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Qualiport

The Qualiport Tumbles
Wednesday 29th July 1998

Find out what we're doing about it

We interrupt the How To Value Shares series for this very important announcement.

The Qualiport is falling!

Warning -- the value of shares can go down as well as up.

In case you've been on holidays to a far away place where newspapers don't exist and access to the Internet is impossible, most of you will have realised that the market has been going through a bit of a slump during the last week or two. Having peaked at 6179 on July 20th (only a mere 7 trading days ago), the Footsie 100 now lies below the 6000 mark again, the level where it has spent all but some of the past 3 months of its whole life.

Falling with the market, and dropping more than the market, has been our own Quality Portfolio. Having hit a high in terms of percentage gain for the year of 56.7% on July 8th, it has been down down down since then. Have a look at the latest carnage by checking out today's numbers.

Are we worried? Are we going to sell? Are we doing something wrong? The answers are not really, no and hopefully not.

The Qualiport is the portfolio for the next 10 or 20 years. The last few days have been ugly in terms of the portfolio losing some of its value. But, come 2008, these few days in July 1998 will be so insignificant that I'm wondering what all the fuss is about now. The "market" is a difficult beast to beat, and very few portfolios actually achieve that feat. Only the best private investors consistently better the market. Courtesy almost exclusively of Rentokil Initial, we are still well ahead on the year.

You could say it was plain lucky that Rentokil was our first buy, and that's the only reason the portfolio is outperforming the market. If we had of chosen Marks & Spencer as our first share, the results would be looking far from this good. Whilst those comments are true, it's all about "ifs and buts." I could counter "what if Vodafone (up 90% this year) had of been our first pick, followed by Rentokil," or "but if you take out the big winners out of any investor's portfolio, the results will look distinctly pedestrian." It is often said that 20% of your portfolio will make up 80% of your gains. That's exactly what's happening to the Qualiport at the moment.

What has changed about our companies in the last 2 weeks? Marks & Spencer and EMAP recently held Annual General Meetings (AGM). M&S reiterated that their expansion plans remain on course, and over the next 3 years the company will increase their worldwide selling space by nearly a quarter. Although the costs of that expansion programme are being incurred now, the benefits will come at the turn of the century and beyond.

We all know the retailers are having a tough time of it, and M&S are no exception. The awful "summer" weather has hit most companies, and at Marks total sales in the financial year since March are up barely 5%. With margins being hit due to the increased expenditure in connection with the expansion programme, it appears M&S will be looking at a flat year in terms of profit growth.

At a share price of around 500p, M&S trade on a 1999 price to earnings ratio (P/E) of 18. This is below the average multiple that they have traded at over the past 5 years, yet this expansion programme is the biggest in their history. But when market sentiment is against you, it's against you. Although it would have been nice to see some earnings growth into 1999, nothing else about the company has changed since we bought them. They are still the best retailer in the country, and still the most recognised High Street brand. We're very happy to hold onto the shares.

At EMAP's AGM, the outgoing Chairman said, "Overall our outlook for the year remains unchanged." Since we bought our part-ownership in the company very close to the release of their annual results, which were in line with expectations, that means that all the assumptions we made about EMAP in the original buy report still stand. Current estimates for fiscal 1999 have EMAP growing earnings by almost 13%, where at 1250p they would trade at a P/E of 24. This is about bang on the rating the company has enjoyed over the past 5 years.

Rentokil Initial -- how boringly predictable. We expect them, as usual, to grow their sales and earnings by 20% in 1998, just as they have for the past 16 years in a row. Only yesterday they announced a few more bolt on acquisitions, which were reported in the Daily Fool. They have been by far the most successful company in terms of share price appreciation in our portfolio, rising over 50% in the past 7 months. By rights, their share price should only increase by the growth in their earnings, so we should expect the annual appreciation to be only 20%. The fact that we bought them at a P/E of 25 when now their prospective P/E is 32 explains much of the share price appreciation. In this market at this time, investors are willing to pay more for the quality and predictability of their earnings. The fact that they are our first and biggest holding means to a fair degree the performance of the whole portfolio hinges on their share price movement. We rode it up with Rentokil in the good old days (only 2 weeks ago, remember) and now we're sliding down with RTO. Such is life.

Finally, to our most recent purchase, Unilever. After much debate, a toss of the coin decided the timing on the Unilever buy. Heads it was, and we picked up shares in the company at 672p. It's been just about all downhill from there, however. I blame it on Dave Berger. Their interim results will be released next week, and I for one am eagerly awaiting them.

We remain confident that the Qualiport is made up of great companies with superb long-term growth prospects. Why should we panic or be worried? We'll leave all that to the 90% of highly paid fund managers who fail to beat the index each year.

On Friday, unless the Marks & Spencer go into voluntary liquidation in the next couple of days, we'll continue the How To Value Shares series. Next cab off the rank is Return on Equity (ROE).

Sleep easy, and remember don't have nightmares.

Bruce Jackson (TMF Googly)

Qualiport Numbers

Today's Numbers            Date    29/07/98


         Change       Bid
          pence        

RTO       -0.14      3.84
EMAP      -0.06     12.40
MKS        0.07      4.97
ULVR      -0.08      6.19   


Rec'd      #    Stock      Buy      Now   % Change   Change

19/12/97  1565  Rentokil   2.55     3.84     50.6%    1.29 
17/04/98   337  EMAP      11.85    12.40      4.6%    0.55 
11/05/98   722  M & S      5.535    4.97    -10.2%   -0.57
17/07/98   595  Unilever   6.72     6.19     -7.9%   -0.53


19/12/97  1565  Rentokil  4,040.63  6,009.60   48.7% 1,968.97 
17/04/98   337  EMAP      4,043.37  4,178.80    3.3%   135.43
11/05/98   722  M & S     4,052.24  3,588.34  -11.4%  -463.90
17/07/98   595  Unilever  4,048.38  3,683.05   -9.0%  -365.33


Cash                                    33.96

Total                               17,493.75 


                Day    Month    Year    History

Qualiport      -1.3%   -6.5%    41.5%    44.7%
FTSE 100        0.1%    0.2%    13.8%    16.4%
FTSE All Share  0.0%   -0.4%    13.4%    15.8%