Hi brad my IV is about it’s current price so no discount for me. But depending on the results this year that might change. I did notice Roger has it at 70c IV on the eureka report portfolio. Maybe I’m being more cautious.
Brad J
:
Hi Ron,
Also I have IV for FGE at $9.60 and Roger has it at over $9 which he mentioned on radio recently. This is one that is at a significant discount to IV at the moment and in my opinion is a buying opportunity. I own FGE by the way.
MattB
:
Interesting that GDO is being bought up by a Chinese fund. Also interesting that their price query announcement response hints at an acquisition. How does talk of an acquisition alter your risk profile for this business?
Mal
:
A few things,
Speculation about takeovers is entirely that- speculation, unless you possess some sort of inside knowledge, in which case you legally and ethically shouldn’t be investing in the company.
That said, I would think GDO would be a very attractive takever proposition, they have a market cap of about 350million, and hold 20+million in liquid assets (goliath gold shares + cash & receivables – convertible bonds debt), and will be looking to earn between 60 and 100million dollars 2011 calendar year (lower-upper end of estimates). I know if I had 400million in private equity I would buy GDO and take it off the market any day!
Making an acquisition on the other hand does NOT make sense from a business point of view. With only 20 million in cash- the acquisition would either be small and cash offer or much larger and fuelled by either dilution or debt (which entails significant risk). The reason this doesn’t make sense, is that GDO already has an effective place (in the form of what looks to be a very promising second mine) to allocate its capital. If GDO were cashed up and had no effective allocation of capital- it would make sense to make an acquisition or capital return. BUT, there are a lot of tricky manouevres in the corporate world *that I don’t really understand* to prevent/ or protect against hostile takeovers- I suggest you look at EQN (an excellent, profitable copper miner with a huge copper mine)***
Does anyone else on the blog with a financial background have more to add?
In short, I have no idea if they are a takeover target or if they are planning an acquisition. If they were planning/announce an acquisition, in my mind it will raise significant doubts about the management’s interests aligning with that of shareholders, and more than likely, at least in the short-term, it would negatively impact return on equity (with dilution) or burden them with debt (and therefore risk)
Good luck :)
Mal
*** It seems that the very brilliantly run company attempted to takeover Lumdin with a cash + scrip offer (after previously taking over citadel), in order to put a lot of debt onto its books and increase market cap, and make a hostile takeover less likely. Sure enough, as soon as it looked like the deal was not going to get through, Minmetals have come in with a $7 a share offer (which was significantly more that $5.50 EQN was trading at the time, but is still at a massive discount to intrinsic value of the company). It is still unclear how it will play out. Again this is my very unsophisticated analysis of this situation, and I don’t hold or have any great understanding of M&A (no financial background).
Mal
:
Hi sorry Brad,
I just looked at the actual announcement you were referring to, and it would be safe to say that it would be reasonable to speculate regarding takeovers given that company response. What I’ve said above still stands true though!
Matt R
:
Could someone explain why GDO Sp went up last week- was it talk of a TO? Have the fundamentals changed?
ron shamgar
:
unfortunately it looks like my top gold pick is going to be taken over on the cheap!
now usually im very happy to make money in a short space of time, but in this case whoever buys it is robbing us!!
in regards to an acquisition, companies are constantly reviewing opportunities all the time. even Decmil and Forge are looking at some. does that mean we sell because there is a risk?
Of course not.
we have to trust management in doing the right thing for the benefit of shareholders. but as roger indicates in his book, one of the reasons to sell is if something significantly has changed from when u first bought the business. lets wait and see first
darrin wong
:
Hi Ron
How do I source the information on small cap gold producers?
cheers
darrin
ron shamgar
:
the same way u would go about any other company – research!
but shhhhhh, don’t mention gold stocks or roger will put us in the naughty corner! :-)
Steve I
:
I think he already has ;)
darrin wong
:
HI Ron
Thankyou for your advice.
Still thinking about which gold company Roger has been buying.
Any ideas?
cheers
darrin
ron shamgar
:
hi Darrin we r not allowed to discuss that anymore.
but if u read about my top 4 gold picks, thats where i invested my money to get exposure to gold. just remember to do ur own research, be very conservative with ur forecasts, as prices may fall dramatically in the short term.
David Martin
:
Hi Ron – Back in September last year I bought a company – at the time it cost me around $6.80. Since this time I saw its price rise to $12 and more recently (last week) I purchased some more after a pull back – I paid $10.
It’s a wonderful little cash generator – it has no debt – it pays dividends and special dividends from time to time, has a ROE of around 25%, it is quite illiquid and you need to manage your orders and I reckon its worth a good deal more.
I also wouldn’t mind a small wager that it is your little mystery business.
Love your work
David Martin
Roger Montgomery
:
Aw shucks…you guys!!!
Ron shamgar
:
Ok the wager is a drink if we ever catch up in one of Rogers future events.
Cheers
David Martin
:
Ron – you didn’t say if your little mystery company was trading similarly to mine!!
You never know – we might have to buy eachother one
Cheers – David
Roger Montgomery
:
Dear readers,
I am delighted with the quantum of posts that are now being made here however, the volume makes it difficult for other readers to find the genuine insights – of which you have all contributed many. Paging through reams of banter that offers little genuine educational or insightful material may render the blog ineffective for the the purpose for which it is intended. Could we please think of the value that is added by our posts before posting. The insights blog is a place for you to share your insights and read those of others. We have public company CEO’s and chairpersons, government department heads, regulators and prominent investors frequenting the blog. If they see that the site is becoming more like a forum, I fear they will cease contributing or even taking an interest. Lets go for quality rather than quantity. Thank you all. Roger Montgomery.
ken fraser
:
I agree and well said.
Steve I
:
Personally if the blog is taking such a commercial direction then it is not for me. How does friendly banter between like minded individuals on a blog not fit within normal parameters? Every blog comments section that I read tend to take this format.
Since I started reading this blog it has acted like a forum and it has worked. I’m not sure that it is different now to how it always has been?
Matthew R
:
I have noticed the changes
There used to be more of a focus toward discussing competitive advantages, new developments in industries, new companies etc
There was also a lot more discussion about the basics… I had a prolonged discussion last year with Ken Milhinch about payout ratio for example.
Maybe readers have moved on from the basics now but I would like to think that if people have questions about areas of value investing they are still grappling with then they would ask. We haven’t been getting many of those questions recently.
I don’t mind the personal comments but I come to read the insights and to ask/answer questions
I think what started happening was the discussions turned in to questioning and defending of a person’s idea. In my humble opinion, everyone should post like Lloyd does, he doesn’t care what people think of him! :)
So, if you are new to this blog and you have a question, post! You will not be the only one thinking it. Even the grads have lots of questions so don’t feel you can’t ask!
ron shamgar
:
hi Matt,
defending your own ideas is very good as it makes you think hard about what makes your idea better or different than someone else.
and in doing so you improve the way you think.
(as an example my discussion with Lloyd regarding REA made me think harder about their business going forward.)
take care.
Ron shamgar
:
I agree Roger, but keep in mind we r not bantering about the footy results or my last trip to Europe. It’s mainly banter in regards to companies or someone’s opinion of a business etc.
Just my opinion and in future will try my best to stay within ur guidelines.
Brad J
:
Hi Ron,
Love your contributions. I do however think that if you have a company in mind, it is best to come forward and mention who they are rather than getting bloggers to guess it. Maybe this is what Roger is referring to, I am not sure.
It is not an issue for me as I have enjoyed your contributions and this is just a little side issue. It doesn’t worry me which gold stock it is anyway as I am not interested in investing in gold. If it was oil related it would be another story.
Sahin
:
Hi Ron,
is your mystery stock ESV – 130% ROE which looks sustainable for 2-3 years
Cheers
Ron shamgar
:
ESV recently sold their business so that’s why ROE inflated. Looking forward they won’t b making too much money anytime soon. Management has great track record.
BUT Please let me know if u find a company with +100% ROE which is sustainable 3 years going forward. I’m willing to pay big money for that!
Cheers
Brad Voigt
:
heads up the link to the eureka report doesnt work
Roger Montgomery
:
Thanks Brad. It has been fixed.