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What A1 stocks would Roger Montgomery buy for his SMSF?

Media Room, TV Appearances | Comments (37)

What A1 stocks would Roger Montgomery buy for his SMSF?

Peter Switzer asked Roger Montgomery to imagine he was starting is own Self Managed Superannuation Fund today. What stocks would he buy? A vintage Maserati and some artwork would be nice, but when it comes to the stock market, Roger tells investors to treat the stock market like a supermarket — buy the best quality businesses when they are cheap. So what businesses does Roger think will be winning the race in 5, 10, 15 years time? JB Hi-Fi, Oroton, Commonwealth Bank, DWS, Matrix, Forge and MACA are some of Roger’s well-known stocks that says qualifies for his SMSF. Roger also reveals a debt collection, retail, car accessory manufacturer and an IT services business that make his A1 Montgomery Quality Rating. Watch the interview.

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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37 Comments

  1. Ano
    :

    Hi Roger,

    I noticed in this clip said that a company you would buy today would include FLT.

    I may have misunderstood the comment, but I have FLT at a current valuation of $13.97 and forward estimate using commsec of about $15.

    I have used a 11%RR and ROE of 17.5%

    Is FLT grossly overpriced or is there another factor which points to you thinking that forward estimates on earnings may be higher than first thought?

  2. Alex
    :

    Hi Roger

    I am a strong believer of value investing and have also listened to your speeches on Podcast and also through ASX presentations you do from time to time.

    I am thinking of investing $10K with an investment horizon of 18 years. The purpose of this investment is to put away some money to pay for my newborn’s university education. I am wondering if you have any recommendations. I am leaning towards CSL as its low debt, blue-chip and has a steady ROCE. I would be interested to hear you thoughts.

    Many thanks

    • Roger Montgomery
      :

      Hi Alex,

      I cannot give you any specific recommendations but I can suggest generally, you will do ok buying extraordinary businesses – those with sustainable competitive advantages, high rates of return on equity, low debt and solid cash flows – when trading at sharp discounts to intrinsic value. Have you read Value.able?

  3. SUE
    :

    HI RODGER,
    I GOT YOUR BOOK AWHILE AGO, AND HAVE BEEN GETTING THROUGH IT. NOT SURE IF I AM GETTING IT THOUGH.
    I TRIED TO GET THE INTRINSIC VALUE OF PRG,
    MY VALUE $2.03. THE STOCK WENT DOWN TODAY ON LOWING OF PROFIT, SO AM QUESTIONING MY CALCULATIONS????????
    THANKS SUE

    • Roger Montgomery
      :

      Hi Sue,

      Estimating intrinsic value has nothing to do with predicting the share price. Presuming you have conservatively estimated an intrinsic value that is higher than the price, this does not preclude the share price halving or worse, in the short term. Remember Ben’s voting versus weighing machine. Further, business is dynamic and a company in a fast changing industry can surprise with downgrades or other bad news that not only pushes the price down but forces you to revise lower your intrinsic value and even reappraise whether you want to own it.

  4. Ashley Little
    :

    Hi Room,

    Looks like I am on the outer with banks.

    but dont you love it.

    Thats what makes a Market

      • Simon
        :

        Wise words Roger! Never tell a woman that she is wrong! Rather that she “might be a touch early” I’ll write that one down for the next time we discuss travelling overseas.

    • Gavin
      :

      Hi Ashley

      I’m with you on the banks.

      The difference between Credit growth and GDP would not have been so bad if the borrowed money went into productive (self liquidating) assets. However most of it was used to push up established house prices.

      Core earnings are already falling. Given circumstances that would not be historically abnormal (decline in resource income, unemployment rising etc) the bad debt provisioning improvements this reporting season has the potential to reverse rapidly and grow considerably.

      I can’t predict the future – The threat might not materialise and the timing is certainly unknown to me. But what I do know is that our housing is expensive and despite the GFC we havn’t had a domestic ressesion to test the robustness of household balance sheets. Given the earnings risk that represents to our banks if we were to hit an economic pothole. – I’ll make preparations by avoiding them at these prices, especially considering the inherent leverage involved in banking.

      • Ashley Little
        :

        Hi Gavin

        Thanks mate

        I need support here mate

        Bank bashing is way more popular in the press than it is on this blog

        LOL

  5. Ian Bowditch
    :

    Hi Roger
    Great book Roger.
    Boy would I like to know what is to happen to banks. So would everyone else. Is it just noise at present? Who knows. No one seems to have thought of those who lend to the banks and what happens if regulations lower the profitability of the banks.
    I for one wont be slitting my wrists just yet.

      • Sav
        :

        Hi Roger,

        banks seem to be on the nose at the moment. The threat of increased government regulation is stunting their share price. An opportunity do you think? Their monopoly under 4 pillars is unlikely to go away anytime soon and I reckon all this is political posturing. No changes of any real importance are likely to be made. Thoughts?

      • Craig
        :

        Hi Roger,

        I’ve heard the banks may be considering reducing exit fees (or deferred entry fees, if you like) on mortgages as a sort of pre-emptive strike at any government reform.

        If these exit fees were moved to where they are supposedly incurred by the banks (ie. entry), may they just create an even better scenario for themselves? I mean, many deferred entry fees are only paid by people leaving a loan early on in it’s life, whereas entry fees are paid by everyone.

        Regards,
        Craig.

  6. Scott T
    :

    Wandering around and getting to know a business:

    Morning all, as bank bashing has been the flavour of the month in the main stream media, and CBA is the largest holding in my SMSF, I spent Saturday going to branches to chat to the duty manager. (Yes many CBA branched are open on Saturdays)
    I went to Hornsby and Macquarie Centre, on Sydney’s North Shore. Both branches were crowded, Macquarie had 12 staff on, and dozens and dozens of waiting customers. Hornsby had 15 staff and many more customers.

    At both branches I really only got to ask 2 questions:
    1) “Man, is it always like this?” Well, yes but lately it’s been getting much busier.
    2) Trying to encourage a comment on staff dissatisfaction,
    “Are all these people trying to switch out of their mortgages?
    No, that queue is for new account openings
    that queue is for new loan applications
    that queue is for foreign currency transactions.

    That was all I got to ask as the Concierge had too many people to cope with.

    So clearly, people are not leaving in droves as I had been concerned about.

    All the best

    Scott T

    • Joab Soh
      :

      Hi Scott,

      Your action to visit the branches reminded me of Warren Buffet, who goes out into the field and gets his hands dirty.

      If I may add, when banks increase home loan rate, home owners don’t switch banks, instead they go to the same bank and ask about fixing their loan.

      Also, considering that small business are having difficulties obtaining approval for loans, it goes to show banks are enjoying their market share will the ability to choose their customers.

  7. Ashley Little
    :

    Hi Roger,

    For what is worth my view on our Banks are not as Bullish as yours.

    Our banks are very profitable beasts by world standards and over the past 20 years have been able to ride a wave where credit growth far exceeded GDP growth. Helped out by a distinct lack of competition in the sector.

    However, as WB says if past results were all their is to the game then the richest people would be librarians. As much of the western world discovered during the GFC credit growth far in excess of GDP growth is unsustainable.

    Therefore over the longer term the best outcome for our banks is for earnings to rise with GDP. That is, around the 3% mark.

    Combined with the current dividend still not a bad result. I just can’t see the 10% EPS growth that many of the analysts have factored in.

    The worlds finances are still on a pretty shaky footing and if for reasons beyond our control Australia is forced into a situation where credit growth is less than GDP or in fact is negative then out banks will not look so pretty.

    This is pure speculation of course but enough for me to have a high required return and an even bigger margin for safety.

    To paraphrase Buffets again I’ll stick to businesses that are not dependant on the kindness of strangers.

    • Roger Montgomery
      :

      Thanks Ashely,

      Four pillars was set at a time when it gave balance. That is now a legacy and balance no longer exists. Four banks is not enough. and while we have four banks and four banks only, they will continue to increase profits at a rate much faster than analysts expect. WItness westpac’s results and aggregate 92% market share for all four. I don’t say that they are at big discounts but I do say that they are 1) at intrinsic value, 2) intrinsic value is rising and 3) are a great business to own when you live on an island that is too far away from anywhere else to swim.

  8. Sav
    :

    Hi Roger,

    great book mate. You have revolutionised my investing life. I n ow feel like I have a GPS to navigate me through the stockmarket, whereas before I was just driving blind, hoping to end up at the right destination. Sure things could still be rocky but now I feel better prepared. And thanks for sending the book to me twice. Sticky fingers at Australia Post methinks!

    My question is about ORL. Yes it’s a great story, and after crunching the numbers I picked some up the other day. My fear is it all rests on Sally McDonald and her retailing genius. I used RR of 15 to allow for this risk and it still seemed cheap. If Sally leaves the company then I reckon the shares will plummet. She will be a big loss. However, should we see this as an opportunity do you think? If they drop 30% are they now “on sale”? Has Sally built up enough of a team around her to continue the story or is it really a one (wo)man show?

    • Roger Montgomery
      :

      Hi Sav,

      Thanks for the compliments. I am delighted to hear the book has become the beacon you were looking for. WIth regards to ORL, retailing always requires a great merchant and Sally appears to be just that. If you inadvertently received two books, please consider sending a copy back if you don’t want to purchase it for a friend or family member!

      • Sav
        :

        Sadly, no second book arrived Roger. The first one you sent is still MIA. My theory about a now better educated worker at Australia Post still stands though.

        You will be pleased to know, however, I have been harassing my investing friends non-stop to get a copy. They are starting to avoid me…..

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