Woolworths – what are Roger Montgomery’s thoughts?
Following Woolworths latest results announcement, Roger Montgomery shares his insights on why Australia’s leading retailer failed to meet the markets expectations. Roger said ‘WOW is lowering their prices to drive profit growth, which is not sustainable or good for our country’. In this appearance on Switzer TV, Roger also highlights the key data points that investors should look for when analysing annual reports. Watch the interview.
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.
Darrel Harris
:
As I will be overseas till early October could you please keep me on the list when the A1 service is finally released.
I will have access to my emails
Regards
Darrel Harris
Brad
:
If anyone wants check out a business with a bullet proof franchise, take a (random) walk down Collins St to the new Tiffany’s store.
Imagine it’s a special anniversary, you want to buy a present for a loved one – it’s going to much more memorable if you come home with one of those little blue boxes.
Roger Montgomery
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We’ve had the little blue boxes here in Sydney for many years and can vouch for its impact. From a business/competitive advantage perspective that ‘blue’ is patented or trademarked too.
Andrew
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I know those blue boxes well. I have had a few purchases from there in the previous year and now they send me catalogues as a preferred customer. I completley agree with both posts, that blue box, the tiffany name is worth a lot when you give it to someone special. Also, the quality (cut, colour and clarity for diamonds) is better than i haev seen anywhere.
Also, i can’t see their brand changing, i know for a fact that Tiffanys will always be remembered by me as playing an important part in two of my most important memories. That means that in the future i will more than likely see that as the first place i go to for future jewellry purchases.
Lloyd
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Roger,
You hold 206 WOW share in the Value.able portfolio of your regular Eureka Report column.
The IV of WOW has declined considerably following the annual results announcement and the cost base of your holding is considerably above the current IV, as is the current WOW share price, notwithstanding the share price decline.
Bearing in mind what you have said previously on the subject of “when to sell” this leads to the question: What is your next move with respect to the WOW holding in the Eureka Report Valuable Portfolio?
If it is not to sell, but rather to continue to hold, then what is you rationale for this decision?
On a related matter: The MCE holding of 2,047 shares represents (or at least it did) the largest holding by value in the Eureka Report Valuable Portfolio. It is currently trading above your low entry price and below your current IV. Therefore, in light of what you have said about MCE, I infer that you are prepared to hold the stock pending confirmation of new contract wins.
However, this approach has an significant (at least 30% risk) of loss of currently unrealized gains, if not purchase capital, should MCE management fails to deliver on new contracts in a timely manner. If my assessment of the risk of contract delivery is correct, then this hold decision would appear to make sense on a risked outcome basis. Is this the basis of your hold decision?
However, if MCE management fails to deliver on the promise in a timely manner what do you do? It is all very fine to say MCE is a good long term business, but the reality is that a further failure of management to deliver on its promises will see its reputation sullied to the point of at best taking years to recover, and with that the share price will languish no matter what the IV relativity.
An aside: I have written previously about the WA factor in business management and its detrimental effect on shareholder value. The jury is still out on MCE management on this point, but the jury’s decision will soon be called on the subject.
These questions are at the heart of the tactical aspects of portfolio management and I hope you can/will take the time to clarify your thinking in so far as it pertains to the Valuable Portfolio in your Eureka Report column. To do so would be more Value.able for your readers than anything else.
Stock selection and getting in is relatively easy, determining when to get out and managing the tactical aspects of portfolio management is where the genuine alpha (out-performance) comes from…. and most people understand little about this subject.
Regards
Lloyd
Roger Montgomery
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Hi Lloyd,
So with wow we will take a look at the direction of intrinsic values that come out of our reassessed forecasts for future equity. If the price is above the current iv but well below forecasts we may hold and if lower prices follow we may buy more. If the price is below future expectations we will sell. I suspect however that we will hold and add. Will be having a good look during the next week or two.
Your logic appears rational on MCE. Our decision will be vindicated or not in a matter of weeks. If not we would simply be happy to exit and wait for a demonstration of success. That might mean paying a higher price but if that new price is still below the then new iv, that’s ok too.
David King
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Lloyd, what is the WA facror?
David King
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I mean “factor”
Lloyd
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We are repeatedly told that things are better and bigger in the West, where it appears the consensus is that the world of knowledge and skill ends at Kalgoorlie on one side and Rottnest on the other. In such an environment ego and hubris thrive. The propensity to hyperbole, overstatement, accompanied by a mine is bigger and better than yours attitude is very apparent.
Frequently, the over sized egos lead to risks and uncertainties not being identified, let alone managed. Stakeholders are ignored in the bluff bravado of the ethos of “push ahead at all costs and show ’em how its done”.
The all to common result: premature project sanction, lousy risk management, damaged stakeholder relations, the inevitable over capitalization of projects matched by under performance. A consistent record of over promising followed by under delivery.
The examples of this are so many, at all levels of market capitalization, that its almost possible to conclude that it is an endemic feature of the business landscape in WA.
That in a nutshell is the WA factor that needs to be carefully monitored by investors in WA based companies.
I think it comes from insularity and isolation, rather than something in the water!
Roger Montgomery
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Thanks Lloyd,
That’s a very useful perspective, upon which even a framework can be built – albeit one requiring continuous observation.
Brad
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Are we talking about 1987 or 2011?
Stock market time machine
Bring back Rothwells !
Brad
:
I just watched an interview on sky business with Telstra business of the year Australan Pressure Testing -a couple located in Henderson
Started in 2003 with no money now 180 employees they described at “family”
Very down to earth couple
Lay of WA, they’ve got all the resources and might try and secede again!
David King
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Agreed. I lived in WA for 8 years. Bond & Connell days. Wow…
Simon Anthony
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What’s that Buffet quote? “The future is never clear, and you pay a very high price in the stock market for a cheery consensus”. I wonder if this applies to your rational concerning MCE. My view that Uncertainty is the friend of the buyer of long-term values- hold for now.
Lloyd
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Yes – I think it was the cheery consensus on this blog that led to a bit of heartache, if not hip pocket damage, for many followers of the company and led to the concern expressed by so many.
My questions/comments on the subject were to explore (for me) the risks of buying into MCE at this time, against the uncertainty and the failure to deliver to date on the promises (although I framed the questions/comments against Roger’s published Value.able portfolio in order to secure his response).
A key issue for me in a such a buy decision: does a leopard change its spots and what evidence is likely to demonstrate that it can and has? I only invest when I am confident of an outcome. To do otherwise is gambling.
My personal confidence is a different thing to the confidence of the market, but that also has to be weighed in an investment decision if returns are to be maximized.
To quote a well known former PM: “Can a soufflé rise twice?” In the context of MCE and events that have transpired that is the question that I am pondering, because I look to cover the short term while investing for the long term. After all is said and done, buy and hold (with blind hope) is a sure way to lose money.
Lloyd
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Simon,
I forgot to add that Buffett also said
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
Personally, I am not much of one for Buffett’s delphic and often contradictory aphorisms, particularly those of recent times, but this one sticks in my head and is up there with the best of them from the greatest of Buffetts – Jimmy Buffett.
So “The future is never clear, and you pay a very high price in the stock market for a cheery consensus” needs to be weighed against Warren’s rules No 1 & 2. Imprudent acceptance of uncertainty, with blind hope that all will be okay is a path to ruin in my view.
Now for a few relevant quotes from the great Jimmy Buffett:
“Indecision may or may not be my problem.”
“Humor has bailed me out of more tight situations than I can think of. If you go with your instincts and keep your humor, creativity follows. With luck, success comes, too.”
and the one I really like
“If I couldn’t laugh I just would go insane, If we couldn’t laugh we just would go insane, If we weren’t all crazy we would go insane.”
Remember, the inmates are running the asylum, despite what our leaders say to the contrary. And this is the key to understanding markets.
Regards
Lloyd
Lloyd
:
Roger,
Thanks for the wise counsel…”If not we would simply be happy to exit and wait for a demonstration of success. That might mean paying a higher price but if that new price is still below the then new iv, that’s ok too.”
In my opinion, this soufflé may yet rise twice, but a demonstration of capacity to do so needs to be forthcoming before any major commitment of investor funds.
Regards
Lloyd
Roger Montgomery
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Correct
sapporosteve
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Lloyd,
You have provided some very serious food for thought. Sometimes I think we get caught up in the current waves of the market without actually realising it. For example, I think we always look at irrationality as a negative rather than a positive force. For example, we usually see the irrationality in prices above intrinsic value (when the market is “booming”) but seldom see the irrationality when the market is in fear mode. Both are cases of irrationality but as we know we humans fear the pain of losses more than the pleasure of gains.
One thing that can not be counted on for sure but there is historical evidence is for a bounce in the market. I mean that we are currently closer to the bottom of the market than the top. Looking at the earnings reports most companies that provided good and solid earnings reports got “hammered”. From my perspective this is not rational assessment of each company but simply a repeat of the market’s “herding” where they are simply all following each other.
With regard to intrinsic value, many company as we know can spend considerable time above there intrinsic value. There are many reason for me to believe that MCE share price will rise in the future.
From an irrational point of view, MCE may well rebound simply as the market goes from fear to greed (which it will eventually). Institutional investors will return to making share prices irrational in the other direction at some time and I am sure that MCE will be among them.
From a rational point of view,but also just asking some simple questions, I would suspect that there is little downside risk and more upside for the following reasons.
1. MCE actually has a decent result.
2. MCE has built a facility with an aim to expansion that has not started to contribute in any meaningful way to profits. It would seem to defy belief that management would make an error of such potentially large proportions.
3. MCE has, and is continuing, to develop new products.
4.MCE has opened new offices O/S.
5.MCE has an experienced management team which would understand the vagaries of the business better than any of us.
6. MCE, I think it is widely agreed is still undervalued.
I disagree that Buy and Hold is dead. This thought has being raised in previously fear markets and it always appears that way in the short term. I can offer a paper by Tweedy Browne – Investing for Higher After Tax Returns: Lessons for Tax Paying Investors from Warren Buffett, Index Funds, the Best Performing Stocks over an 18 year period, and Our Own Experience.
I would be interested to hear your thoughts regarding whether you see any positives from the potential “irrational upside” of the market.
regards
Steve
Lloyd
:
Steve,
Irrational markets provide opportunity for gain at the same time as risk of loss. If markets were rational then there would be little, or even no opportunity for traders or investors, as everything would be priced at fair/true value.
For my part I don’t pursue a pure value investor approach, although the latter is always provides a foundation for my investment decisions and one of the factors in my determination of risk attached to an investment. Overlaid on fundamentals I am always factoring into my strategy the ever changing mood of markets (i.e. the degree of irrationality both positive and negative) or the “animal spirits” of Keynes:
“Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”
I am always on guard for and looking for the signs of tipping points of change in the “animal spirits” and invest or divest of positions accordingly. My invested position can move three hundred percent or more upward, or up to eighty percent downward in a short time frame depending on my reading of the “animal spirits”.
Only a few very robust and high performing business ever remain in my core long term hold category (e.g. COH). When I am in the divested mode such holding can constitute up to 35% of my invested portfolio (as recently the case).
In simple words, I prefer to buy low when the animal spirits are turning positive and sell high well before the animal spirits start to turn negative. The operative words here are “well before” because once the rush for the exits starts then there is little hope of escaping unharmed. More often than not I am a long way before, which can be a source of self flagellation, which inevitably turns to self congratulation with time.
Thus I am only prepared to hold long term a few businesses in which I have absolute confidence. These form a small invariate core of my portfolio. This is a long way from buy and hold with blind hope, which is what I described in my post as a loosing proposition.
At this stage MCE is far from being in my long term buy and hold with absolute confidence category. Unless management lifts its game and demonstrates a propensity for reliable disclosure, amongst other things, then in never will make the long term buy and hold grade for me. That does not preclude it from being a short to intermediate value based investment holding if the price/IV relationship and the anticipated animal spirits prove attracive. That is what I am pondering upon at present.
In summary, I seek to remain at all times rational, while playing for my benefit the irrational animal spirits of the market. It is not easy to do and requires a degree of self monitoring and self awareness to ensure that the market’s animal spirits don’t become a source of personal contagion. I have fallen foul of the latter on more than one ocassion (but not in the case of MCE) and it behoves anyone pursuing this approach to keep his/her ego in check and to periodically review their record of personal investment fallibility (we all have such a record and don’t let anyone tell you otherwise).
By now Roger is probably quivering at the market timing heresy implied in my approach. But hey it works for me and lets acknowledge that there are many ways to make a market work for you.
On that I’ll end with another aphorism from Buffett… Jimmy that is:
“Searching is half the fun: life is much more manageable when thought of as a scavenger hunt as opposed to a surprise party.”
Regards
Lloyd
sapporosteve
:
Lloyd,
What a wonderful response and for the majority, I see many similarities in my own approach. As a eternal optimist, my sins are of the commission type but I am also prepared to wait out the storm and do nothing, especially when the market is in fear mode.
Timing is an interesting issue for me. I often hear the “invest for the long term” but I agree that the reality is that there are very few companies that can be held “long term”, which I count as longer than 3 to 4 years. From my studies, I see that company profits are mean reverting so I keep a general watch on them and believe that selling after 5 years or thereabouts is a good rule of thumb.
As Roger has mentioned and also Ben Graham, it is best to buy when the company’s share is less than IV, but even better if the market as a whole is in the fear mode. This is what I aim to do which sees me buy and sell in bursts – I am not sure if you know of Stephen Jay Gould’s punctuated equilibrium theory, but this is essentially the philosophical framework for my investing. He is a wonderful writer and it is such a shame that he and Keynes died while relatively young.
This then leads me to the the Pabrai strategy of “Big bets, few bet and infrequent bets”. But in order for this to be successful, it depend heavily on choosing those types of companies that I dont think are available in Australia. Or buying at prices that are considerably undervalued (like 2008/09). But even then, I have sold some of my 07 holdings because I believe that they will suffer profit reversions and that there are now some excellent value propositions in the market.
Probably the most important point you raised is the ability for self introspection and in being rational and honest with one’s own abilities and decisions. I must confess that the older I get the easier it becomes and even provides a source of joy.
All the best and thanks for the considered response.
regards
Steve
Rob
:
Wow….Lloyd and Steve. Great posts. I’d love to hear and learn more.
Roger, it seems a blog, as recently suggested, on portfolio structure and strategy will illicit some wonderful contributions from fellow posters.
Thanks for the brain fodder, guys.