Oracle - the future is bright

When your business goes digital you need somewhere to store the data. And that is where Oracle comes in, providing the database software that allows users to store, backup and retrieve that data easily.

Sounds pretty basic but practically every company on earth bigger than a corner shop needs a database and Oracle is the market leader.

In the UK the National Health Service is gradually moving away from patients carrying their own notes around to having central databases that store all that vital information. This is not the sort of data that can be stored in a spreadsheet or an Access database or even a free database product like mySql. The sheer quantity and confidentiality of the data means that an enterprise solution must be used and Oracle is the prime candidate.

So Oracle is in a growing market and has been for the last 30 years. But what about the financials?

ORCL has a non-GAAP trailing PE of 15 and analysts estimate that it will grow at about 15% a year for the next 5 years. It has a cash mountain of about $9 Billion which it is using to fund share buybacks, acquisitions and its recently started dividend payments. Its non-GAAP margin is 46% and this figure just keeps rising as the proportion of its income that comes from software maintenance increases.

ORCL is currently trying to purchase Sun Microsystems - a move which will see Oracle offering hardware products for the first time. It is also a great chance to increase the profitabiliy of Sun by getting its cost base under control.

My time has run out but ORCL looks good as a purchase for the very long term. With dividends, share buybacks, a cash mountain, margin expansion and constant growth it ticks all the boxes. How many companies can you say that about?

A quick hello

Well I am still alive and investing!

Having a baby has rather impacted my morning routine hence the recent lack of posts. Hopefully I will be getting my early mornings back sometime soon!

Anyway what is the current status of my portfolio?

I am still fully invested and even have some bank shares showing a profit!

In an investment book I read it said that if you can get through a bear market without selling your shares on the way down then maybe you have the right aptitude to be a stock picker rather than just invest in the index.

So I passed that test but can I pick the right stocks?

Sometimes but I have been taught a painful lesson about diversification in the last couple of years. Being overweight banks in the summer of 2007 was not very clever but in my defense I did not buy any Northern Rock even when it looked really cheap. Secondly no one saw the banking crash coming - not the Bank Of England and certainly not the directors of the banks. So what hope did I have? Hence the need for diversification.

The good news is that one of the banks I held was Barclays which is now at 50% of its pre-crash price and could conceivably return to 2007 levels in the next 5 years. The even better news is that I bought more Barclays early this year and those purchases are now showing a gain of 160%!

The bad news is that I bought into Halifax before the crash. Those shares are showing a 95% loss and will stay in my portfolio as a lesson that even blue-chips can get things spectactularly wrong.

Regarding other companies, I am keen to buy into Oracle but as I decided that now is the wrong time to buy defensive shares (which is how I think of Oracle) I put the money into Barclays to catch some of the current recovery. This plan is turning out rather well, with those purchases showing a 20% gain over a couple of months. By the year end I will probably take the profit and put the money into ORCL.

Looking at things from 10 miles up, the current decade has been a challenging one to begin investing in! The FTSE 100 will almost certainly end the decade lower than it started it. So I don't feel too bad about showing a loss. And maybe the next decade will be like the 1990s?

That would be refreshing!

Selling winners

When looking to raise cash to buy into a company I admire I often sell my winners as I don't like selling at a loss. But this goes against the wisdom of running with your winners and selling your losers.

BHP Billiton is the only stock in my mortgage portfolio that is still showing a profit! Therefore I was considering cashing in the gain to finance the purchase of Oracle shares. However having just scanned their most recent interim report I feel that rather than selling BLT I want more!

In the second half of 2008 BLT managed to increase its underlying profit by 25% and its cash flow by 75%! With a useful 4% dividend yield and on a very reasonable PE of 11 BLT has good prospects for steady share price growth, especially as oil prices recover and its petroleum projects start to come on line.

So Oracle with have to wait. This one is a keeper!

We have lift off

In the last couple of months something amazing happened. Some of my shares started to gain in value!

In fact it appears that after 18 months of haplessly buying small amounts of bank shares in the hope of getting in at the bottom I have finally managed it!

In February and March I bought some Barclays shares at an average price of 82p. These shares are now worth 280p a couple of months later! After months of banking pain a bit of banking pleasure!

It appears that the world is not about to end. And maybe some UK banks have a future.

So am I still buying Barclays? Yes - even though its PE ratio is approaching 5 - sky high for a bank these days!

So what companies are catching my eye these days?

Oracle looks like a great combination of growth and defense. Its database software is critical for IT solutions all over the world and is needed recession or not. It has a huge pile of cash, is buying back shares and is aiming to grow EPS at 20% at constant currency rates. All this on a PE of about 13? Gimme some now!

The only disadvantage is that being a defensive stock that has held up pretty well over the last year ORCL will not capture the full benefit of a market recovery. But I am an investor not a trader so that is a secondary consideration.

Happy investing!

The strong get stronger

Barclays released their 2008 results last week. And what a breath of fresh air they were! A bank making a profit - even after the write downs! EPS was 60p which puts Barclays on a PE of under 2!

Yes that is right. The PE of Barclays is under 2!

So if you have some money to save you can either get about 2% return in a savings account or you can get a 50% earnings yield if you buy BARC shares.

Is this the sort of mad Mr Market pricing that Warren Buffet loves to take advantage of?

Possibly but bank share prices have been dropping for so long it takes a strong conviction to start buying now.

Barclays are going to start paying dividends again in the second half of this year and this should give the share price a solid boost. They are going to start paying the dividends quarterly rather than twice yearly which will be better for income investors like me.

Barclays have been able to use their solvency to buy assets like Lehman Brothers at fire sale prices. This bodes well for the future when things eventually stabilise.

As for me, I am buying this one again while it stays below 200p. How often can you get a PE of 2 for a global multinational that is profitable and the government will not allow to collapse? Not that often is the answer!

I have seen the light

Finally I have seen the light!

Firstly, I have stopped buying UK banks! Although my theory that the government will not allow them to fail is correct, the banks can keep diluting my holding by issuing more shares to the government. The tax payer already owns 65% of RBS!

So enough is enough! All businesses are not created equal. In the good times banks can give a very nice return on equity but in the bad times they can easily go bust if they have not been managed cautiously enough. I am not selling my banks shares as they are barely worth anything anyway. They can hang around in case one day they are worth something.

Luckily the losses I have made have not been fatal. I am still in the early days of my investing career and have been taught a very vivid lesson about the importance of diversification.

The second revelation I have had is that portfolio ratios do work. If I had had a rule that 20% of my portfolio must be in cash then as the stocks in my portfolio fell I would have had to buy some more to maintain the 20% ratio. This would meant I would have picked up some cheap stocks on the way down. Then when (if!) stocks rose again I would be forced to sell some, locking in some profits.

Also if I had had a rule limiting me to 20% in one sector and 10% in one company then I would not have been so exposed to UK banks.

This is all pretty basic stuff that I had read a long time ago but it seems that I have to learn things the hard way.

Here is a sample collection of rules for a medium risk portfolio:

20% cash
No more than 20% in one sector
No more than 10% in one company
No more than 50% in US stocks.
No companies with a market cap. less than £1 billion

And here is an idea for a high risk portfolio:

10% cash
No more than 20% in one sector
No more than 20% in one company
No more than 50% in US stocks.
No companies with a market cap. less than £0.2 billion

And finally here is an idea for a high yield portfolio:

No cash
No more than 10% in one sector
No more than 10% in one company
No foreign stocks
No companies with a market cap. less than £5 billion

I have 4 portfolios in all: 1 high risk, 2 medium risk and 1 high yield.

Over the next year I will be slowly adjusting the portfolios to meet these rules. Any adjustments will be made at opportune moments in order to keep trading costs down.

My main portfolio is 40% in Genzyme! This obviously rather breaks the rule of no more than 10% in one company. So I will have to take some profits on that one. Oracle looks like a suitable parking place for the proceeds.

Best of luck!

Happy 2009!

Hello there!

After a few months off to pursue my career as a budding chess player it is now time to start think about securities again.

I was hoping that by now my bank shares would be on the rise and my faith in the UK banking system would be vindicated. Ha! Yesterday Barclays hit a new low amid fears that it would need a bailout from the government. And there I was thinking it had already been bailed out by Arabs.

The chart below demonstrates why I recommended UK bank stocks in summer 2007:


The only things I can say in my defence are that I didn't recommend Northern Rock and even Fred Goodwin didn't predict the extent of this crisis. Sir Fred is now undoubtedly licking his wounds on some sunny island whereas I would still like to see my bank shares worth something one day.

So am I still buying banking shares? Yes!

Stubbornness is a very bad quality for an investor. However I do have a theory.

If the banks collapse completely then so will the UK economy. Therefore the government cannot allow names like Barclays and RBS to disappear. It has already bought most of RBS and I guess will do the same for Barclays if it needs to. Therefore while there is still plenty of risk involved in buying banks like Barclays and RBS there is little chance of the shares becoming worthless.

I am only having occasional nibbles at Barclays anyway. The serious money is going into Tescos which will no doubt weather this crisis.

So I haven't given up on investing but I have been taught a very good lesson on the importance of diversification. Thankfully my main portfolio was reasonably diverse and thanks to Genzyme and the strengthening dollar that portfolio did no worse than the market last year. Considering that it contains RBS and HBOS that is a result!