Mistaken Phil

2011 in review

2012-01-21T07:29:00.002Z

2011 - the year that I saw the light.

Enough games, enough allocation rules, enough mediocre companies, just pile into the best companies.

I have been in and out of Google several times over the years and made some nice profits but if I had just sat on my hands and kept my position (and added to it) my results would have been so much better.

This also seems to be the theme of the famous book "Common Stocks, Uncommon Profits" - rather than search for bargains buy great stocks and hold them.

Charlie Munger endorses buying and holding a great company that keeps on growing because "then you can just sit on your bum for years!"

The problems are that trading is fun, it is human nature to want to just do something and we have the financial media bombarding us with stock ratings and price targets.

Warren Buffet says that the fact that he lives in Omaha rather than New York has been a huge benefit as it gives him a better perspective on the market, away from all the Wall Street hype.

So less is definitely more when it comes to investing.

I have now sold the last of my mediocre holdings and am about to buy more Google and Apple. So it was farewell to BP, BHP Billiton, British Land and Barclays. This is not discrimination against the letter B! Rather I am focussing on companies that I understand, that are growing fast and have a low cost of growth. It is hard to sell stocks that are as cheap as the four above but I believe that Google and Apple are even cheaper when you factor in their growth.

So how was my 2011? Pretty decent compared to the market, largely thanks to my Apple and Google holdings. My aggressive portfolio, which ended up just consisting of Apple, was up 10% compared to a fall of 5% for the FTSE100. My "pay the mortgage" portfolio, weighed down by the British companies mentioned above, just rose 2%.

Here are the rules for 2012 and beyond:

1. Buy only beauties.
2. Keep It Simple Stupid - no allocation rules.
3. Stop trading.
4. Do something interesting with your life!

All the best in 2012.

The cost of growth

2011-10-08T06:26:00.005Z

This market is ugly. Who would have thought that 3 years after the market meltdown of 2008 we are still suffering from the repercussions?

I am still waiting for the general stock market to start moving upwards in the way that all pension advisers claim that it does. In the meantime those who want a return on their investments are going to have to do more than invest in an index tracker.

My flight to quality is paying off big time. While most industrial stocks have tanked and banks remain in the doldrums some technology stocks have actually grown. Look at the chart below:

This is the 5 year chart for IBM. Here is something that you won't find in many places. Growth in the last 5 years!

The surprising thing is that companies like this are not hard to find. Here are five the come to mind instantly: Apple, Google, Microsoft, Intel, Intuitive Surgical.

What are the key qualities that separate these companies from the industrials that Warren Buffet understands and loves?

1. Large amounts of intellectual property.

These companies don't make commodities. They produce something that is hard to compete with. Banks may all copy each other's products but could you copy one of Intel's processors?

2. Cash rich with little or no debt.

These companies throw off cash in the normal course of operations. Some of them have so much cash that the idea of needing to borrow money is laughable.

3. Low cost of growth.

Producing new products for the companies above is just an ongoing process, not an extra cost. If BHP Billiton wants to grow it has to carefully weigh up the cost of building a new mine against the potential reward. The above companies have engineers that design new technology every day. Some of them have no direct competition (Intuitive Surgical.)

4. High margins.

When your product is unique you can charge a lot for it. Google can charge a lot for its marketing services as no other internet company has its reach. Apple can charge a fair price for its iPad as no other product comes close to it.

Sometimes investors are guilty of thinking too much about what they do. This results in confusion and much thrashing about. It probably explains why I ended up with large chunks of my portfolios in banks, miners and even airlines.

As a personal investor you have huge advantages over funds. You can invest in anything, there are no portfolio weighting restrictions and you do not have to show results within any particular time frame. How many of us throw away these advantages by applying restrictions to our portfolio and over diversifying?

My understanding of investing is maturing. I have still not managed to offload industrials such as BP and BHP Billiton. I still have bank holdings. It is hard to sell securities that currently look so cheap. And there will come a day when these companies will outperform the market. But long term I am going to concentrate on beauties and leave the ordinary for the funds.

Going all in with Apple

2011-07-25T05:57:00.002Z

Last Friday I sold most of my Google position and bought more Apple. This makes my Apple holding my biggest position ever by quite some margin. Why did I do it? I was inspired by two facts:

1) Apple's free cash flow (FCF) per share was higher than Google's last quarter. I calculated Apple's at $11.23 and Google's at $8.07. However Google's share price is over $200 higher. This despite the fact the Apple is growing much faster. If Apple stopped growing right now it shares would still be fairly priced.

2) Charlie Munger said I could. Seriously at a recent Berkshire Hathaway shareholder meeting Charlie said that he once had over 100% of his portfolio in one stock (meaning that he used leverage.) He thinks that it is less risky to invest in one company you know really well that to diversify into a number of companies that you know less well. On the whole I agree with him so my aggressive portfolio is now 100% Apple. However I am not sure that I would recommend putting all your savings in one company. Although you may understand the company and its market you may not understand all the macro-economic factors that could affect it. Investing in a handful of promising opportunities that you really understand may be the best option.

One problem with having only one stock in a portfolio is that it makes for painful viewing when the stock is having a bad week or month. However I have other portfolios I can look at and I am not one to panic.

When the next iPhone is announced the stock should get a modest boost and iPhone and iPad should sell like hotcakes in the 2011 Christmas season.

Now that I have a big position it is time to hold on and enjoy the ride.

Is Apple fully ripe?

2011-07-22T06:33:00.002Z

Another blow-out quarter from Apple, another market under-reaction.

Here is one key statistic: Free cash flow for the last quarter was over $10 per share. If you annualise that to $40 Apple has a Price/FCF ratio of under 10! And yet earnings growth was over 100%!

The reason Apple is so cheap is clear - its market cap. of $358B. How can a company that big grow fast in the future?

To get the market cap. in perspective, Research In Motion (the Blackberry maker) has a market cap. of $15B and Nokia has a market cap. of $22B. Microsoft has a market cap. of $228B

In order to continue growing at stellar rates Apple is going to have to grow its markets and enter new markets. For example the iPhone has grown the overall smartphone market as well as stolen market share from Nokia and others. The iPad has virtually single handedly resurrected the table market.

There are rumours that Apple is going to enter the TV market - probably by combining its Apple TV box with a flat screen. While this could be lucrative it is not going to be the next iPad - it would be for consumers rather than business and consumers do not change TVs as often as computers.

Could Apple double its earnings in the next couple of years? Quite easily and without entering any new markets. Apple has less than 10% of the global mobile phone market and less than 10% of the global PC market so there is plenty of room for growth there. Apple also makes bigger margins on its products than competitors as they are all at the premium end of the market.

So here is the problem. The numbers say that Apple is amazingly cheap. The market cap. says that Apples growth must slow.

But here is the odd thing: Apple is cheap even if the growth slows to 10%.

The risk - reward ratio is phenomenal for this one - still a screaming buy.

My smartphone position

2011-07-08T05:49:00.002Z

When you have a significant idea take a significant position.

My idea is that Apple (AAPL) and Google (GOOG) are cheap - very cheap. Here are my recent purchases to build up a position:

05 Jan 2010 - Buy 3 GOOG @ $624
13 Jan 2010 - Buy 4 GOOG @ $572
09 Apr 2010 - Buy 9 AAPL @ $251
12 Jul 2010 - Buy 4 GOOG @ $507
26 Jul 2010 - Buy 6 AAPL @ $273
19 Jan 2011 - Buy 8 AAPL @ $342
10 Jun 2011 - Buy 5 GOOG @ $512
07 Jul 2011 - Buy 6 AAPL @ $358

My GOOG position is showing a slight gain and AAPL is showing a significant gain.

I thought I would plug some numbers into Benjamin Graham's stock valuation formula to see if they are still cheap.

Here are the figures I am going to use:

AAPL EPS = 21
AAPL Growth = 20%

Using the simple formula (see here)

Value = 21 * (8.5 + (20 * 2)) = $1018

This takes no account of the amount of cash per share AAPL has and uses the GAAP figures and a conservative growth estimate!

Now lets try the more complicated formula that takes into account current bond yields:

Value = ((21 * (8.5 + (20 * 2))) * 4.4) / 2.67 = $1678

So AAPL looks pretty cheap at its current price of $357!

Now I'll plug in GOOG's figures:

EPS = 26
Growth = 15

Value = 26 * (8.5 + (15 * 2)) = $1001

And the more complex formula gives a value of $1649

I wonder if any analyst would be brave enough to publish these figures as a target price? The answer is no as they have to save their face.

Of course the risk is that the companies will not keep growing over the next 10 years. However even if the companies only grow at a rate of 10% over the next 10 years they are still undervalued.

I have seen several articles on how to play the smartphone revolution by investing in component manufacturers like Qualcomm and Samsung. Well you could but why not just invest in the players at the top of the value chain? They have the brand and the momentum whereas a component manufacturer can be silently replaced without the public caring.

GOOG and AAPL are cheap - very cheap. This is my position on smartphones.

Sorting the wheat from the chaff

2011-06-08T05:42:00.002Z

I have mentioned previously that I want to eliminate mediocre stocks from my main portfolio this year, especially as growth companies like Google and Apple are so cheap at the moment.

I am going to do a quick comparison of four companies that I own with a view to selling some of them to invest in Google.

1. eBay

eBay is one of my oldest holdings and I have learnt some valuable lessons while holding it. For example, just because a company recently had a trailing PE of 100 doesn't mean that it must be cheap when it has a trailing PE of 40. By buying eBay when it had a PE of 40 I had little margin of safety when the growth slowed and the fall in the share price was painful. eBay has recovered somewhat and I am now sitting on a 30% loss.

eBay is forecast to earn about $2 non-GAAP this year giving it a 2011 PE of 15 or about 13 if you subtract the cash per share from the share price.

Here is the scorecard:

Growth Potential: 6
Risk: 6 (low score means high risk.)
Valuation: 7

This give eBay a score of 19 out of 30.

Barclays

Barclays is one of the few British banks that emerged from the Credit Crunch of 2008 with its pride intact. It accepted a large investment from a Middle Eastern fund rather than use government assistance and as a result is still in control of its own destiny. However it is currently a low yielder, still has a lot of bad debt and operates in a very competitive marketplace.

Barclays could earn about 45 pence this year giving a 2011 PE of about 6!

Here is the scorecard:

Growth Potential: 5
Risk: 6
Valuation: 10

So Barclays scores 21 out of 30.

BP

Everyone knows that 2010 was not a good year for BP. However the oil spill in the Gulf of Mexico may end up costing less than analysts feared and the current price of oil means that BP is still making a very sizable profit.

BP could make 70 pence this year giving a 2011 PE of 6.5!

So the scores are:

Growth Potential: 5
Risk: 5
Valuation: 10

Giving BP a score of 20.

And finally the big one:

Google

I have recently written about the monster that is Google. It is huge and it is still growing at 30%. Android is taking off and with the Chromebook Google is trying to access the enormous PC market. There is plenty of growth left for Google.

Google could earn $40 in 2011 giving it a 2011 PE of 13 or 10 if you subtract the cash per share from the share price.

Here are the scores:

Growth Potential: 8
Risk: 7
Valuation: 8

Google gets a score of 23.

Conclusion

Barclays and BP are very cheap and highly profitable. Across the pond Google is cheaper the eBay and growing much faster.

It looks like I should hold on to the British pair for now but consider offloading eBay for Google. Does Google's better score justify the trading cost of changing position? Probably. Google is a growth machine and is much more central to the internet economy than eBay. I have some and I want some more.

Get switched on

2011-05-14T06:14:00.002Z

Hello again!

I have been keeping a low profile, letting my investments look after themselves. It is now time to do a health check on a couple of my stocks, checking that they are still as attractive as when I first bought them.

Here are my thoughts:

Apple - ridiculously cheap. Maybe people think it is too big to grow but it has an enormous PC market to eat up and enormous populations like India and China to sell phones to. Once people get used to the iOs platform it will be inconvenient for them to switch to Android or Phone 7. This means hundreds of millions of people will be buying Apple products as long as Apple keeps on making them desirable. That is the risk - what if a competitor releases a hit product? Well the Android smartphone is that product but this world is big enough for both of them. Blackberry and Nokia will have to feed off the remaining scraps.

Google - cheap and plenty of growth left. If you think that Google is too big to grow then you are wrong. Google has an ability to innovate that Microsoft can only dream of. Take the upcoming Chromebook. This is a cheap netbook that stores all your data online (in the cloud) rather than locally. Most of us have had an experience of losing data because of a hard disk failure or accidental deletion. With the Chromebook this will become a thing of the past. What about when you cannot access the internet? I suspect that there will be a way of caching your work locally and working offline for a time. However if you get a 3G Chromebook it is unlikely that both your broadband and mobile operator will be unavailable at the same time.

How hard would it have been for Microsoft to produce a product like this? Not very hard actually but Microsoft seems to be stuck in an eternal cycle of endless iterations and incremental improvements rather than innovation. The world is changing and Microsoft is being left behind. Unless it accepts that it needs to get involved in the hardware side and produce products that look and feel good as well as having good software it is going to get beaten by Apple and Google.

Microsoft has finally realised this with its Phone 7 product and so is collaborating with Nokia. It had better do the same with PCs or it will be toast.

One other big advantage of the Chromebook is that it updates itself. Can you remember giving up a weekend to re-install the latest version of Windows? This will also be a thing of the past as the Chromebook quietly updates itself in the background.

Google seem to realise that people don't want to think about the operating system - they just want it to work and quietly let them get on with surfing the Web or listening to music.

Google realise this with their Chrome browser. People don't want to think about a browser, they just want to surf the Net as fast as possible with as much screen real estate as possible. People don't want to spend an hour upgrading to the latest browser version so Chrome quietly does this for you in the background. And the better people's internet experience the more time they will spend online potentially clicking on Google's sponsored links.

There will come a time when Google and Apple are the giants of the consumer PC world and Microsoft will be able to play the role of innovative competitor. The path to that situation should be a fun one for Google and Apple investors.

So there you have it. Leave your boring, low-yielding savings accounts behind and invest in the future!

Eating forbidden fruit

2011-01-21T07:22:00.002Z

Sometimes the market offers you an opportunity that cannot be resisted. This opportunity is not some obscure stock that hours of research will uncover as being undervalued. It is Apple - the world famous maker of computers and smartphones.

Every investor is familiar with the Apple story, everyone knows how its stock has performed over the last five years and many people realise that it is now the second largest company in the world by market capitalisation. So the obvious conclusion is: investors have already missed the boat and Apple is now too big to grow quickly.

I beg to differ. The personal computer market is enormous and Apple is a small player in it (in 2009 it had 7.4% of the US market.) Profits are traditionally split between the OEMs (like HP and Dell) and Microsoft who supplies the software. However when Apple sell a box they supply the hardware and software and so can make a better margin. The hardware and software are designed to work together and so the overall result can be more pleasing.

I imagine that the iPad is already eating into this market somewhat and as consumers grow used to Apple products they are then more likely to look to the rest of the range for their computer needs (the halo affect.)

So how about the numbers?

Apple earned $6.43 per share in Q4 2010. Analysts predict earnings of $23 in 2011 but I think this is much too conservative. I predict earnings of $30 as the iPhone and iPad continue to sell like hot cakes. Cash and securities per share is now about $60. Subtract $60 from the share price of 330 to get an enterprice value of $270. This gives a 2011 PE of 9!

Apple is now cheaper than last time I looked and yet the growth is not slowing down. I don't understand why it is valued so cheaply but I think that the market is wrong. The Apple shares I bought last year are now showing a 30% gain. I have now bought some more.

Do your own research and then buy Apple!

2010 in review - Genzyme bounces back

2011-01-11T07:03:00.002Z

Another year, another unpredictable stock market. How was it for you?

My main portfolio grew by 19%, largely thanks to Genzyme which jumped up when Sanofi-aventis made a hostile bid for it. BHP Billiton also kept on rising, as it has since I bought it four years ago.

My "aggressive" portfolio grew 26% thanks to rises in Apple and Google. It is now almost entirely composed of these two companies as I flew to quality.

My strategy for 2011 is to continue sorting the wheat from the chaff in my portfolios. Why hold mediocre stocks merely for the sake of diversification when you can hold quality growth stocks like Google, Apple and Oracle? The diversification requirement can be met by having a large chunk of your portfolio in an index fund.

In this vein I will eventually unload BP and Barclays when the time is right. BP is a fine company but is exposed to the risk of big accidents as we are all now very aware. I am also unsure of the ethics of investing in a company that is directly and indirectly responsible for so much global pollution (even when accidents do not occur.) I don't see any reason to hold BP individually rather than an index of petroleum companies or of large high-yielding corporations.

Barclays did better than most banks in the financial crises of 2008 but is now a low-yielder and I don't think I understand enough about banking to justify investing in individual companies. Again it would be better to buy into an ETF of financial stocks.

Holding BHP Billiton (BLT) for 4 years has demonstrated the advantage of holding on to a winner rather than taking a quick profit. I could have taken a 50% gain after a year or so (and re-invested the profits in rubbish like banks) but instead I held on for the ride and am now sitting on a gain of over 100%. How many FTSE 100 companies have done that in the last four years? BLT is large enough to act as a mining ETF in itself and has a decent yield so I will be holding for now, despite some ethical concerns about the amount of pollution it causes.

I now have to decide what to do this my Genzyme (GENZ) shares. When news of the Sanofi bid first emerged I sold half my holding to lock in a decent profit. Do I sell the rest now or wait for a higher bid? I expect I will sell in the near future and re-invest in either Johnson and Johnson or Berkshire Hathaway. Watch this space for a comparison of the three companies.

Looking forward I think smartphones will continue their explosive growth in 2011 and so I am happy to have large position in Apple and Google. I will take a look at Qualcomm in the near future as they supply the chipsets that many Android phones are based on.

Happy value investing in 2011!

Safety first

2010-10-02T06:36:00.002Z

Well it turned out that performing a detailed investigation into SSE while staying awake was too hard. Instead I have considered some high level factors and decided on National Grid.

1. NG is growing faster. In 2009/10 SSE reported EPS growth of only 2% while NG grew 14%. Although SSE's compound growth for the last 12 years is 12%, growth has levelled off in the last two years. NG has grown in a more consistent way over the last 5 years but obviously not at a rate of 14% per year.

2. NG is lower risk. While SSE has a customer base it needs to keep hold of and large generating operations that are subject to one-off events, NG has a more predictable operation that is not subject to customer demand in the UK. It is everything a utility should be: predictable, high - yielding and without competition in its sector.

That is all the analysis I am going to do at this point. Perhaps utilities do not require as much research as other investments due to their intrinsic defensiveness and lack of competition.

As long as they keep yielding a 6% dividend that rises faster than inflation then I and most other investors will be happy.

Utilising Utilities

2010-09-11T06:34:00.003Z

Don't you just love utility stocks? A big fat dividend, steady growth and an economic downturn has little effect on them.

The downside is that growth is slow and only achieved through massive capital investment. But their defensive nature and high yield means that they deserve a place in most portfolios.

Unbelievably my main portfolio does not yet contain a utility. Having recently cashed in on Genzyme's buyout speculation I am in a position to buy into one. But which one to choose?

One problem is that foreign companies keep buying British utilities so the choice of companies listed on the LSE is slightly limited. However there are two promising possibilities I am going to investigate:

Scottish and Southern Energy (SSE)

SSE is one of the leading energy companies in the UK and the second largest energy supplier. It is the UK's largest generator from renewable sources. Here are the basics:

Market Cap: £10.8 Billion

Trailing PE: 10

Dividend yield: 6%

Growth: ~3%

Typically of a utility SSE has a reasonable PE, a nice yield and low growth.

Now a quick summary of the other contender:

National Grid

National Grid is an electricity and gas company which operates the electrical grid in the UK and North East USA. Here are the fundamentals:

Market Cap: £20 Billion

Trailing PE: 11

Dividend yield: 6%

Growth: ~7%

So National Grid is more expensive but is growing faster. Both companies have a great dividend yield.

Next up - a more detailed look at SSE.

Low Hanging Fruit

2010-07-24T05:57:00.002Z

The market is a funny beast.

This week Apple released amazing results with revenue growth of 60% to name just one highlight. The market's reaction was "whatever!"

Then eBay released a decidedly average forecast and the market's reaction was to jump up 6%.

I know it is all about how the results match expectations but surely anyone can see that Apple is cheap at these levels?

The fact that AAPL shares have increased 500% over the last 5 years perhaps makes people think that they have already missed the ride. But could it be that the ride is just reaching top speed?

Let's assume that Apple earns $20 per share over the next 12 months. Then subtract the cash and securities mountain of $50 per share from the share price to get an "enterprise" price of $210.

What's this? A forward PE of about 10? For this global monster which could be eating Microsoft's enormous PC market share for years to come?

The AAPL results are so good that the executives seem to be doing their best to underplay them. For example they are not bothering to give a non-GAAP EPS (which I calculated at about $3.85) or highlight the huge difference between income and cash flow ($3.25 B compared to $4.8 B.)

Should I sell my EBAY shares and buy more AAPL? Maybe but I am trying to resist the urge to trade. When I bought EBAY at $44 per share about 5 years ago I thought I was getting a once-in-a-lifetime opportunity. And then the EPS growth disappeared and the share price plummeted.

I can't see this happening to Apple but I could be wrong. However if you are looking for a risk / reward ratio that is crazily balanced in your favour look no further than AAPL at these levels.

Doubling up on Google

2010-07-14T06:21:00.002Z

I have been lying low recently, concentrating on other things while keeping half an eye on the market. And it has been a pretty depressing time market-wise with the gains of 2010 gradually ebbing away as the market's confidence disappeared. Google has been typical of stocks in the first half, peaking above $600 when I first bought into it in January and then drifting down all the way to $450 recently.

If I had had a stop loss on GOOG at say 20% I would have stopped out by now and would no longer has a stake in one of the safest growth prospects around. Rather than panic and give up on GOOG I have taken advantage of this low price and bought some more! As Warren Buffet is fond of saying, the attractiveness of a stock increases and the risk decreases as the price goes down. And to paraphrase another Buffet quote, with stocks you don't get extra marks for making hard decisions rather than easy ones. So rather than gamble on some new Biotech whose one drug may or may not be approved I can buy more GOOG with a trailing PE of 20 and a growth rate of almost 20%.

Google is too big to grow at the rates it did in the past but, as it helps the continuing trend of working online rather than off with products like Chrome browser, Chrome OS and Google Docs, it should continue to gain market share in a growing market.

Facebook has been compared to Google as the next big tech IPO. But Facebook is just a website whose adverts are ignored most of the time. Google's search engine is a backbone of the Internet whose sponsored results are often just what the user is looking for. Google is a monster and I want to share in its growth.

GOOG - a stock for the next 20 years. Buy and then buy some more.

Valeant Pharmaceuticals

2010-04-10T06:32:00.002Z

After a break for Easter it is time to conclude my battle of the growth stocks. Last up is Valeant (VRX), a speciality pharmaceutical company that also has a branded generics branch.

Michael Pearson has recently taken over VRX and has been turning it around. He has been aggressively buying back stock, restructuring the debt and acquiring new products. The strategy appears to be working as revenue is up 30% year on year while the share price has more than doubled.

Here are the fundamentals:

Market Cap: $3.4 Billion

Dividend Yield: 0%

Cash: $80 Million

2010 PE: 16

Predicted Growth Rate: 20% annual

The fundamentals looks great but when you look more carefully at the balance sheet things get a bit messy. VRX has almost $1 Billion in liabilities and a current ratio of only 1.4. Michael Pearson is using debt to buy back shares, pay off old debt and acquire more companies. This may be the right thing to do but it does increase the risk. For someone who does not have the time to analyse the debt structure all these liabilities are a bit of a turn off.

The other risk is that Michael Pearson may find greener pastures elsewhere. VRX's turnaround seems to be based on his energy and vision rather than any competitive advantages that VRX has. Therefore it does not have the protective moat around it business that Warren Buffett loves to talk about.

Here is the scorecard:

Growth Potential: 7

Risk: 5 (low score means high risk.)

Valuation: 7

That gives VRX a score of 19 out of 30.

And now for a confession. I have already made my decision and bought Apple. Intuitive Surgical and Amazon were too expense. VRX lacked a competitive advantage. Apple has great products, millions of loyal fans and is using its success with iPods and iPhones to introduce the public to its more expensive, higher margin products like iMacs. Most importantly the valuation is reasonable. I think subconsciously people think the stock is expensive as it over $200. The fundamentals suggest otherwise.

I should have the opportunity to buy into another growth company this year so I will be keeping an eye on Amazon and Intuitive Surgical.

Thanks for reading!

Amazing Amazon

2010-03-13T07:44:00.001Z

What can I say about Amazon?

It is expensive and it is lovely, just like a pair of Armani jeans or a Lamborghini.

All CEO Jeff Bezos talks about the is Kindle - Amazon's eBook reader. And you can see why. The statistic that 6 eBooks are sold for every 10 physical books where both are available is astounding. Only a couple of million Kindles have been sold so far so Kindle owners really do read!

There is no doubt that in the long run books are going digital. Amazon want to do to eBook readers what Apple did to MP3 players - bring them to the mass market and own the space. If they achieve that goal there is no doubt that the current market price will appear cheap.

However I don't think everyone will be willing to fork out $250 for a black and white book reader when you can get an iPod touch for $200. But if everyone starts using the iPhone Kindle app. then that would be something.

That brings me to the fundamentals:

Market Cap: $60 Billion

Dividend Yield: 0%

Cash: $6 Billion

2010 PE: 45

Predicted Growth Rate: 30% annual

Amazon is not cheap. It hasn't been cheap for a long time and I don't think that is about to change. But it is growing at a rate of over 30% and seems able to sustain that over the medium term.

Some might call it speculative but I want some!

Here is the scorecard:

Growth Potential: 9

Risk: 8

Valuation: 4

That give Amazon a score of 21 out of 30.

Next up is Valeant Pharmaceuticals.

Invest Intuitively

2010-03-06T07:15:00.002Z

Now for part 2 of my 4 part "battle of the growth stocks" series.

Intuitive Surgical (ISRG)

ISRG makes robots for performing surgery. The robots are controlled by a surgeon sat in the same room as the patient but the fact that all the surgery is actually performed by the robot arms allows the surgeon much more control over the incisions and makes the operations much less invasive. The benefits in terms of patient recovery time are enormous.

There are over 1400 da Vinci Surgical Systems installed worldwide. Best of all, once a system is sold ISRG get revenue from every operation as it sells the disposable parts. This recurring revenue now accounts for over 50% of total revenue and the proportion is growing.

Even in the turbulent economy of last year ISRG sold 338 systems - quite an astounding figure.

ISRG is the global leader in robot surgery. Once a hospital has invested in the system and the associated staff training it would be financially painful to then change to a competing product. This gives ISRG a very strong position.

There is no doubt that ISRG is a very attractive company. Here are the fundamentals:

Market Cap: $14 Billion

Dividend Yield: 0%

Cash: $1.2 Billion

2010 PE: 45

Predicted Growth Rate: 25% annual

There is a feeling that, in terms of the ISRG share price, the ship has already left the dock. When it was under $100 last spring the valuation was compelling but with the shares selling for $360 it hard to see ISRG as a bargain. The ship may come back to the dock at some point in the future of course but a purchase at the current price would be speculative.

So the results:

Growth Potential: 7

Risk: 8

Valuation: 4

That give ISRG a score of 19 out of 30.

Next is Amazon.

Apple - where style and technology meet

2010-02-27T07:26:00.003Z

There has been a change in the line up for my growth stock comparison.

Out goes Oracle as I have already covered it and will buy into it this year. In comes Valeant Pharmaceuticals. I was alerted to the potential of Valeant a few days ago and so far I like what I see.

Anyway first up is Apple.

The Apple share price has increased in eight years from $10 to over $200. That is pretty spectacular but does not mean that the fun is now over.

Here are the basics:

Market Cap: $185 Billion

Dividend Yield: 0%

Cash: $40 Billion

2010 PE: 17

Predicted Growth Rate: 20% annual

So Apple is enormous, has a huge stash of cash, is growing and still has a reasonable valuation.

The Apple brand is rated as the 20th most recognised in the world and there is a large core of Apple fanatics who would never buy a Windows device as a matter of principle.

What about risks? Consumers are a fickle bunch and if someone else manages to produce something stylish and useful who is to say that they won't desert the iPod and iPhone in droves for the new fad? Some would but the fact that only Apple devices have iTunes and it is a bit of a hassle to export all your music to MP3 many (including me) would not consider that a nice option.

I have mentioned before that controlling the hardware and the software of its MacBooks and iMacs gives Apple a huge advantage over Microsoft which can only produce the software and hope that the oems make the hardware appealing.

One more thought: Apple has over $40 per share in cash. If you adjust the share price accordingly the forward PE reduces to 15.

So here are the results (out of 10 where higher is better)

Growth Potential: 7

Risk: 6

Valuation: 8

This gives Apple a score of 21 out of 30.

Next up: Intuitive Surgical

The Battle of the Best

2010-02-24T07:26:00.002Z

I am part way through converting my growth portfolio from bargains to quality. Out went British Airways and CSR and in came Google. The timing of the Google purchase was not good as they have since declined over 10% but when you are buying to keep for the next ten years that does not matter so much.

Next step is to ditch Dana Petroleum and some remains of British Banks to buy into an American Beauty.

There are four possibilities. They all have fantastic global growth prospects, high to outrageous returns on invested capital and more cash than they know what to do with. Let's line them up:

1. Apple

Everyone knows how well Apple has been doing in the last five years or so. The question is can it maintain the momentum. If so then the current forward PE of under 20 is not expensive.

2. Amazon

Amazon is perhaps the most successful of the dot com boom companies. One recent survey had it as the 43rd biggest global brand which is quite something for a pure website. Recent financial reports have had analysts drooling into their coffee but the forward PE of 30 is not cheap.

3. Oracle

I have spoken about Oracle before. With increasing margins, share buybacks, dividends and a strong competitive position it is the sort of company Warren Buffet would love if he understood technology. Perhaps the safest choice of the four.

4. Intuitive Surgical

ISRG is the joker in the pack. It will never make the top 100 brands but as long as it stays number one in the field of robotic surgery its future is extremely bright. The fact that every robot sold leads to a long stream of earnings from the disposable operation equipment gives it wonderful financial prospects. With a forward PE of over 30 and 2009 sales of "only" $1 Billion ISRG is the one that could become a "10 - bagger" in the next twenty years or so.

I will post on each company separately in the near future.

Let the battle begin!

Income Investing

2010-02-19T08:23:00.002Z

Time for a heads up. I am still alive and investing though yet to get control of my early morning blogging time.

With interest rates on saving accounts being truly pathetic at the moment surely now is a good time for people to start investing in defensive stocks purely for the yield? It is, but it won't happen as for most people the stock market is a dangerous wilderness best left to the professionals.

For myself I am building an income portfolio that will one day pay for a family holiday every year. It would struggle to pay for a monthly fish supper at the moment but investing is for the patient!

Anyway the idea is to build up a portfolio of 10 diversified stocks and let the dividends build up in the account rather than re-invest them like I normally do.

As normal real life proved to be rather messy and at present my RBS holdings are showing a huge loss and not likely to yield anything for a while. On the other hand my Barclays shares, luckily bought in the first half of last year, are showing a huge profit and have started yielding. Other holdings like Tesco, BP and British Land are doing fine and throwing off nice dividends.

One British company I have yet to invest in is GlaxoSmithKline. However having briefly looked at its latest report I think I will soon be a part owner of this pharmaceutical giant. It has an enormous diversity of products, 10% earnings yield and a 5% dividend yield coupled with single digit sales growth and a CEO focussed on costs and productivity.

As a final icing on the cake it pays dividends quarterly. This means that if you built up a portfolio split evenly between GSK, BP and British Land you would get a 5% yield, some diversification and a dividend on every month of the year. What is not to like?

As much as I like investing I have to admit that only long term savings should be invested, even if you stick to defensive companies like the 3 above. So for now I will have to stomach getting about half of one percent interest on our savings and just enjoy BP and the like paying for our monthly fish supper!

eBay looking up

2010-01-21T07:25:00.002Z

I have probably written more about eBay than any other company on this blog. When I first started investing my comments on eBay were filled with optimism about the near term prospects of the stock. Then as the stock continuously fell my posts became more resigned and circumspect.

It could be that eBay is now at an inflection point between pessimism and optimism. The 2009 Q4 results were released last night and marketplace revenue has finally returned to growth.

However it must be remembered that Q4 2008 was the peak of the credit crisis and for the next 3 quarters or so eBay will have some easy comparisons.

So the Q4 2010 results will probably be a better indication of how eBay is growing.

In the meantime some exciting things are happening. In particular payment revenue growth is accelerating. If PayPal can become the de facto payment method for online transactions then the sky is the limit. eBay are away of this and now talk about payments first in all reports. Users who sell on eBay will end up with a PayPal balance. It is much more convenient if they can spend this cash directly using PayPal rather than having to transfer the balance over to another account, incurring fees in the process.

In terms of marketplaces John Donahoe (CEO) is rightly totally focused on the user experience. I was so gratified to hear that advertising revenue is down as eBay optimise the user experience. Hopefully they will get rid of those annoying and distracting banner ads sometime soon.

It looks like Amazon has the big ticket B2C (business to consumer) market pretty well wrapped up but if eBay can stay in the C2C and more obscure B2C markets then it will have a valuable niche.

How investors would like to see eBay trade at Amazon like multiples at some point. If PayPal growth keeps accelerating that could become a reality.

2009 in review

2010-01-05T07:32:00.002Z

Hello again and sorry for the lack of posts.

One of my resolutions for 2010 is to get control of my early morning time and blog more often. We will see what happens...

So what was 2009 like for me investing wise?

Well it was a lot better than 2008!

My biggest portfolio made a gain of 0% largely thanks to Genzyme having a year to forget. That of course is the problem with being very exposed to one stock but Genzyme should be OK long term. Impressive gains by Tesco and BHP Billiton compensated for Genzyme's misfortunes.

Another small portfolio of mine gained almost 50%, largely down to the recovery of Barclays. My third portfolio gained 27%, again mainly down to the recovery of British holdings such as British Airways and CSR.

Did I learn anything? Well I think the penny is finally beginning to drop. Stop Trading! So many times I have sold a great share that is showing a healthy gain to buy into a "bargain" stock that then keeps on falling. I have been in and out of Google (GOOG) twice and both times I made a nice profit but if I had just stayed in GOOG my performance would have been so much better. At one point a few years ago I held 12 shares of GOOG. If only I still had those 12 shares!

Warren Buffet gives the example of how someone holding one Coke share through most of the last century would have become a millionare with that share alone (although after stock splits he would be left with a lot more shares of course.)

Coke used to be the biggest brand but Google is now. In the UK at the moment they are advertising their Chrome browser on billboards. When was the last time you saw an advert for free software? Google take their quest for market share seriously.

My task for the next 3 weeks is to get 6 shares of GOOG before the Q4 earnings come out. And then keep the shares for at least 10 years!

Funding the purchases will require some selling at a loss; never an enjoyable experience but if I will buy into risky shares like British Airways or RBS that is the consequence.

So a resolution for 2010 is to end the year with significant amounts of Google, Oracle and Apple. These three companies will not be requiring government aid in the near future!

Oracle - the future is bright

2009-09-12T06:54:00.002Z

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

2009-09-05T07:24:00.002Z

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

2009-05-09T06:34:00.002Z

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

2009-05-02T05:41:00.003Z

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

2009-02-12T07:11:00.002Z

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

2009-01-24T07:42:00.003Z

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!

2009-01-17T07:22:00.003Z

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!

A rest from stocks

2008-08-20T06:31:00.002Z

I am having a bit of a rest from thinking about stocks and shares in August.

That is the beauty of being a long term investor. Occasionally you can just keep half an eye on the latest prices and not spend any time digging deeper. As long as you are invested in sound companies you can rest assured that they are not about to fall off a precipice financially speaking.

While I have been resting not much has changed. Banks have been bouncing around as normal and are still on ridiculous PE ratios. The news flow is still mainly bad.

Genzyme got a nice kick when Cramer recommended it. It is now showing a 30% gain over 18 months and is my biggest holding. I will not be selling. I still think that GENZ has an incredible risk reward ratio and is a great foundation for the rest of the portfolio.

I am still coveting Google, Apple and Oracle. These global brands all have a similarly great risk reward ratio and a fantastic balance sheet. They are stocks to be bought and not sold.

Happy holidays.

The chickens come home to roost

2008-08-07T05:56:00.002Z

This time last year as the credit crunch was starting in earnest I was wondering what all the fuss was about. Now as the UK banks report their first half results the results of the dislocation are easy to see.

HBOS reported EPS down 52% when including various negative fair value adjustments to their assets. Not including these assets EPS was down 13% at 47p.

Using that 47p figure gives HBOS a 2008 PE of 3.5! And the directors guide for a stronger second half of 2008.

I believe that UK banks are very cheap here. Over the last four months I have been buying into Barclays and RBS on a monthly basis. My Barclays shares are now inching towards break even. The bottom may have been hit for the banks this summer.

It has been hard to keep buying banks when their price keeps falling and the news flow is terrible. However Warren Buffet's greatest investments were made by buying into companies that had suffered a temporary glitch such as GEICO when it almost went bankrupt in the 70s or Coke when it changed cola flavour in the 80s.

I believe this is a temporary glitch for the banks. The are making mountains of profit even now!

Lets review their position in 12 months time and see if I am right!

Genzyme juggernaut rolls on

2008-07-26T06:15:00.003Z

Genzyme reported Q2 results this week. With revenue up 21% on a like for like basis they were as solid as ever.

The amazing thing about Genzyme is that all its products keep growing on a quarterly basis, nearly all by double figure amounts. As it has about ten products this growth is diversified and consistent.

Genzyme generates excess cash which it used to invest in manufacturing capacity, strengthen its pipeline with acquisitions and buy back shares.

Genzyme is available for a 2008 PE of less than 20. As management have publicly stated that they are aiming to grow the EPS by 20% yearly up to 2011 this make Genzyme a great buy. It has defensive qualities and it is growing.

Last year I doubled up on Genzyme. With the declines of RBS and eBay it is now by biggest holding, showing a 20% gain while most of my other holdings have been falling.

Am I tempted to sell any? Absolutely not! My Genzyme shares are going nowhere. I have learnt by painful experience that taking a quick profit only guarantees that you never make spectacular gains.

Genzyme is a keeper.

eBay growth slows (again)

2008-07-18T05:30:00.002Z

eBay reported Q2 results on Wednesday night and once again I wondered why they didn't just refer us to the Q1 results.

Marketplace growth is slowing, PayPal is doing great and Skype is growing fast but decelerating rapidly.

The headline numbers look good with revenue growth of 20% and EPS growth of 25%. However if you take out the FX benefits, revenue growth was only 13%. Even worse, GMV growth was a mere 4%.

eBay is of course a victim of its own success - its ubiquity in the marketplace sector makes rapid growth hard to achieve.

The market took a dim view of eBay's latest figures - yesterday the stock dropped almost 14%!

At $24.20 eBay is on a 2008 pro forma PE of 14. Astoundingly low for eBay and surely the stock is good value at these levels?

One day the multiple contraction will end and then if the share price can grow with the EPS at 20% I will be a happy investor.

For the moment I will just have to be a patient one.

AstraZeneca PLC

2008-07-15T05:36:00.002Z

Time for a quick look at another FTSE100 constituent.

And, for once, an interesting one!

AstraZeneca (AZN) is a large, diversified pharmaceutical company.

The market cap. is about £34 Billion, the yield is about 4% and the PE about 10.

AZN markets a bewildering array of drugs, some of which are growing some of which are not. The number of drugs on its books makes it hard to analyse but does lower the risk of a single drug falling out of favour.

AZN has been buying back its own shares aggressively recently.

In the last quarter EPS grew about 10% and it is submitting 3 new drug applications this year.

That is a very short and dry summary of AZN. But overall I like it! As a defensive portfolio member with a healthy dividend yield it has a place.

One to add to the wish list.

A pretty picture

2008-07-06T06:20:00.003Z

They say that a picture speaks a hundred words. Well what does this picture say?

To me it says stop thinking about your portfolio for a few months. The market is ugly, valuations seem almost meaningless and who knows where the bottom is. Those who moved to cash at some point in the last year are looking clever. However I don't attempt to time the market so I just have to grin and bear it.

The one consolation is that my performance is more or less in line with the market. In fact as I have a large stake in Genzyme which has proved very resilient my performance may be slightly better.

As I am not a trader this may be a good time to concentrate on home improvements and gardening and let the stock market do its thing until it settles down again. Hopefully some sort of sanity will be restored in the autumn.

This is not time to give up on the stock market. It is a great time to buy into high quality companies on a monthly basis. That way at least one of your purchases will be near the bottom and in the meantime you will be averaging down.

Tesco at 360p looks good to me and yes I am practising what I preach, buying some more every month.

Hopefully in five years I will be able to look back and think about the bargains I got in the summer of 2008!

One final point. This decade is starting to look like a poor one for investing. The market may only end up where it started. But as I do not need to sell my shares this decade that is OK. I will keep buying cheap shares and hopefully the next decade will be more rewarding!

Aviva

2008-06-25T05:38:00.002Z

Aviva - owner of Norwich Union, is an financial services company with operations in Europe, Asia and America.

The market cap. is about £14 Billion, the PE is about 11 and the dividend yield is about 6%.

Aviva is an insurance company. And that is the problem. Insurance companies are very hard to value as their accounting is more complicated than most other types of companies. Also, as an insurance company you are selling a commodity - most consumers will take the cheapest quote they can get regardless of the brand. This makes it almost impossible to build some sort of competitive moat.

If I want to invest in an insurance company I will probably choose Berkshire Hathaway.

Having said that, Aviva is cheap, the brokers love it and the yield is generous.

One to keep at the back of my mind I think.

Antofagasta

2008-06-23T05:35:00.002Z

Here is another quick look at a FTSE 100 company.

Antofagasta (ANTO) is a Chilean based copper miner. It also has operations in Bolivia and Peru and also mines Molybdenum. ANTO also has railway and water distribution operations.

The market cap. is about £6.5 Billion, the PE is about 10 and the dividend yield is about 4%.

So is ANTO worth a second look? Probably, although other more diversified miners like BHP Billiton are available at a similar PE. Unless you have a specific reason to be bullish about copper prices BLT would be the safer option. ANTO obviously has greater political risk as it operates purely in South America. The chance of a serious political crisis is low but increased taxation on miners is always possible.

Another point to note is the volatility of the ANTO share price - in the last 6 month is has moved between 600p and 800p twice. The could present trading opportunities but could also be a bit disconcerting when it is plunging.

A final positive point - the 4% yield is generous for a miner.

One to keep an eye on I feel.

UK banks buy tip

2008-06-12T05:28:00.002Z

I hope you all acted on my buy tip for UK banks last summer. As you can see from the chart above when I said buy I actually meant sell!

Joking aside, the fear in the market when it comes to banking stocks is palpable. HBOS and RBS have both recently released updates stating that trading is inline with earlier guidance but the market has just ignored that reassurance and kept on selling.

The problem is simply that no one wants to buy banking shares at the moment. No one knows when the stream of bad news for banks will end and as a result the shares have been heavily discounted.

Is the sell off overdone? Probably, but then I have been saying that for a long time.

Incredibly HBOS has lost 75% of its value since its peak just over a year ago. I would have thought that discounts all the current bad news and lots more to come, including a UK recession.

It looks like UK banks are going to ruin my 2008 performance as well 2007's. I am still clinging on to my HBOS, LLoyds TSB, RBS and Barclays shares for the moment. They have to stop falling at some point... don't they?

AMEC

2008-06-07T07:05:00.002Z

At my current rate of progress through the FTSE100 I may just finish by the end of 2009! And by then the constituents would have changed considerably. So maybe I am permanently stuck in a trawl through forgettable FTSE100 companies! Aarrgh!

Anyway, AMEC is a consultancy supplying to the energy industry. So as you would imagine with any company involved in the energy industry it has done rather well in the last couple of years with the share price more than doubling.

The basics: Market cap. of almost £3 billion, the 2008 PE ratio is about 20 and the dividend yield is almost 2%.

AMEC is growing. Brokers forecast EPS growth of 35% in 2008 and 20% in 2009.

The growth rate is impressive but I am not a big fan of consultancies. That is because they are totally subject to the whims of their customers and the movements of their industry. Their differentiator is the quantity and experience of their consultants but human resources are rather dynamic by nature. Therefore this is not the enduring competitive moat that Warren Buffet so prizes.

I feel more inclined to yawn than invest.

Next please.

Alliance Trust PLC

2008-06-03T05:41:00.002Z

Not much time this morning but let me see if I can knock another FTSE100 constituent off.

Alliance Trust (ATST) is an investment trust. The market cap. is £2.3 billion, the dividend yield is about 2.5% and the PE ratio is about 40.

By selecting shares I am effectively forming my own investment fund so I won't be letting ATST make mistakes for me. If I wanted to stop selecting shares I would invest in a tracker fund or possible a number of ETFs.

Although ATST has a low expense ratio of 0.5% that is still 0.5% off all gains (or added to losses.)

Not for me,

Alliance & Leicester

2008-05-26T06:18:00.002Z

A bank! A UK Bank!

The market cap. is £1.8 Billion, the PE is 7 and the dividend yield is 13%!

I have had more than enough of UK banks in the last 12 months. That probably means that now is a good time to start buying, and in fact I am, but not into AL.

AL has been hit harder than most UK banks with its share price now just over one third its peak price a year ago. This is because AL is relatively small and derives a lower proportion of its funds from savers than other banks. Also it is fundamentally a mortgage bank which means it is receiving a double whammy from the credit crunch and the housing market slowdown.

It has had to make some nasty write downs recently but excluding the "one-time" write downs trading is in line with last year.

This probably makes AL a good choice for the risk-loving investor. I would certainly rather buy AL than some pre-sales biotech that might never make money.

However I already have holdings in Barclays, RBS, HBOS and Lloyds TSB (which explains a lot about my portfolios' performances last year!) I do not need another UK bank.

Bye Bye AL.

Admiral Group

2008-05-26T06:09:00.002Z

Admiral Group is a car insurance provider with operations in the UK, Spain and Italy.

The market cap. is about £2.5 Billion, the PE ratio is 18 and the dividend yield is about 2.5%.

Insurance is not the most exciting of industries but Warren Buffett has proved that there is a lot of money to be made. Admiral's revenue increased a healthy 14% in the last quarter but the PE ratio is rather high and the UK car insurance market is highly competitive.

If I do invest in insurance it will be into Buffett's Berkshire Hathaway company so I will leave this one.

Associated British Foods

2008-05-21T05:35:00.004Z

Next up from my trawl through the FTSE100 is Associated British Foods.

ABF owns a number of well known brands such as Kingsmill, Ovaltine, Twinings and Ryvita. It also owns the Primark chain of clothes stores.

The market cap. is about £7 billion, the PE ratio about 18 and the dividend yield about 2%.

So is ABF worth dwelling on? Probably not. Its defensive nature has resulted in a higher PE ratio than Tesco and I know which company I would rather own.

For those looking for exposure to the food industry the fact that over one third of the profits come from Primark is a bit disconcerting.

Revenue growth of 15% in the latest reporting period looks nice but unless the PE ratio comes down substantially I will ignore this one.

FTSE100 all over again

2008-05-20T05:14:00.002Z

A while ago I resolved to examine every company in the FTSE100 in turn, deciding for each one if I thought it was worth further investigation or not. I didn't get very far. There were too many dull companies to keep my attention.

Now I am going to try again but this time I will give only a very cursory look to the dull companies, rejecting them as soon as I decide they are uninvestable.

So here goes...

Anglo American

Aha an interesting one to start with!

AAL is a diversified miner in the same league as BHP Billiton and Rio Tinto. The market cap. is about £45 billion, the PE ratio is about 12 and the dividend yield is just under 2%.

AAL has six operations: platinum, diamonds, base metals, ferrous metals, coal and industrial minerals. In common with most miners its share price has been soaring, tripling over the last five years. But with brokers forecasting 2008 EPS of 320p its 2008 PE is only 11.

As with all miners, their attractiveness depends on your view on commodity prices over the next five years and longer. With continued rapid growth in China and India there is a case that current high prices will be maintained and could escalate further.

AAL's share price has gone nowhere in the last 12 months. So now could be a decent time to accumulate some.

I will mark this one as worthy of further investigation.

I have sinned dear Graham

2008-05-03T06:49:00.004Z

First, a bit of history:

A classic and underrated performance by Queen.

When Freddie was singing "I have sinned dear father" I don't think he was talking about his investment decisions.

However if I were to write a song to Benjamin Graham, the father of value investing, about some of my recent investing decisions I might have to include a similar line.

Selling a fantastic company like Google to buy into fair to middling companies like British Airways and CSR was crazy. I have been in and out of Google a number of times in the past 3 years. Overall I would have been better off just to have stayed in and enjoyed the bumpy ride.

The encouraging news is that Warren Buffet himself confesses to making similar mistakes - selling shares in a great company to lock in a profit and take advantage of a "bargain" elsewhere, only to end up buying back into the original company at a higher price.

Sometimes the hardest part of value investing is doing nothing. Buying and selling is fun. Watching from the sidelines can be quite fun but doesn't get the pulse racing.

So successful value investors have to make a trade-off: less fun but better results.

I am not going to rush into buying back into Google, but I will gradually build up a decent stake and this time I am going to keep it unless the stock becomes crazily overvalued.

As Warren once said, in investing you don't get better results just for making a hard decision. Buying into Google is an easy decision and all the better for it.

Wheat and chaff

2008-04-26T06:04:00.003Z

Here is another great peace of advice from Warren Buffet (paraphrased:)

"It is better to buy great businesses at fair prices than buy fair businesses at bargain prices."

If only this advice had permeated my consciousness a few year earlier!

My success rate with buying so-called bargains is very low. This is because when companies hit hard times their share prices fall further than you could imagine. This has happened to me so many times: eBay, Vodafone, British Airways and CSR are all examples that have or are making me suffer.

One rule for the future: when catching a falling knife spread your purchases over 6 to 12 months to lower the risk.

For now I am going to go through each company that I own shares in and categorise them as either a great or fair business.

Barclays, Lloyds TSB, RBS, HBOS

These are all banks! Need I say more! In good times banks generate lost of profits but in hard times when loans start defaulting or the value of their assets starts plummeting they become very unattractive. Now is one of those times. The need for banks is not going to dwindle and their time will come again in due course. For this reason I am still fond of them but they are definitely only a fair business.

British Airways

BA is an airline! Need I say more! Airlines normally demand a great deal of capital in order to make a small loss! But BA has a great competitive advantage - its terminal and landing slots at Heathrow. For long haul passengers to and from London, Heathrow is more convenient than Gatwick or Stansted. CEO Willie Walsh also has a close eye on costs. For these reasons I think the share price will recover but it is definitely only a fair business.

CSR

CSR has some great Bluetooth products. It is also branching out into WiFi and GPS. However it is in a dynamic industry and there are plenty of competitors. The continued proliferation of wireless devices gives CSR a tail wind but it has no enduring competitive advantage and can only be a fair business.

Dana Petroleum

Dana has a history of increasing its oil production on a yearly basis by a combination of acquisitions and exploration. The share price just jumped this week after a new discovery. However it is selling a commodity and has no brand and so must be a fair business rather than an excellent one.

eBay

I have written so much about eBay in the last few years. If only words written were proportional to share price gains! eBay is an excellent business. It has a strong brand, an enduring competitive advantage and generates excess amounts of cash. One day the market will start agreeing with me!

BP

BP sells a commodity and has no real enduring competitive advantage although its network of refineries could not be easily matched. It is also returning a lot of money to shareholders but it is still only a fair business.

Genzyme

Genzyme is a fantastic business! It has a diversified range of drugs which seems to increase the sales each year without fail. It also has an exciting pipeline and generates enough cash to supplement its pipeline with acquisitions when something interesting crops up. One to hold for the long term.

British Land

British Land does not have an enduring competitive advantage or a strong brand although it does own some great commercial properties which should generate an increasing rental yield ad infinitum. A nice company but not an excellent one.

Shire

I have yet to fully get my head around Shire. It is not in the same league as Genzyme as it does not have the product diversity and all its growth seems to be via acquisitions rather than organic. Only a fair business.

ARM

ARM supplies processor designs that set the standard for low power processors. As more and more products go digital the demand for processors is not going to decline. However ARM is dependant on the whims of its customers and needs to keep investing heavily in R&D. It is almost an excellent business.

Phew! I make that 13 businesses and only 2 of them qualified as excellent.

I now need to find some excellent companies that I don't own. I am pretty sure that Google is one. Finding British examples may prove more difficult but Tescos looks good.

So the five year plan: ditch the fair businesses and overload on the excellent ones. And stop being distracted by "bargains."

Tesco looking tasty

2008-04-19T06:58:00.002Z

Last year I sold my Tesco shares at a healthy profit once they reached 440p. As the stock is now at 410p that would have looked like a good move if I hadn't invested some of the proceeds in banks!

Anyway after reading Tesco's latest annual report the stock has come back on my radar again. What do I like about Tesco?

Constant overseas expansion means Tesco gets more internationally diversified each year
Management have a proven track record
Property portfolio worth as much as 200p per share at market value
3% yield that grows in line with the EPS
Exposure to Chinese market

Tesco is not a stock that is going to double in the next 3 years or so. Its size and 12% growth rate will see to that. But it is a worthy member of any income portfolio thanks to its defensive properties and steady dividend growth. With the stock down from its highs of last year now is a great time to start accumulating some.

Wot no eBay quarterly review?

2008-04-19T06:48:00.002Z

I normally summarise my thoughts on eBay after each quarterly earnings release. But this time I won't write much as in my view nothing has changed. PayPal and Kijiji are still doing great, GMV is still not growing fast enough, Skype still has no synergies and the stock is still undervalued!

How long does the market want eBay to grow the EPS at a rate of over 20% before rating it as a growth stock again? That growth may be fueled by aquisitions and share buy backs on top of organic growth but it is still a steady 20%+ growth which shows no sign of abating.

The only consolation is that there is now very little room for further multiple compression. So the share price should average a 20% increase each year. Then one day the market may get excited about eBay again and present a good selling opportunity. Until then I will just console myself with the fact that eBay shares have out-performed the market this year.

UK banks are poisonous

2008-04-15T21:36:00.002Z

I am currently reading through Warren Buffet's letters to his shareholders. There are about 30 of them (from 1977 to 2007) and they are fascinating. One of his most famous nuggets of wisdom is his advice that investors should be "greedy when the market is fearful and fearful when the market is greedy."

The market for UK banks is full of fear at the moment. Morgan Stanley released a note today stating that "international investors should stay away from UK banks." It also issued revised price targets for all the major banks. HBOS for example was cut from 715p to 535p.

Bearing in mind that the current price of HBOS is 515p the advice to stay away from UK banks seems a bit strange. Every profitable business has a price and HBOS is currently trading below the heavily revised price target. Shouldn't that make it worth buying?

It is a bit late for Morgan Stanley to advise its clients to stay away from UK banks when their share prices have already halved. It is very easy to write bearish notes about banks in this climate but are there any brokers brave enough to advise the purchase of them?

I think we know the answer to that.

Morgan Stanley also give EPS estimates for the banks. It thinks HBOS will earn 86p per share in 2009. That puts it on a 2009 PE of 6. Pretty cheap by most standards.

Finally, MS also think that we are halfway through the bear market. If we are already halfway through the bear market then I would say now is a great time to start accumulating some beaten down banks.

MS is advising its clients to sell now that the market is fearful - the opposite of Warren Buffet's advice.

Time will tell if I am right to buy UK banks here. But I know whose advice I would rather follow.

Stocks for income

2008-04-13T06:52:00.002Z

I love receiving dividends. They give the shareholder a tangible return that the market's whims cannot take away. And they allow the investor to diversify his portfolio by re-investing the cash in a different company. And best of all they (nearly always) go up each year, normally at a rate greater than inflation.

So in theory you could spend the income from shares and still have more purchasing power the next year.

With this is mind I have managed to cut some monthly costs so that we can start building a high yield portfolio. This will be a fund of high yielding shares whose dividends we can spend.

It will take a few years before the income is anything like exciting but hopefully one day it will pay for a holiday each year.

Another challenge will be to buy companies that pay dividends on different months so that eventually some dividends are received every month. Companies like BP and British Land that pay dividends quarterly are very useful in this respect.

The first position in this portfolio? RBS of course. A yield of 10% and an earnings yield of 20%? I think the downside is factored in!

Another year, another portfolio. We now have four. Let's hope one of them can show a gain this year!

Lessons learnt the hard way

2008-04-05T07:00:00.002Z

Now that this blog is over 3 years old it can be amusing to look back at posts from several years ago and see how wrong I was!

Two years ago in early 2006 I thought eBay was cheap at $43. It had a forward PE then of about 40 which I thought made it a bargain. So I bought more. And watched the share price drop like a stone for the next few months. Two years later, even after a good couple of weeks for the share price, eBay is at $33. No dividends were paid in that time either. Hmmmm.

Where did I go wrong? Paying 40 times forward earnings made the purchase risky. Maybe I could have had a small eBay holding but to put 25% of my portfolio in a company that expensive was unwise.

Benjamin Graham in his famous book "The Intelligent Investor" talks about the concept of a margin of safety. This involves accepting that your analysis could be wrong and the future is unpredictable anyway so only buying securities at a price well below what you think they are worth. And lowering the risk further by diversifying.

The good news is that eBay the company has been doing quite well, even though the share price hasn't. In a year or two my shares could be showing a profit. You never know, in five years the shares could be showing a 10% annualised gain. But it has been a long wait.

This too will pass

2008-03-29T07:37:00.002Z

This week, as a HBOS shareholder, I received its 2007 annual review in the post. Given some of the rumours that have been going around the stock market it is surprising that Halifax has sufficient liquidity to afford the postage costs of mailing all its shareholders!

Anyway the report starts with a report by the chairman, Lord Dennis Stevenson CBE. I would like to quote one sentence from his report:

"Gradually this current market liquidity dislocation will pass."

There you have it! It is not Armageddon, nor the end of all UK banks. Investors in UK banks, myself included, should print out this sentence and stick it above their laptop screen to provide perspective when reading the latest market rumours.

Of course Dennis could be wrong but he wasn't made a Commander of the Britsh Empire for telling big porky pies!

I think the market has totally mis-priced UK banks at the moment and I am putting my money where my mouth is. Each month I am buying more Barclays and RBS shares through a regular stock purchase plan. My expectation is that by the end of this year those purchases will be showing a healthy profit; of course it could take longer. But there is an 8% yield to make the waiting easier.

There are two ways this situation could play out for the banks. They could carry on doing what they are doing and when the liquid crunch passed their share prices will soar. Or they could go the way of Northern Rock and the shares will become almost worthless. The market is obviously deeply unsure which way things will swing. I do not believe Barclays and RBS will suffer this fate. For one thing it would be a disaster for the UK banking industry and the government will try not to let it happen.

But I don't think it will come to that. UK Banks are knuckling down, doing what they do best and eventually this crises will pass and investors will focus on something else.

Lets see if I am right!

The man with a plan

2008-03-15T07:48:00.002Z

I am a man with a plan - armed and dangerous.

I recently noticed that RBS is on a 2008 PE of about 5 and is yielding about 10%! Barclays is on a 2008 PE of about 6 and has a yield of about 8%.

Another company I own - Gilead Sciences (GILD) - is on a 2008 PE of 25 and has no yield.

I think at these levels the UK banks offer a far better risk / reward ratio than GILD. GILD has been fantastic for me, gaining 30% last year when most of the market was going down. But now it is relatively richly priced compared to the market and I don't see anything on the horizon that will stimulate the share price. Obviously GILD has great defensive qualities as its HIV drugs are needed whatever the economic climate but on the other hand a company like United Utilities has similar qualities and is on a 2008 PE of 13 and yields 5%. At times like this a decent yield is most welcome. GILD has growth of course but its HIV drugs can't gain market share forever.

RBS and BARC on the other hand just need to recover to previous levels to double in price! Even if that recovery takes 4 years that is 20% annualised and a chunky yield on the way.

So the question is, are RBS and BARC heading for some kind of meltdown or will they recover in the medium term? If you believe that this is not the end for UK banks then they are a fantastic bargain.

However the current share price may not be the bottom so I am going to drip feed the proceeds from selling GILD into BARC and RBS over the next 8 months or so. Hopefully I have learnt something from previous experience of rushing to buy "bargains" only to see the share price continue to fall a lot further.

Happy hunting!

A sane investor in an insane world

2008-03-08T07:28:00.002Z

It is a while since I have examined a company closely on this blog. And in one sense there seems little point. Why analyse a company carefully to arrive at a valuation when the market is ignoring company results and trading on fear and sentiment instead.

But this is a trap that investors must avoid, similar to the temptation to give up on the stock market altogether at times like this. This is actually an exciting time for investors. The market is proving to be very inefficient at pricing securities and the patient investor can take advantage by buying shares that have ridiculously cheap valuations.

The strange thing about this bear market is that stocks weren't in a bubble at the start of it. Valuations last October were merely average, not crazy like they were in 2000. That should mean that the bear market is a relatively mild one but having said that prices keep going down even when I think they must have bottomed out.

RBS is now at 330p, half the price is was 12 months ago. If 12 months ago I had told you that the share price would halve in the next year, what sort of catastrophes would you have imagined that could cause such a fall? Severe global recession maybe or corporate fraud? Or maybe a large and risky acquisition? Or maybe a combination of all 3? But for the fall to be caused by an attractive acquisition, the risk of recession in a couple of big markets and the write down of some assets in unbelievable.

Warren Buffer with his $40 Billion war chest must be rubbing his hands with glee at the moment. I am just buying some very cheap shares on a monthly basis and learning some lessons:

1) Be more fussy about what you buy. There are thousands of options and if you are patient you may be rewarded with a better price.

2) Try to keep some cash available. The problem with schemes such as always having 10% cash so that bargains can be picked up is that as soon as you use some of the cash to buy a bargain then you have to sell something else to maintain the ratio. So I won't have a ratio but it wouldn't hurt to have a little war chest of my own.

3) Lower the risk by being defensive. Growth shares are really being hammered in this market. Cheaper shares with a healthy dividend should hold up better.

The second most important lesson is not to give up on the market. Unless this is the road to Armageddon the market will recover at some point. And if this is Armageddon then it doesn't matter where your money is!

But the most important lesson is that money doesn't make you happy anyway so spend most of your time investing in more important things!

God bless you.

Market Madness

2008-03-01T07:58:00.002Z

This market is crazy at the moment and I really am not enjoying it. If I had a large cash pile and no equity positions I would take great pleasure in grazing on some bargains. But as I, as always, am 100% invested it is a bit disheartening watching the market ignore solid results and keep pummelling the share prices of companies I own.

RBS and CSR reported this week, two companies who share prices have already been severely punished.

RBS's results were totally solid and the share price remained flat.

CSR reported solid results and a slightly worrying outlook and the shares dropped 20%! So CSR is now on a 2008 PE of 7.

The problem with CSR is that it has guided for a flat H1 in 2008 and slight growth in H2. This is not growth company performance. So CSR is now not a growth company but has no dividend or share buyback scheme. No wonder the shares have lost their popularity. Still I would have thought they deserve a forward PE of more than 7!

There are exciting products in the pipeline and if CSR can manage to deliver on some of their promises then the share price will recover.

These are troubled times on the stock market. They remind me slightly of early 2003 when the market fell because of the threat of war in Iraq. When the war actually started the market recovered strongly. Now the market is falling because of the threat of recession. I expect that if the recession actually starts or if even better the growth rate of the economy picks up then the market will recover quickly.

For now though I will be watching my portfolio from behind the sofa!

Hello World

2008-02-16T08:17:00.002Z

Well after two weeks of either having 'flu or looking after family members with 'flu I am finally attempting to surface.

I have been keeping half an eye on the market but there has been very little to cheer me up. The market is still highly volatile but seems to be edging downwards.

My purchases of British Airways and CSR in a volatile market now appear ill-timed as these shares have been severely punished as the market worries about consumer spending and a possible global economic slowdown. However they are both great companies and the share prices will no doubt recover.

One bright spark in my portfolios has been Genzyme (GENZ.) The GENZ share price has been remarkably resilient amongst all the market uncertainty, reflecting the defensive nature of its revenues. GENZ is now my biggest holding, a situation I am very comfortable with and I am not selling any. I would like more but I am resisting that temptation.

GENZ released their Q4 results this week and it was a case of more of the same. There are some short term issues with the manufacturing of thymoglobulin and Myozyme but revenue keeps growing at a rate of 20% and EPS at a slightly higher rate as GENZ leverages its size and buys back shares.

In terms of pipeline GENZ should file for the approval of Mozobil this year and launch it early next year. Mozobil is a stem-cell transplantation drug with the potential to obtain annual sales of $400 million.

There are other drugs in the pipeline but most exciting is Alemtuzumab for multiple sclerosis. This product is scheduled for launch in 2011-2012 and has the potential to be the best drug in a $8 billion market.

In terms of valuation GENZ is on a 2008 PE of 18. That is cheap for a company growing income at a rate of over 20%.

I am not buying any more GENZ but as the share price grows it will become a bigger component of my portfolio and that is fine by me.

Now I need to find some more biotechs as attractive as GENZ.

Happy hunting.

eBay leaves investors cold

2008-01-26T07:23:00.000Z

Once again eBay delivered a great set of results this week. And once again eBay disappointed investors with a light forecast for 2008.

The problem for the share price is that investors look forwards, not backwards. And with a revenue growth of 14% predicted at the top end of the forecast, growth hungry investors gave eBay the thumbs down. Revenue has just grown in 29% in 2007 so a deceleration like that is hard to stomach.

The problem as ever is that the marketplace business, which accounts for almost two thirds of the revenue, is struggling to grow having become a victim

New CEO John Donahue is going to make some radical changes to the eBay experience in an effort to re-ignite growth. But this creates a risk that the changes will have the opposite effect. Only time will tell and investors are an impatient bunch.

Assuming that eBay earns $1.70 per share in 2008, eBay is on a 2008 PE of 16. This is incredibly low for a company of eBay's quality.

I think eBay is great value at this price. It has an amazing company in PayPal, $5 billion in cash, a share buy back in progress, a great cash cow in the eBay marketplace and a couple of wild cards in Skype and the classified sites that are in hyper growth mode.

What am I going to do? Watch from the sidelines as normal. I already have a full position in eBay and I am not going to average down.

In 2004 eBay investors had an exciting time as the share price doubled in one year. I am still waiting for those days to return again. Luckily I am a very patient man!

Genentech still expensive

2008-01-19T07:49:00.000Z

Genentech (DNA) has not been kind to its shareholders recently with its share price declining
steadily over the last couple of years. Now that the excitement of its new blockbuster cancer
drug Avastin has worn off investors are looking down the pipeline and seeing little to get
excited about.

The directors are aware of this and have announced that they are aiming to introduce 30 new
molecules to the pipeline in the five year period ending 2010. In 2007 they introduced 8 new
molecules. This sounds impressive until you find out that they also removed five molecules from
the pipeline last year. The directors do not state if the 30 figure is net or gross!

In general these new molecules do not have names yet and little is known about them. Until some exciting phase II or III results start coming in investors will mostly ignore them.

Another worry for DNA is its new AMD drug Lucentis whose sales actually declined in Q4 year on year. This is because Lucentis is very expensive and doctors are prescribing Avastin as it is much cheaper and seems to be equally effective.

So where is the growth going to come from in 2008? From increased sales and new indications of its existing drugs only. In reality Avastin will be the growth driver, making DNA a bit of a one drug wonder at the moment. Most of the other drugs are growing at single figure rates.

DNA is on a 2008 PE of 20. This is a much cheaper multiple compared to one year ago but still not cheap enough considering that earnings growth in 2008 will probably be considerably less than 20%. And if any new medical or competitive threats arise for Avastin all hell could break loose with the share price.

DNA might be worth another look in 6 months. But for now it seems that the multiple compression is not over.

Market Blues

2008-01-09T07:29:00.000Z

Well it is a new year but the market is carrying on just like 2007 never ended. Financials are getting hammered, defensive companies are holding up and the market has no direction.

What does the patient investor do in this scenario? Stay cool and look for bargains of course.

If you are in the lucky position of have cash available for investment then there are some great opportunities at the moment.

EBay has been falling again and is back at $30 now - where it was 12 months ago! That puts it on a 2008 PE of 18 - very low for a company growing at 20% and that should do OK in a recession.

UK banks are amazingly cheap. RBS is a good pick at 418p. It is globally diversified, has minimal sub prime exposure and is on a 2008 PE of 6!

For a UK technology play ARM Holdings at 110p has become a buy if you believe that fears of a global slowdown in consumer spending are overdone. It is growing at 20%, has a yield of 2% and a share buy back program. All for a 2008 PE of less than 20.

I am not going to sell any of my defensive holdings to buy into companies that are currently hammered and volatile. I did that last year, selling Google to buy into British Airway and BA seems to go down on a daily basis. But I will accumulate cheap companies on a monthly basis. I already have full allocations of eBay and RBS so that means buying into Barclays, ARM and maybe Land Securities while they are cheap.

One day the market will go up again - honest!

2007 in review

2008-01-03T06:20:00.000Z

2007 was a bad year.

It was mainly bad for a number of personal reasons but it was also bad for my portfolios. 2007 was a bad time for me to go overweight banks and dabble in real estate for the first time.

The FTSE100 only managed a 4% gain but none of my portfolios managed to beat it.

The best performer was my nest egg portfolio which managed a 2% gain. The star stock was Gilead Sciences which gained 25% in less that one year. My worst decision was to sell my Google shares in August, missing a 20% rise! I used some of the proceeds to buy into British Airways which is now down almost 20%. Ooops!

My mortgage portfolio did OK, only losing 3% despite containing banks and a REIT. The star performer was Genzyme which gained 20%. My best decision was to double down on Genzyme - a decision that was richly rewarded in the second half of the year when Genzyme went up while the market was going down. My worst decision was to buy into a second bank and a REIT in the first half of the year before the credit crunch set in. If I had invested the money in commodities stocks instead the result would have been so different.

My college fund portfolio spent most of the year just containing two banking stocks and consequently performed appallingly. The performance was broadly inline with the UK banking index - down about 30%! Thankfully I will not be needing these funds for a long time and it is just a paper loss. My worst decision was to sell Vodafone and buy RBS. The Vodafone share price then had a great year and the RBS share price had a terrible one. My best decision was not to buy into Northern Rock!

So what are the lessons from 2007?

1) Do not sell a stock that is performing well to catch a falling knife. This refers to my decision to sell Google to buy into British Airways and CSR. Both these stocks had further to fall while Google went on to have the rally that I had been anticipating but had lost patience waiting for. Selling a great stock just to raise funds to buy into a falling stock is a risky business.

2) Diversity wins. My nest egg and mortgage portfolios were held up by my technology and biotech stocks, despite having significant exposure to banks. My college fund which only had banks got hammered. Having said that I think my college fund will be OK in the long term as the two banks it holds are top quality ones that are still profitable and the share prices will recover sharply when the credit crunch starts to ease.

3) Consider investing in an index fund. In the last two years only one of my portfolios outperformed the index over 12 months and none over two years. While it would be boring to give up stock picking if I consistently under perform then I will have to put at least some of my portfolios into an index tracking ETF.

2007 has been bad. If bank stocks recover somewhat this year then 2008 will be a lot better.

eBay gets greedy

2007-12-21T06:34:00.000Z

The eBay share price has had a terribly time in the last 3 years, plummeting over 50% from its late 2004 high and is still bouncing around at rock bottom. However I have never been tempted to sell my shares having had faith in the strength of the business model and its community.

However one thing makes me want to sell my shares - they have put ads on their auction sites.

Using eBay UK, search for something that gets a lot of results e.g. "ipod". At the top of the results page is a banner ad. Ugly but at least ignorable. What is unforgivable is the three sponsored links at the bottom of the page between the listing and the "next page" links. This is really annoying as it gets in the way of natural navigation.

This is stupid, stupid, stupid. It makes me want to bang the executives' heads together!

I can't believe that eBay are compromising the usability of the site to put in some dumb looking sponsored links that are often advertising direct competitors!

eBay auctions make money by commissions from auctions. Full stop. Everything eBay does should be aimed at making the auction experience better. To put ads on its site displays a lack of focus.

What is even more stupid is that eBay spends millions advertising on search engines to draw users to its site. Now it is putting ads on eBay to take users away from its site.

Don't think that just because you open an ad. in a new browser window means that users haven't left the site. If the user buys his product in the new window then of course he will close the old one.

eBay executives please get it together. You are an auction site, not Google. EVERYTHING you do needs to be about enhancing the auction experience.

Meg please sort this out or leave.

Now we know

2007-12-08T07:31:00.000Z

A collective sigh of relief was uttered by investors in the Royal Bank of Scotland (RBS) after their trading statement on Thursday. Because of the way banks report results in this country it was four months since the last report. During those long four months the financial markets have been in turmoil, Northern Rock almost went bust and the RBS share price fell as much as 30%.

So how much have RBS been affected by the sub-prime meltdown? Not that much it seems. Yes there will be a £1 billion writedown but apart from that it has pretty much been business as usual. EPS will be well above the market consensus, the dividend will keep growing and RBS has benefitted from all the deposits flowing out of Northen Rock into other banks.

The share price surged on Thursday of course but is it still a buy? With the price under 500p the PE is about 7 so it would appear so. The market is more concerned about the banking sector as a whole at the moment so now is a good time to pick up quality banking stocks and wait for sentiment to improve.

It could be a long wait of course but unless we really are on the verge of a big global recession the selling has been overdone.

Bright future for Asian Citrus

2007-11-24T07:13:00.000Z

I have written before about Asian Citrus Holdings Limited (ACHL) - the AIM listed China - based orange producer.

Why invest in a Chinese agriculture company?

For the diversity, dividends and solid growth prospects I guess.

ACHL currently has 1.2 million trees producing oranges. It is about to start commercial production from another plantation with 1.6 million trees. And for the slightly more distant future it has just leased land for a new plantation where it will plant 2.4 million trees.

EPS for the year ending 30 June 2007 was 32p or 20p if the gains in value of its orange plantations are excluded. The dividend is 4.4p giving it a useful 1.5% yield. EPS grew at a rate of almost 20%.

The trailing PE based on operational profit is about 14.
Tony Tong, Chairman, said ''We are very confident that Asian Citrus is progressing on the right track and we will continue to deliver good value to our shareholders"

ACHL is nice but will I ever get around to buying it?

Being an AIM stock it does not belong in my mortgage portfolio so that leaves the growth portfolio. If any of my holdings ever reach a sell point then there may be room for a small position in a solid Chinese orange company that should show little correlation to European and American stock movements and therefore offer useful diversity.

Don't expect too much excitement from ACHL but when the market is as volatile as it is at the moment it is nice to have a bit of solidity.

British Land at half price

2007-11-20T06:37:00.000Z

The severity of this market correction continues to amaze me.

Some of my blue chip bank holdings are down 40% from their highs in February. Not to be outdone, British Land (BLND) is down over 50% from its January high.

This fall has everything to do with fear of the future and nothing to do with the present.

On the 15th November BLND reported their results for the 6 months to 30th September. Net Asset Value (NAV) was the same but income was up 10% and EPS was up 30%. Real estate companies are valued more on their NAV than their PE and BLND is now available for 50% of its NAV. Even the trailing PE of 16 is starting to look reasonable as real estate companies typically have a PE of around 30. The dividend yield is now a very pleasant 4%.

So why has BLND been hit so hard? Part of it is a general market correction, part of it is a specific property market correction and part of it is a fear of any kind of real estate company due to the sub prime mortgage issue in the US.

However the shares look cheap at this level - so cheap that the company has started a buyback program.

I think the shares are a bargain at this level so I will accumulate some more. There is nothing to say that the price will not go down further though. Anything can happen in this market!

Shire is the answer

2007-11-13T06:24:00.000Z

I have been struggling to find a new company to start accumulating in one of my portfolios. It has to be listed in London, at least a mid-cap, pay a dividend and not a bank or miner.

Previous holdings like ARM, Tescos and Vodafone are too expensive to buy at the moment. I considered Marks & Spencer but I would really like something with a bit more growth potential.

Could Shire be the answer? Shire described itself as a "global speciality biopharmaceutical company." It focuses on ADHD and rare genetic disorders. Revenue is growing at 30%, the market cap. is just under £7 billion and 2008 EPS should be above 50p. That puts it on a 2008 PE of 22.

That is not cheap but then there are not that many growth companies of the quality of Shire on the LSE.

The news that really attracted me to Shire was the announcement that it is partnering with US biotech minnow Amicus Therapeutics to bring its biological chaperone drugs to market outside the US. Amicus's drugs target lysosome storage disorders so it is a potential competitor to Genzyme. Amicus's drugs have the great advantage of being an oral therapy rather than delivered by injection.

I would have liked to have invested in Amicus but it is too risky for my tastes - no revenue and a small pipeline. However now that Shire is working with Amicus I can gain exposure to these exciting new drugs by buying into Shire.

Unfortunately most of Shire's sales are in dollars so I will have to grit my teeth and hope that one day the dollar stops falling.

So Shire it is. I just can't get enough of biotechs!

The cost of not knowing

2007-11-03T07:51:00.000Z

Remember me saying how much I liked banks as investments?

Well let's see how three of my bank holdings have done in the last six months:

Pretty isn't it?

Bank shares are being punished because the market just does not know how much they have been affected by the sub-prime mortgage mess. It is hard not to think the worst when the American banks have reported such horrific write downs.

The last reporting season for British banks was in early August and that was for the first half of the year, before the credit crunch reached its climax. The next round of trading updates starts in late November so all us bank investors have had to go on for the last three months is detailed reports of the demise of Northern Rock, shocking results from American investment banks and downgrades of UK banks by the brokers. No wonder the share prices are suffering.

It is pretty frustrating watching a big holding get hammered knowing that it is probably at a great entry price now but it would be irresponsible of you to add more. All you can do is grit your teeth and ride it out.

Solace can be found in the Vodafone chart for the last two years:

In mid 2006 the market was concerned about slowing organic growth and some possible extra tax charges from the government and the shares were punished all the way down to 110p. Just over a year later the share price is over 180p - a nice return for those lucky enough to buy at the bottom.

I am confident that in a year's time the current prices of bank shares will look like bargains. Despite what I said earlier I am still accumulating a few Barclays shares every month so I will enjoy getting some bargains and wait for the storm to subside.

Intuitive Surgical - a bargain?

2007-10-27T06:27:00.000Z

I have spoken before about Intuitive Surgical (ISRG) - the robotic operation systems company that Wall Street is excited about. It has just reported Q3 revenue growth of 64% and an acceleration in system sales.

Robotic surgery is still in its infancy and ISRG is the leader. So is it good value?

Based on 2008 earnings of $6 per share and a share price of £330 the prospective PE is 55. That is very high but if ISRG can keep growing at a rate above 50% for the next 3 years then it will be worth it.

When the Q2 earnings came out the share price shot up to $200 which looked expensive. No one likes to buy into a company after a huge rise but those that did have made 60% in three months.

Of course ISRG is now expected to beat and raise every quarter and will be punished severely if it disappoints. However it has a monopoly in an new field with high barriers of entry and will probably be relatively untouched by a recession.

Google looked expensive at $300 a couple of years ago and those who bought in have now made 100%. EBay looked expensive at $120 three years ago and those who bought in are still 40% down (taking into account the stock split.)

So it could go either way. But for the patient investor the ISRG share price should be above $600 in 4 years time. That would be 20% annualised growth. Most investors would settle for that.

eBay delivers again

2007-10-20T06:51:00.000Z

Challenges come and challenges go but one thing seems to remain: eBay's bottom line keeps growing.

The latest struggles include a slowdown in new listings and underperformance by Skype. Despite this, revenue grew 30% and earnings increased by 53% thanks to a one-time tax benefit.

Here are the key take-aways from the Q3 earnings report and conference call:

Organic revenue growth was 23%
PayPal is still growing at a rate of over 30%
The performance of eBay America and Germany is still not where the executives would like it to be
Skype and advertising revenue are still growing at an almost 3 figure rate
Margins will come under pressure next year as eBay invest more in their products to keep the competition at bay.

So there is plenty for Meg and co to think about. But I expect the earnings growth to continue at a rate of at least 25%. So if eBay makes $1.80 next year and is awarded a multiple of 25 that gives it a price target of $45.

eBay is well diversifed as over half of its revenues are now from overseas. It would be likely to perform well in a recession as more users would turn to it to save money.

So it looks like eBay is still a buy below $40. I already have my full allocation - unfortunately all bought above $40 - so I will be cheering from the sidelines.

The meaning of risk

2007-10-17T05:44:00.000Z

Is it just me or does Adam Applegarth, CEO of Northern Rock, have a different understanding of the word "risk" to the rest of us?

In defence of his bank's strategy he says that the current banking crisis could not be predicted.

But since when has the future been predictable? I thought risk management was about managing things that you cannot predict?

Why is his bank the only one that needed an emergency loan from the Bank Of England if his strategy was so benign?

I have nothing against the guy personally but the only thing that amazes me is that he hasn't resigned yet. As CEO you get the most pay and the most responsibility. So when your company nosedives you accept the blame and move on.

The once proud name of Northern Rock is now muck; the brand is irreparably damaged.

If I was from Newcastle and had seen my local bank driven into the ground I would certainly find Applegarth's position rather spineless. Take it like a man Adam and move on!

Now for the reward

2007-10-16T05:39:00.000Z

I have spoken before about Genzyme's (GENZ) incredible risk - reward ratio. Well after 10 months in this stock I am finally seeing the reward.

Yesterday GENZ released results of the phase II trial of Campath. Campath is already approved as a cancer drug but GENZ is investigating its efficacy against multiple sclerosis.

The results were highly promising, suggesting that Campath is more effective than Rebif, the current standard MS drug.

The market for MS treatment is about $6 billion and the market liked the news - sending GENZ up over 4% on a day when almost everything fell.

So now I am up 18% on this stock. Woo Hoo! A fantastic performance made all the nicer because GENZ is one of my biggest holdings.

If GENZ hits $80 I will probably sell half my holding to lock in a 20% profit. But this is a stock I could be invested in on some level for a long time.

Robbing Peter to pay Paul

2007-10-06T06:07:00.000Z

Tesco released their first half results this week and the market liked them. Underlying earnings per share were up 17% and the dividend was upped 14%. The share price shot up over 5% as a result but I cannot make sense of the current valuation. The problem is that the business is not really growing at 17% but at 10%. The EPS growth includes profits from sales of their property portfolio which Tesco then leases back.

Tesco plan to sell a whole chunk of its property and use the profits to buy back shares and increase dividends. It sounds nice and certainly helped the share price but is it really such a win? What would happen if Tesco sold all its property and used the money to buy back shares? The share count would be less, the assets would be less and the profits would be less as Tesco would then have to pay rent for its stores. So everything would be smaller.

As a retailer you need property. Whether it is best to own it or rent it is up for debate. But I do not think releasing the value in your crown jewels is such an exciting move.

So back to the valuation. If Tesco is growing at 10% and has 100p per share in assets and is going to make 24p per share this year then the valuation could be

(24 * 10) + 100 = 340p

Maybe Tesco is worth more because of its defensive qualities and the fact that the rapid growth overseas may gradually result in overall growth accelaration as it become a bigger proportion of the pie.

So maybe Tesco is worth 400p. But it is currently at 460p so I will remain a share price observer for now.

Trading Update

2007-09-28T05:55:00.000Z

The lesson I have learnt from the recent market correction is the importance of diversity in a portfolio.

My growth portfolio only has one bank and has US technology, US biotech and oil stocks. It has been relatively unaffected by the recent volatility. My mortgage portfolio on the other hand contains two banks and a UK real estate stock. It has been hammered by the correction, with the three stocks all down over 20%.

I hoped that owning a real estate stock would increase the diversity of the portfolio but British Land often seems to just follow the banks. Maybe it is because the current crisis concerns mortgages - leading to bad sentiment towards real estate.

Thankfully there have been two bright sparks in my mortgage portfolio - eBay and BHP Billiton.

The eBay share price has finally got some serious upwards momentum - heading for $40 for the first time in well over a year. The listing count is finally rising now that last year's pricing changes have been anniversaried and investors are relieved and able to focus on the other positives.

BLT has been going up all year. Analysts were plain wrong when they assumed that commodity prices would fall this year. Prices have gone up and taken BLT's share price with it.

My bank stocks will recover and I am looking forward to some nice dividends in October. But for the moment I am grateful for the limited diversity that I had.

Loaded and ready to fire

2007-09-17T05:28:00.000Z

Well I am glad I resisted the temptation to buy into Northern Rock a few weeks ago. Hopefully I have gained some wisdom during my short investing life and I have been stung before by buying into companies soon after bad news is released, only to find out that the share price has so much further to fall.

Even on Friday I read on message boards about people buying into NRK as soon as the market opened to get a "bargain" only to see the share price fall throughout the day. In my opinion to buy into a company like NRK at this point you need to either be a trader or a real expert in the banking industry. I am neither so I will stay away.

I think a good way to play the current banking crisis is to buy into non-financial companies that have been unfairly sold off due to all the bad sentiment around.

In this vein I sold my remaining Google shares on Friday as I saw the CSR share price hovering above 600p. I have written about CSR recently and I think if it hits 600p there is a chance of a quick 10% when it recovers. I did actually put an order in for 250 CSR shares but the share price rose out of range as the American markets opened.

So I am now left with a loaded gun. I will try to be patient and wait for the right bargain to appear. And it will not be a bank!

A taste of Apple

2007-09-08T06:07:00.000Z

Hands up who bought into Apple in early 2003? I didn't think so. Nor did I. Apple's 1700% rise in less than 5 years is that sort of growth that investors dream about but rarely capture.

Is Apple still worth a look? Definitely, although it is not cheap. Apple just grew its revenue by 25% and Macintosh sales grew by 33%. Apple is on a 2008 PE of about 27.

The great thing about Apple compared to Microsoft is that they control the hardware and software of their products. While Microsoft are struggling to come up with compelling reasons for customers to upgrade to Windows Vista, Apple can make a new product desirable just by making the external design more attractive.

My only experience of Apple products is my iPod shuffle - the humblest product in Apple's lineup. However in terms of entertain per pound spent no product has given me more than my little iPod. Now that my music is in iTunes I am effectively locked in to using iPods as it would take a long and tedious effort to export my music library.

My opinion of the Shuffle is that it is a very well designed and produced product. If all Apple's products match it for quality than Apple should continue to gain market share.

The great thing about the Apple Mac is that it has less than 10% market share in the PC world so there is plenty of ground to be conquered. Microsoft and Dell should be very worried.

I like Apple but not at these prices. If the share price drops below $100 then I will look again.

CSR - a value trap?

2007-08-31T05:25:00.000Z

For a few hours on Wednesday morning this week the CSR share price dipped below 600p. This is quite extraordinary seeing as for a day in July it peaked above 900p and nothing very bad has happened in the meantime. Someone somewhere is really not sure what to make of CSR.

Obviously the recent fall has a lot to do with the current market uncertainty and as a technology stock on a higher PE than the market CSR gets punished more than most.

So is it a bargain now? Probably - but maybe not of the back-up-the-truck variety.

CSR's guidance is certainly rosy with revenue predicted to rise by 15 to 20% over the next 5 years. The problem is that CSR management have been over-optimistic before - most notably last year when they had to give two profit warnings as revenue ended up being nowhere near their guidance.

The other problem is that costs are increasing rapidly as CSR has made a number of acquisitions that are not helping the bottom line.

However I think CSR is right to invest in other wireless technologies like WIFI, GPS and UWB. By integrating several wireless solutions on one chip CSR can provide a cheap and differentiated product.

So revenue growth looks good at the moment but cost growth is significant as CSR invest in the future.

EPS for Q2 2007 was $0.25. EPS for Q3 should be significantly higher due to the seasonality of the business. If CSR makes 45p per share this year it is currently on a 2007 PE of 14. Tesco is on a 2007 PE of 17 and is growing at a mere 12% clip.

So CSR does look nice. Unfortunately it has already jumped back up to 640p but there may still be a chance of a quick 10% at these levels.

BHP Billiton strikes gold

2007-08-25T06:13:00.000Z

Early this year I made a big mistake. I did not buy enough BHP Billiton (BLT.)

Soon after buying into BLT at below 900p the share price jumped up 20% so I decided to wait for the price to come back down before buying any more. The problem is that the price never came back down and in July touched 1500p.

Anyone who thinks blue chip companies are boring investments would have had their perceptions challenged by the volatility of miners and banks this year. But that is another story.

On Wednesday BLT issued the kind of yearly report that investors live for.

Profit is up 30%, cash flow is up 50%, the dividend is up 30% and over 5% of outstanding share have been repurchased!

This is all mainly due to rising commodity prices which begs the question - will commodity prices remain elevated? BLT management think that the growth of the Indian and Chinese economy is strong enough to maintain these prices in the medium term.

BLT has ten major projects scheduled to come online this financial year so sale volumes should increase significantly. In conjunction with the ongoing share repurchase program EPS growth should be in the low double figures even if commodity prices are static.

Is BLT good value? Assuming BLT makes 130p this financial year it is on a forward PE of just over 10. That seems a nice price for a company of this quality. I am buying more anyway!

Sell, buy, hold or just cry?

2007-08-16T20:25:00.000Z

What to do?

The market is jumping around like a ferret on speed, but mostly down. When will this correction end? Or will it turn into a crash? Can the bargains available be resisted?

If there were easy answers to questions like these then investing would not be so difficult and so potentially rewarding.

Personally I do not see a crash coming. Valuations are too cheap and the economy is not doing badly enough for that. I could be wrong though.

Assuming that a crash is not coming it would make sense to buy some bargains. The problem with that is that this correction might not be over. I bought some British Airways on Friday at bargain basement prices. This move looked great on Monday when the stock jumped up but after today's fall they are showing a small loss.

If I had a cash position at the moment I would probably do some bargain hunting at these levels but hold at least half the cash back in case the market drops further.

Potential bargains? Where do I start? CSR look good at 625p. It should earn 60p per share next year and is growing at a rate of 15 - 20% which makes its 2008 PE of 11 look nice. And as a UK technology stock it has absolutely no exposure to the US sub-prime mortgage sector!

Airlines look over-sold here - British Airways or Continental Airlines might be worth a punt.

Banks obviously are crazily cheap. British mortgage bank Northern Rock is on a 2008 PE of 6.5 and is supposed to be growing at 15%! If you are not quite brave enough to buy a mortgage bank then RBS is more solid and has a 2008 PE of 7!

For nervous types it is hard to go wrong with Tesco at 404p!

If, like me, you invest in the stockmarket in a monthly saving plan then probably the best thing to do is to keep buying something that has really got hammered and hold tight. In a few years it will look like you got a bargain.

Sleep well!

British Airways ready to take off

2007-08-11T06:52:00.000Z

What is the best thing to do when the market is tumbling and everyone is running for cash? If you are crazy like me then you sell a stock that is holding up and buy a bargain.

So yesterday I sold half my Google position and bought into British Airways. There are plenty of bargain banks around as well but even I am not crazy enough to increase my exposure to banks in the current climate.

Google has been relatively untouched by all this market uncertainty while BA is down over 30% since the start of the year for a variety of reasons.

BA is on a 2007 PE of less than 8 and is about to resume paying dividends. As for growth - well this is an airline! Lets just hope Bin Laden leaves it alone.

What do I like about BA?

- Bargain basement valuation
- £2 billion in cash
- CEO Willie Walsh is keeping a close eye on costs
- Modern fleet
- Strong brand
- S & P has upgraded its debt to investment grade
- Should yield over 2% now dividends are resumed
- Moving into new terminal at Heathrow next year. This will put an end to changing terminals for connections.

What do I not like about BA?

- It is an airline!
- Subject to intense competition, especially in the short haul market
- Exposed to terrorist events
- Will be hit hard in a recession

I think BA has the potential to hit 500p in the next year, giving it a 30% upside.

BA has been good to me in the past; hopefully it will produce the good again.

Tesco safety net

2007-08-04T07:06:00.000Z

With the markets looking volatile and uncertain now is not the time for panic selling. It may be a good time to get into Tesco though.

I sold my Tesco holding earlier this year when the share price sailed through 440p. The share price is now down to just above 400p and the story is essentially unchanged.

Tesco is growing slowly in the UK (about 9%) and rapidly overseas (about 25%.) International sales are now about one quarter of total group sales.

In November this year Tesco are launching their US operation. I expect significant media interest and an associated share price uplift when this happens so now would be a good time to jump in, before people start talking about it.

Tesco's property portfolio is worth about 300p per share, and people always need to buy food, making them a popular defensive choice. I expect Tesco to outperform the market if it drops further and to do fine if the market rises.

The only problem with buying into Tesco is finding something to sell to make way for it! Now is not a good time to sell one of my bank holdings or British Land. Maybe I will take some profits on BHP Billiton and put the money in the safe hands of Terry Leahy.

Genzyme solid as a rock

2007-07-26T05:49:00.000Z

At last - one of my companies issues an earnings report that the market likes!

Genzyme reported revenue growth of 18% and earnings growth of 30%! They are so confident in the growth of their products and in their ability to keep increasing profit margins that they are predicting earnings growth of 20% per year over the next five years!

How many companies are able to predict that kind of earnings growth so far into the future? That is why I stated recently that the risk - reward ration with Genzyme is incredible, and why I have invested a significant sum in them.

Genzyme should make at least $3.50 per share in 2007 so even after yesterday's rise they are on a 2007 PE of 18 and a 2008 PE of 15.

I am almost tempted to put all my investments into Genzyme and forget about the stock market for the next five years but that would be a bit rash!

I like Genzyme's CEO Henri Termeer who clearly shoots from the hip. I like their wide product spread which dilutes the individual risk of one of the products falling out of favour. And I love the fact that they would probably be untouched by a global recession. Just to add the icing to the cake they have a substantial pipeline with several new products coming to the market over the next couple of years.

Watch out eBay, Genzyme is rapidly becoming my favourite investment!

Google Juggernaut Continues

2007-07-21T06:46:00.000Z

Google reported Q2 earnings on Thursday night and guess what - the stock is down! It seems whatever sort of numbers GOOG reports the stock will take a tumble.

This time the bears seized the fact the earnings were slightly below analysts expectations and only represented a 28% year on year growth.

Never mind the facts that revenue grew at 58%, traffic to the high margin google.com sites was higher than expected and the management explained exactly why operating expenses were a bit higher than normal in Q2.

Actually despite all the hype, by the end of Friday GOOG was only down 5% - hardly tragic for a stock that had already made 20% in the last 3 months.

Google should still make $15 per share this year and at least $20 in 2008. A 2008 PE of 26 seems fairly cheap for a company that just grew revenue at 58%.

I am still holding out for $600 before I reduce my holding in GOOG. I seem to remember some analysts had that as a 2006 price target but multiple compression meant it did not happen.

I have a big exposure to Google and I like it that way. The company is monetising the continued growth of the Internet in a way few other companies seem able to do, eBay included.

eBay on track

2007-07-19T05:46:00.000Z

eBay reported Q2 earnings last night.

What is my 5 minute take?

eBay is doing great at the moment. Revenue growth is accelerating, the buy back program is making a material difference to EPS and cash flow is extremely strong.

GMV growth is still struggling in their two biggest markets; Germany and the USA. If they can re-accelerate growth in these markets then investors really will start to get excited.

There are a couple of worries; Skype growth is not where it should be and the total number of listings is dropping in some countries. But eBay management are working hard on these issues.

I love the fact that Meg understands that the eBay experience should be FUN and is introducing new initiatives to make the buying process even more fun.

I can see eBay making $1.7 per share in 2008. If eBay end this year on a forward PE multiple of 25 that gives them a price target of $42.

One day the share price is going to start moving. When it does I will be ready. I have been for the last 18 months but then I am a patient person!

Genzyme shows the risks

2007-07-11T05:40:00.000Z

After a few weeks of intense decorating I am gradually surfacing again. Maybe I would be better off hiding for a few more weeks judging by the market performance at the moment and especially Genzyme.

I stated a few weeks ago that the risk - reward ratio with GENZ was incredible. I still stand by that statement, even though GENZ is down over 10%.

GENZ has been displaying the risks of investing in biotech; the rewards will come later.

Biotech companies issue bad news sometimes. That is a fact of life. Not all trials will go your way. But if your pipeline is deep enough then long term the good news should outweigh the bad news. This is the case with GENZ.

CEO Henri Termeer recently stated that the company should double its revenues in the next five years based on its current products alone. This is a nice starting point.

Even if Tolevamer fails to ever be commercialised there are enough other drugs in the pipeline to significantly add to revenues over the next five years.

GENZ is on a 2007 PE of 18 and a 2008 PE of 15. That is fantastic value for a company growing at 20%.

Sadly I already have a full portion of GENZ but this is one for the long term.

UK Banks for sale

2007-06-29T07:33:00.000Z

The valuation of UK banks at the moment is astounding. Here are the PE ratios and growth rates of the largest banks:

Bank 2007 PE Ratio Growth Rate (%) Yield (%)
HSBC 12 9 5
Barclays 10 10 5
RBS 9 9 5
Lloyds TSB 11 10 6
HBOS 9 10 4.5
Northern R 9 15 5

This data is from the III web site and should be taken with a pinch of salt. However it does display the value available at the moment. With most banks yielding as much as a savings account and growing EPS by 10% a year as well it is hard to imagine a portfolio of the above six banks giving a total shareholder return of much less than 15% annually over the next five years.

I already have a large investment in RBS, medium size investments in Lloyds and HBOS and a small investment in Barclays. So I am not really in a position to increase my exposure to banks. But I wish I was because at these valuations I could buy in and sleep very well at night.

If you have a loaded gun now is the time to fire at some of these bargains.

Genentech Contraction

2007-06-23T08:05:00.000Z

It is nice to be right for a change!

Back in April I recommended waiting for multiple contraction before buying into Genentech (DNA.) Well the contraction happened with DNA dropping from the low 80s to $75 with no specific bad news to explain the fall.

DNA certainly looks attractive at these levels. A 2008 PE of 22 is not bad for a company which grew EPS at 61% in the last quarter. Of course the real benchmark is sustainable revenue growth and this is where DNA starts to fall short. US product revenue growth in the last quarter was 30% but take out the new revenue from Lucentis and this falls to 16%. So assuming that once the launch for Lucentis is anniversaried it keeps growing, US revenue growth could be down to 20%.

Of course with MG&A expenses growing slower than revenue and an ongoing share buy back program, EPS growth should be higher than revenue growth. So assuming EPS growth of 25% DNA looks fairly valued.

However if DNA can expand the labels for existing drugs or launch a new one its valuation starts to look like a bargain. Although there are no new blockbuster drugs on the immediate horizon, both Avastin and Herceptin could receive new indications in the next year. There are over 10 Phase III trials of Avastin ongoing at present so DNA certainly has confidence that its use can be expanded.

In summary DNA looks worth accumulating at these levels. There may still be more multiple contraction in the short term but it is hard to see it falling much below $70.

Do yourself a favour - pick up some DNA for the long term.

Banking on banks

2007-06-13T05:31:00.000Z

After taking advantage of RBS's recent slump in share price I am now officially overweight on banks.

A good place to be. Add a typical 4% yield to 10% annual earnings growth (and matching share price rise) and you get an average total return of 14% for very little risk.

The downside of my strategy is that bank stocks tend to move together so you can end up having some very bad days. Yesterday was a good example with HBOS down 3.5%, RBS down 2.5% and Lloyds TSB down 1%. Ouch!

HBOS' plunge was due to a trading update that stated that their share of the mortgage market had dropped from over 15% to under 10%. This was due to a management strategy to retain mortgage customer rather than gain new ones. This strategy did not work very well! HBOS think they can recover their share to over 15% by the end of the year. If they succeed then the current price is a good buying opportunity as the 2007 PE is under 10.

I guess the other problem with being overweight banks is that when opportunities to top up appear you can't as you have already done all your topping up.

Not to worry. My bank shares add yield and stability to my portfolios and I am not letting go of them easily.

Doubling up

2007-05-31T05:33:00.000Z

There seems to be a theme developing to my recent trading: doubling up.

Royal Bank of Scotland has been one of my favourite holdings for a while and as a result of their bid for ABN Amro their share price has dropped to ridiculous levels. Analysts estimate that RBS will earn 70 pence per share in 2007 giving it a 2007 PE of 9. This for a company growing at a rate of at least 10% and yielding over 4%!

The market hates uncertainty so while the battle for ABN rumbles on the share price will be depressed. With or without ABN I think RBS is a great company so I will be increasing my holding.

To that end I sold my last position in Vodafone on Tuesday. The market loved the yearly earnings report sending the shares up to almost 160p. However VOD is having a terrible time in Europe at the moment with profits falling in its biggest markets. To counter this VOD is buying into developing countries such as India where mobile penetration is low. However revenue from non-Western European countries is still a small fraction (maybe 20% from the top of my head) of total revenue. The best thing about VOD is their enormous Verizon Wireless investment but after years of agony caused by the VOD share price I am happy to get out at a decent level and put it on my wishlist.

So I now have overweight positions in Google, Genzyme and RBS. I hope I know what I am doing!

Onyx Pharmaceuticals

2007-05-17T05:45:00.000Z

Here is another biotech that I do not like. With a market cap. of $1.4 Billion and only 125 employees (according to Yahoo!) Onyx's share price could be inflated.

Onyx is really a one drug company (it does have another drug in phase 1 trials.) Its one drug is Nexavar, currently indicated for advanced kidney cancer, which it markets with Bayer. Nexavar is also in phase III trials for liver cancer, lung cancer and melanoma.

Onyx reports that in Q1 2007 Naxavar sales more than doubled from $24 million to $61 million. However it does not make clear how much of this revenue it received and how much Bayer kept. Maybe it is just me but before I invest in a company like Onyx I would like to understand that exact nature of their partnership with Bayer.

If all the phase III trials come good that Onyx will soar. However if safety issues are uncovered then the stock will plummet.

For me the risks are too great; not for me.

Biogen Idec

2007-05-14T05:49:00.000Z

Having found a couple of biotech gems recently in Gilead and Genzyme I am currently trawling through the biotechs in the Nasdaq 100 for more beauties.

Amylin Pharmaceuticals was first but as it not currently profitable I ignored it for now as to value it will require an in-depth understanding of its drugs and their markets.

So on to Biogen Idec (BIIB.)

BIIB has a market cap. of $16 Billion, a 2007 PE of 18 and a revenue growth rate of 17%. There is no dividend but BIIB does have a small share repurchase program.

BIIB specialises in Multiple Sclerosis with its main drug Avonex accounting for over 60% of its revenues.

Most of the remaining revenue is made up of its Non-Hodgkin's Lymphoma drug Rituxan which it revenue-shares with Genentech.

BIIB has a new MS drug on the market - Tysabri - which currently accounts for 4% of revenue but is growing fast.

The pipeline is strong with 3 drugs in phase III trials as well as a program to expand the use of Rituxan to MS.

So what do I think of BIIB? I would give it a B grade. The valuation is reasonable and the pipeline looks strong but being so dependant on one drug for revenue is risky as Amgen has recently found out.

The late-stage drugs are not ready to hit the market yet so it may be worth re-visiting BIIB in a year's time.

Trading update

2007-05-11T05:33:00.000Z

It is all change at the moment as I double up on some tempting opportunities.

In our growth portfolio out went CSR and Dana Petroleum and in came Google. Google has experienced so much multiple contraction in the last 18 months or so that it looked like a screaming buy to me.

In our mortgage portfolio out went the rest of Vodafone. I have been in and out of VOD several times in the last three and a half years and have never made much out of it. In fact the share price is now roughly where it was when I first bought in. Revenue growth is very slow and I think bank shares offer better opportunities for capital appreciation.

In will come Genzyme. GENZ in on a 2007 PE of 20. It is growing revenues at 20% and growing EPS faster as it leverages its scale. It has about five drugs in late stage trials which could hit the markets in the next three years. At its current levels it offers an incredible risk / reward ratio.

Time will tell whether doubling up on these beauties is brave or foolhardy. Either way the ride will be entertaining!

Average up! Underdiversify! Win big with Google!

2007-05-04T05:53:00.000Z

Enough hyperbole.

My decision last year to double up on eBay certainly was not inspired as those shares are now showing a 20% loss, and that is after a significant recovery from the low of $23 last year. What was I thinking of, buying a company on a forward PE of 40 that was growing at 25%? In fairness I thought eBay was growing at 40% and no one can really explain why it dropped so much last year.

So if I double up on Google will that be any different? Well Google is on a forward PE of about 25 and it just grew revenue at 60%. So the numbers look great but what are the risks?

Loss of market share is one I guess but that is hard to imagine as Google has been growing market share for so long now. Even if market share remains static revenues will grow as the online advertising industry expands and Google reaches into new product areas.

A global recession is another risk. Unlike eBay, Google would be adversely affected by a recession as advertising budgets would be slashed. However as Google's sponsored search is so effective it is likely that other forms of advertising would be dropped first.

International revenue is now almost 50% of total revenues so a slowdown in the US economy would not be a complete disaster.

Google is a buy. So it is bye bye to CSR and Dana Petroleum for now and hello to more Google.

Trading update

2007-05-04T05:43:00.000Z

Sold ARM Holdings last Friday for a 25% profit in 9 months or so.

The Q1 results were OK but the market was mainly excited about a significant return of capital to shareholders through dividends and share buy backs. Fair enough but I would rather cash in the gain now in the form of the higher share price rather than wait for the dividends or for the buy backs to take effect.

Dollar revenues were only up 14% and at 140 pence ARM is on a 2007 PE of almost 30. Not a bargain by any means.

ARM will go back on my wish list. If it drops below 120p this year I will look at it again.

Google going, going, gone!

2007-05-02T05:51:00.000Z

The summer sale has started early! Line up here for shares in Google at $470 each!

Google may have just increased Q1 revenue over 60% year-on-year but Google is available on a 2008 PE of 24, based on a very conservative estimate for 2008 EPS.

By comparison, eBay, growing revenues at 20%, is on a 2008 PE of 22. Yahoo, also growing at 20%, is on a 2008 PE of 38!

Why is Google so cheap? I guess investors assume that growth at 60% is not sustainable. And they are probably right. But if over the next year Google's growth rate settles down to 30% the shares are still cheap.

Psychologically the shares look like they must be expensive at $470. I think a share split could have a material effect on the share price as Google would look so much cheaper at $47.

In 2005 I doubled up on Google before the Q3 results came out and made a very nice return. Should I do the same now? Probably, as I think the downside from here is limited.

Rest In Peace

2007-05-02T05:49:00.000Z

To my second child, who did not live more than a few weeks in his mother's womb: Rest in Peace. God bless your soul.

The 3G of biotech

2007-04-26T06:00:00.000Z

The three biotechnology companies I follow all reported 1st quarter results in the last couple of weeks. How do I rank their performance at the moment?

1= Gilead
1= Genzyme
3 Genentech

Gilead

GILD has a huge amount of momentum at the moment with its HIV drugs. In Q1 its HIV sales grew 56% to $700 million. Its drug cocktail Atripla is rapidly becoming the number one treatment for newly diagnosed patients. It also has a new HIV drug under development which is about to enter Phase III trials.

GILD's 'flu drug Tamiflu is providing a growing income stream and sales of their Hepatitis B drug grew 35% to $71 million in the first quarter.

To cap it all off GILD has a new drug for the treatment of PAH under review by the FDA with the result due on June 18, as well as a Cystic Fibrosis drug in Phase III trials.

Analysts were estimating earnings of $3 for 2007 but as GILD earned $0.93 in Q1 full year earnings could be closer to $4. That would put GILD on a 2007 PE of 21 - not bad for a company that just grew revenues at 48%!

Genzyme

What is there not to like about GENZ? The drugs may be obscure but revenues are growing at a 20% rate and margins are tightening as GENZ leverages its scale.

Management are extremely bullish about the future, recently stating that they could double their revenues in five years based on their current drugs alone. Behind the current drugs is a strong pipeline including a C-difficile drug in Phase III trials, a tranplant aiding drug in Phase III trials and a viscosupplement drug also reaching the end of its Phase III trials.

GENZ have just raised 2007 guidance to $3.25. Using a growth rate of 20% a PEG of 1 would value it at $65 - right where it is now. However EPS growth should be above 20% as margins are increasing. Either way a 2007 PE of 20 seems cheap for a company of the quality of GENZ.

Genentech

Genetech is the big boy of the three, with Q1 revenues of $2.8 billion. Earnings increased 60% in the last quarter but the share price is going nowhere. The reason is the pipeline. There are no new drugs on the immediate horizon, just expansions of the uses of the current drugs. Avastin has been so successful it is almost making DNA look like a one trick pony.

The pipeline is particularly difficult to understand thanks to Sue Hellmann's love of jargon. I quote from the recent conference call: "We anticipate that event-driven regular interim analysis will begin in 2007 in the Phase III adjuvant colon cancer study, NSABP C-08." A sentence you may need to read more than once!

DNA is probably good value at $80 but it may be worth waiting for more multiple contraction before buying in.

My time is up. My opinion of large biotechs is unchanged - at these levels they offer a compelling risk - reward ratio.

eBay looking solid

2007-04-19T05:47:00.000Z

eBay reported another solid quarter last night with revenue up 27% and non-GAAP eps up 34%. Not bad for a company on a 2007 PE of 27.

The bottom line grew faster than the top line thanks to a weak US dollar, a higher operating margin and a lower share count. Obviously the dollar weakness may not continue for ever but it is great to see the share buyback program making a material difference and to see expenses growing slower that revenues.

One plus point was the acceleration of advertising revenue growth which grew by 65% compared to 2006, compared to 49% growth in the last quarter. Advertising revenue is still relatively insignificant though at $60 million compared to other revenues of $1700 million.

The problem eBay faces is the one all large, successful companies face - saturation in their largest markets. In this sense eBay are a victim of their own success, with growth in the US and Germany stalling. The management are doing their best to re-ignite growth and if they succeed this will obviously have a very material impact on the results.

The pattern is still one of slowing revenue growth. The figures for the last five quarters are:

35, 30, 31, 29, 27.

One positive is that international marketplace revenue now accounts 51% of total marketplace revenue, so hopefully the faster growing international revenue will become more and more significant.

What do I think of eBay? I think it is cheap at $35 and deserves to trade at $40 at least. It is recession-proof and still growing at a respectable rate. In light of that and the ongoing share buyback it is a buy for me.

The mystery of insurance

2007-04-12T06:32:00.000Z

As this blog is called "Mistaken Phil" I feel at liberty to admit that a recent report I studied left me with more questions than answers.

The company in questions is Friends Provident (FP), a FTSE 100 life insurance provider.

Here are the basics: the market cap. is £4 Billion, the PE is about 15 and the yield is about 4%. The analysts expect earnings growth of 10% in 2007 but as the income jumps all over the place depending on external factors that is at best a rough guess.

The confusion arises from the 2006 report. Group profit before tax is stated twice, once on an EEV basis and once on an IFRS basis. EEV profit decreased 34% while IFRS profit increased 34%!

I am used to seeing results stated on a GAAP and pro forma basis where the pro forma results normally look better but are in the same order of magnitude as the GAAP results. But I have never seen anything like this, where two different measures give totally conflicting information.

What is EEV? Wikipedia comes to the rescue. European Embedded Value is an attempt to standardise how embedded value is calculated between life insurance companies. The embedded value of a company is calculated by added together its net assets and the present value of future profits from its insurance contracts. Obviously the present value of future profits will vary considerably depending on what assumptions are made during the calculation. EEV attempts to standardise these assumptions.

Still awake? So as the EEV profit is designed to be appropriate for life insurance companies I guess I should use that rather than IFRS? So doesn't that mean 2006 was a very bad year? So what does chief executive Philip Moore say about 2006?

"We are announcing a strong set of results built around solid operational performances in both UK and international life and pensions." Right.

There is another EEV metric that presumably Philip was looking at when making that statement. PVNBP or Present Value of New Business Premiums increased by 31% in 2006; an impressive result which makes me wonder why the EEV group profit decreased by so much.

Turning away from confusing numbers, FP has three businesses: UK life insurance and pensions, international life insurance and pensions and asset management through the struggling Foreign and Colonial arm.

Philip Moore is confident about the future: "We are confident that we have three businesses well positioned to deliver excellent long-term future growth."

Is FP a buy? Maybe. It has a nice yield and if I can get my head around the figures it could indeed be worth accumulating.

Power for pensioners

2007-03-24T07:19:00.000Z

After recently discovering the sort of total shareholder returns you can get from high yielding stocks I thought I would look at a few utility / power generation companies.

First up was Scottish & Southern Energy. SSE generate and distribute electricity in the UK and also have about 7.5 million gas customers. The market cap. is £13 billion, the 2007 PE is 15 and the yield is about 3%. The projected growth rate in 2008 is 6%.

Chairman Sir Robert Smith said: "The outlook for sustained real growth in the dividend is very good indeed."

SSE's EPS increased an impressive 37% in the last half year, largely because they added 1 million energy supply customers. However there is a very limited pool of energy supply customers in the UK so this sort of growth cannot continue for long.

As you would expect SSE is involved in the development of gas turbines, hydro-electric dams and wind farms to increases it power generating capacity.

The long term target of SSE seems to be to increase its dividend by 4% more than inflation each year.

I then looked at United Utilities (UU.) UU supplies water and electricity and treats waste water in the North West of England. The market cap. is £6.5 billion, the 2007 PE is 14 and the yield is 6%. Earnings growth in 2008 is projected to be 7%.

CEO Philip Green said: "The group has again delivered strong profit growth."

Although underlying operating profit was up 7% in the last half year the dividend was only increased 2.4% in keeping with their policy of increasing their dividend at the rate of inflation.

I did not spend much time looking at UU as they were obviously a very defensive investment. Operating in a heavily regulated environment there is little scope for rapid earnings growth and the only plus points are the high yield and the defensive nature of the revenues. UU may be right for pensioners who are living off the dividends but not for someone like me hoping for a greater return and willing to stomach the risk.

SSE was a bit more interesting but there are only so many households to fight over for gas supply and surely at some point they will lose customers rather than gain them? Also their stated goal of increasing dividends at a rate 4% above inflation is frankly rather conservative for me.

So banks are great but utilities are a step too far down the defensive road.

Who said banks are boring?

2007-03-15T20:59:00.000Z

Royal Bank of Scotland recently release their 2006 results. They were excellent but one statement in particular stunned me. I quote CEO Sir Fred Goodwin: "Over the last ten years total shareholder return has also averaged 18%." That's right, share price gains plus dividends received had resulted in an average yearly gain of 18% over the last ten years.

Eighteen percent! 18%!

How many funds have averaged 18% growth over the last ten years? I would guess less than 5%. In fact many funds don't last ten years as their historic results start to look so bad they get axed and re-branded.

When I was in the unfortunate position of owning an endowment policy I was told that the fund manager was targeting a measly 6% growth a year. I bet that if the fund was invested in the five largest UK banks the annual growth would easily have exceeded 12%. Just thinking about that endowment policy makes me angry so I will move on!

I am starting to wonder why I bother to invest in risky growth companies like eBay and Google when a staid bank like RBS can offer 18% a year. I know that RBS won't necessarily return 18% over the next ten years but then nor will my portfolio of growth shares necessarily.

I would quite like to divide my growth portfolio evenly between HSBC, RBS, Barclays, Lloyds and HBOS and see how it performs compared to the FTSE100. RBS is currently on a 2007 PE of under 10, but if the EPS is growing at 10% and it is yielding 4% it should return at least 14% a year. So it is cheap and safe.

Now is not a good time to my sell eBay and Google holdings as they are currently at low multiples but going forward I will be looking to switch into safe, boring and exceptional banks!

Ouch!

2007-02-28T06:27:00.000Z

Ooof that was nasty. Thankfully you don't get many days on the stockmarket like Tuesday the 27th February 2007. My growth portfolio was down almost 4% and every stock in my portfolios and wish lists was down. The normally solid FTSE 100 was down over 2% and the S&P500 was down an incredible 3.5%!

On a day like yesterday being diversified didn't help as everything was down. Of course those with a significant proportion of their portfolios in cash were smiling sagely.

It is frustrating to see gains earned over weeks and months wiped out in a day but the stockmarket is a fickle beast. Yesterday's correction was not the worst drop in recent history and certainly will not be the last. I guess the lesson is not to have any money you are going to need in the next few years in the stockmarket. The other lesson is that the market is stronger that individual growth stories. What I mean that is that nice stocks like eBay and Gilead Sciences were hit as much as anything else. The market is like an incoming tide knocking over any sandcastles on the beach.

The final lesson is that it is nice to have some cash sometimes. After selling Tesco I felt that there were some optimistic valuations around and didn't rush to reinvest the proceeds. How being 15% in cash helped yesterday! Now when I do invest it in a few weeks (probably in British Land) I will get a much nicer price. Short term weaknesses are the friends of the patient investor.

Find the right REIT

2007-02-24T06:56:00.000Z

Well it looks like Tesco is not going to come back to my target entry price of 400p any time soon so I need to invest the proceeds of my sale somewhere else.

HBOS looks solid but that would leave me with too much exposure to the banking sector (35%.) Aberdeen Asset Management looked nice but I wasn't sure how well it would do in a recession.

Recently the government has brought in Real Estate Investment Trust legislation which allows property companies to operate on a tax free basis as long as they return at least 95% of their income to the shareholders. Buying into a REIT would be a good way of diversifying my mortgage portfolio and the share price performance of a couple over the last five years certainly looks impressive:

That was British Land in blue against Land Securities. British Land certainly has an edge there.

Fundamentals? The market cap. is about £7.5 Billion, the 2007 PE is 30 and the yield is about 2%. The EPS growth rate is about 13%. The PE looks high but this is always the cause with real estate companies which are valued close to their net asset value. In the case of BLND the NAV is about 1610 pence per share so the current share price of 1470 represents a significant discount.

Chairman Chris Gibson-Smith says "The business continues to make good progress and is well positioned for the future.” A suitably bland but comforting statement!

So why buy BLND? It offers diversification, a quarterly rising dividend and solid long term prospects.

The recent market correction has taken 15% off the share price so now may be a good time to buy. My Sharebuilder account will be buying in for me in a day or two so my money is where my mouth is!