ValueLine: Montgomery’s new favourite stock(s)
Finding an undervalued stock is a wonderful thing. Finding a group of them is something else. In this edition Roger identifies a cluster of undervalued companies and adds one to his benchmark-beating portfolio. Read article.
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.
John Kerr
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I have started reading your book and enjoying it. I just wish I had more time to study it, but I am trying. Thanks Roger
John
Roger Montgomery
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Thanks for the feedback John.
Andrew Hindmarsh
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Hi Roger, love your work !!! Just started reading the book for a second time. As a BHP share holder I am concerned about the board paying too much for Potash. This is the first company i have tried to value-able am i missing something or is the BHP board ? My intrinsic value for 2010 is $22.53 ??? Shares 296 Equity 657 ROE 23 Payout ratio 9% = $6.9 + $15.63= $22.53 . Need help Andrew
Roger Montgomery
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Hi Andrew,
I do think you have mixed some of your numbers up. Some are per share but some are totals. They all need to be totals or they all need to be per share. I went to Google finance Link: http://www.google.com/finance?q=TSE:POT and found that Potash was generating a return on equity of about 26% on $22.25 of equity per share. Less than 10% of earnings are paid out as dividends. If we give BHP the benefit of the doubt and apply a 10% investors required return and optimistically adopt a 27.5% return on equity from my Tables in chapter 11 I get a valuation of $132.09. So BHP are paying an optimistic price. What was interesting for the efficacy of the approach outlined in my book is that prior to BHP’s bid the company was trading below this estimate of intrinsic value at $117 per share.
Luke
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Hi Roger,
I read your article and thought the annual report from this company was worth a read. So I loaded onto my e-reader and read it on the train this morning. All I can say is WOW! (the expression, not Woolworths or World of Warcraft) these guys are massively undervalued even after the recent price appreciation and they are poised for organic growth.
This whole investing thing is really starting to make sense. I had the right attitude of buy and hold but the companies I bought were simply rubbish compared to the quality I have been buying recently. In the short space of 6 months since I started value investing, I have actually been making money – such a strange concept! ;)
I have to hand it to you Roger, thanks to you and your book, we’re on a winner here.
Roger Montgomery
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That’s Great Luke. I hope that you think about what can go wrong too. Don’t be too aggressive with the portfolio weightings.
Luke
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Actually, I have a question regarding that. I have been reading the Intelligent Investor and Benjamin says that you should have between 25% to 75% in bonds. I take it that is why you have 50% of the value line portfolio in cash? What are your thoughts on percentage of total funds invested?
In your book you didn’t cover that aspect of investment although you did cover everything that the subtitle said you would.
Cheers,
Roger Montgomery
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Hi Luke,
The current weighting in cash is purely a function of the fact that in May, everything seemed very expensive (see my May 4 post discussing the dearth of value investments available). Now I am starting to find some cheaper and high quality investments but not enough to fill the portfolio yet. That could of course happen tomorrow. So the cash is not because of any strategic or tactical asset allocation decision. It is purely a function of being able to find suitable investments.