Why blue chips let you down
Are your returns stuck in a time warp? Are you surprised to hear Telstra’s share price is lower than it was in 1999? The NAB share price is also lower. That’s sixteen years with no price growth.
Rio and BHP’s share prices are lower than 11 years ago and Woolworths is lower than almost a decade ago. You might put it down to the resource cycle, disruption or poor management, but in each case I put it down to a poor definition of what a blue chip company is.
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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.
Peter
:
Was curious that you recommended some companies in this article that do not have favorable ratings on the Skaffold site – in regards to the grade you give for performance, as well as the safety margin.
Roger Montgomery
:
Thats right Peter. It’s because Skaffold has the ability to scan an entire global universe of opportunities, that it adopts consensus analysts estimates for its valuations. At Montgomery, for better or worse, we choose to perform our own analysis and produce our own estimates. Both approaches have benefits and limitations. Skaffold is brilliant at narrowing the universe of opportunities so you can be focused on those that deserve your limited research time. Conversely, at Montgomery, we have a team of analysts who are paid to research, that is all they spend their time doing, so time-saving is not a high priority. We’ll inevitably get things wrong and make every mistake by the time we’re done so be careful assuming one is always superior.
LJ Ferguson
:
The 3 Key drivers to MNY “winning it’s race”
1. Clarity from the goverment regarding the SACC regulation review:
This regulatory uncertainty is currently placing a dark cloud over the industry. MNY’s loan book has transitioned to a higher percentage of securitised lending and as such has moved away from short term unsecured “pay day” loans. In 2014 61% of EBIT was generated by secured loans compared to 2015 where the total was 75% of EBIT. The focus of management is oreintated towards continuing this trend in 2016 thereby reducing the risk from any proposed SACC regualtory changes and increasing the overall strength of its loan book.
As long as Australians remain largely financially uneducated and ill disciplined there will be a demand for short term lending. If ligitimate companies can no longer make profits due to government regulation they will withdraw from the market entirely. This would encourage the supply of pay day loans into the realm of the black market causing much greater potential harm to the consumer.
2. Securing of new debt financing facilities:
In August 2015 Money3 was given notice by Westpac of its intention to cease their banking relationship by December 2016. MNY is still in negotiations with suitable providers. Cash Converters(CCV) has recently signed an agreement for the refinancing of its debt facilites with Fortress Investment group at more favourable terms than its previous provider Westpac.
3. Achievement of 2016 forecast results:
According to MNY management “Money3 currently expects a net profit after tax for the financial year ending 30 June 2016 of $18 million, an increase of 30 per cent on prior year.”
This will be achieved by focusing on “clicks over bricks”. The merging of selected stores will reduce operating costs. Continued growth from the Cash Train online lending platform, google trends shows the search results for Cash train appear to be in an upward trend . Increasing the broker network and reducing the loan approval time for key brokers.
LJ Ferguson
:
Sorry I meant to say under book value.
LJ Ferguson
:
Hi Roger,
Great article, thank you.
What do you think of Money3 as a value play?
It trades under tangible book value on a single digit PE ratio with a dividend that is steadily increasing at a rate of 6%+, a less than 50% payout ratio and 10%+ growth per year in EPS over five years.
Roger Montgomery
:
That sounds interesting on paper. Why do you think they will win their race?
Peter
:
Hi Roger, what is your view of the price of IPH relative to its intrinsic value?
Roger Montgomery
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Its getting closer and we are watching it. Having visited Asia HQ in Singapore, the business is very attractive.
Carlos
:
Mostly agree, although CBA and CSL are 2 large caps that have done extremely well. My dad bought CBA at about $6 and CSL at $2.50, can’t complain about those capital gains plus huge dividends from CBA which have exceeded his initial outlay. Plus I can think of plenty of small cap companies that have done far worse than BHP and Telstra which at least haven’t gone broke unlike plenty of smaller companies that have. Personally though I much prefer small to mid cap stocks and don’t find the term “blue Chip” at all useful. I ignore the term blue chip.
Nathan Arnold
:
Hi Roger, appreciate your insights as to how to find a true ‘blue chip’ company.
Regarding IPH, the company policy is to pay out 80-90% of NPAT as a dividend. That doesn’t leave a lot for reinvestment at their high rate of return on equity. At face value, this seems contrary to your description of a blue chip business. Should we instead be looking at dividends as a proportion of Net Cash Flows prior to dividends paid?
Appreciate your thoughts on this.
Roger Montgomery
:
A high quality company is one that can generate high returns on incremental capital. The very best can grow profits each year without any additional capital. Think Sees Candy!