More analysis on LM (Legg Mason)) by Dr. Paul Price

IMHO, a buy with an excellent margin of safety if < $70

Get a 'Legg' Up - Legg Mason - LM

February-27-2008

Legg Mason, Inc. [NYSE:LM] Feb 26 [10:30 AM price] $69.70
52-week range: $66.15 - 106.36 Yield = 1.38%

Legg Mason is a global asset management company. Through its subsidiaries it offers investment management to institutions, private investors, corporations and government entities. Branded units include Legg Mason Capital Management, Royce & Associates, and western Asset Manangement. As of March 2007 assets under management were $968.5 billion. They employ around 1350 financial advisors in 127 offices throughout the mid-Atlantic and mid-South regions of the United States.

Despite the present tough stock market environment LM is finishing its FY 2007 with what should be all-time record revenues and earnings. EPS for the FY ending March 31 are likely to cme in around $4.80/share up from $4.48 in FY 2006. Preliminary consensus estimates for FY 2008 revolve around $4.95/share.

Legg Mason has shown tremendous growth since 1994. EPS have grown dramatically from [split adjusted] $0.33 in FY 1994 to this year's $4.80. Dividends have increased from $0.11 annually to today's $0.96. Book Value/share has risen from $4.62 to over $53 during that same period.

Amazingly, Legg Mason shares are available today near their lowest absolute price point in almost three years! At the current quote of $69.70 LM shares are just over 14.5x trailing earnings despite the fact that EPS have shown a CAGR of 17.5% over the past 5 years. The dead low trades for 2005 - 2006 - 2007 were $68.10, $81.00 and $68.40 respectively.

There was an insider buy on Feb. 1 of 13,590 shares at $73.85/share.

Large instituitional holders [as of YE 2007]:

Dodge & Cox: 5.41%
FMR [Fidelity funds]: 3.81%
T.Rowe Price: 3.63%
Barclays Global: 3.28%
State Street: 3.11%
Vanguard Group: 3.05%
Third Avenue Mgt: 2.52% [Marty Whitman]
Goldman Sachs: 2.32%
Franklin Resources: 2.04%

Guru holders [not mentioned above]:

Robert Olstein
Jean-Marie Eveillard
Richard Snow
Brian Rodgers
Chris Davis
Ruane Cunndiff
Ron Baron

LM shares have typically traded with 'growth stock' multiples because of their stellar long-term numbers. Their 10-year median P/E has been 19x. Value Line is assuming an 18 P/E for their 3 - 5 year projections and I think that is a reasonably conservative way to go.

18 times FY 2008's estimate of $4.95 brings me to a target price of $89.10 or up 27.8% from the quote as I'm writing. Legg's dividend is 1.38% making for total return potential of close to 30% over the next 12 months.

Is this reasonable? LM shares hit peak prices of $129, $140 and $110.20 in 2005, 2006 and 2007 so investors have paid well higher than my goal price year after year [when fundamentals were not as good as they are today].

My expectations may end up being way too restrained based on those previous trading peaks in Legg Mason shares. Value Line notes that LM shares earned a 95th percentile ranking for stock 'price growth persistence' within their 1700 stock universe.

This month's focus

in my portfolio I'm focusing on looking for dips to add to positions in:

1. AXP American Express-- one of the best companies for the long term now (big time insider buying also)
2. LM Legg Mason (new CEO recently bought 1 M worth of stock)
3. ORI Old Republic Insurance-- a conservative way to indirectly buy the monoline mortgage insurers eventual recovery without losing your stake if they go bust-- a very well managed high dividend paying company regardless
4. HOG Harley Davidson (see this article)
5. MCO Moody's
6. BBSI Barrett's Business Services
7. CKI.TO Clarke Inc.
8. BAM.A.TO Brookfield Asset Management
9. CSCO Cisco--- cash machine with massive market share
10. KMX Car Max----extremely well managed Buffett pick with some recession potential
11. DELL-- much maligned cash machine avoiding di-worse-ification despite lots of acquisitions.

I've covered all but ORI in previous posts. I'm hoping for some more ugliness to wash out in the market so I can get more of these real cheap. The uglier the better. I'm finding these short term stock rallies very annoying ;-)

I believe (as does Morningstar) that all these equities (except perhaps Clarke Inc.) are trading with at least a 30% margin of safety.

l

From Guru Focus.com-- consensus about the current investor's outlook

Gurus Think It Is a Great Time to Buy, Do You?

February-26-2008

The recent stock market decline certainly hurt a lot of investors, including some of our Gurus. But historically the best time to buy stocks is when many people are in fear. This is the review of what Gurus think about the current stock mark and opportunities.

Bruce Berkowitz: We have always been attracted to sectors showing large declining market values.

Bruce Berkowitz was largely unhurt by the credit crash and financial sector meltdown, as he did not own many financial stocks. His fund gained 12.35% vs. the S&P 500 Index performance of 5.49% (with dividends reinvested).

This is comment regarding the credit crunch: “Last year’s asset-backed securities 1 earthquake resulted from years of poor loan underwriting, residential builder overconfidence, and real estate speculation. The after-shocks continue to be felt, exaggerated by derivative securities piled on top of each other. Worldwide, financial institutions may ultimately write-off hundreds of billions and are being forced to raise equity to survive — if they can. Almost certainly, there will be high profile restructurings and continued stress.”

What does he think about the opportunities? “We have always been attracted to sectors showing large declining market values. Usually, stock prices of businesses within these industries drop faster than underlying values, tainted by the collapse of speculative securities. Such conditions create a Darwinian process of the strong getting stronger and the weak disappearing. The winners are usually run by battle-hardened owner/managers who know that the seeds of greatness are planted during the worst of times and reaped after the storms pass. To the victor belong the spoils”.

Bruce Berkowitz buys WellCare Health Plans Inc., The St. Joe Company. The Progressive Corp. The prices of these companies have hit multiyear lows and the industry is distressed.

For the complete stock picks of Bruce Berkowitz, go to http://www.gurufocus.com/StockBuy.php?GuruName=Bruce+Berkowitz

David Winters: It is a great to buy if you have cash and do the work

David Winters’s Wintergreen Fund’s fund gained +21.13% in 2007. Winters invest heavily in international stocks. These days he sees a lot of opportunities, even in US.

In an interview with Bloomgerg, Winters says fortunes are made at time like this. “6 months ago, people were extremely optimistic, now they are fearful. If you do the work, and have cash, it is great time to go shopping. You got to buy wonderful merchandise at discount… We have deemphasized the US in the past years, but today there are great companies that on sale, just look at the 52-week low list.”

Watch David Winters video: http://www.executiveinterviews.com/U12198-wint-blus/

For the complete stock picks of David Winters , go to http://www.gurufocus.com/StockBuy.php?GuruName= David+Winters

Dodge & Cox: Some of the best investment opportunities are created during periods of uncertainty.

2007 was the first year since 1999 in which the Dodge & Cox Stock Fund underperformed the S&P 500. The Fund returned 0.1% in 2007 compared to 5.5% for the S&P 500. Certainly seeing a lot of opportunities, Dodge & Cox reopened their fund to new investors.

Regarding to financial market decline, Dodge & Cox write in their shareholder letter: “Beginning in the third quarter, equity market volatility increased dramatically as investors began digesting what has seemed like a constant stream of negative news regarding the U.S. housing market, the Financials sector and the broader economy. A long-term investment horizon is particularly important in the face of volatility. In our experience, some of the best investment opportunities are created during periods of uncertainty.”

What Dodge & Cox are doing? “As valuations in the market and the Fund have dropped, our return outlook for the next three-to-five years has improved. At year end, the Fund’s forward price-toearnings ratio was 12.9 times compared to 16.3 times for the S&P 500. We are finding attractive investment opportunities and have lowered the Fund’s cash position to 1.3%. We also remain encouraged about the long-term prospects for the global economy. Despite the turmoil during the last six months of 2007 and the market’s downturn thus far in 2008, the forces of technological innovation and free market economic principles are creating unprecedented wealth in the developing world and compelling investment opportunities for the patient investor. We will continue to work hard to uncover these potential opportunities and counsel you to have patience and take a long-term view of investing in general.”

Dodge & Cox Buys Comcast Corp., Amgen Inc., Vulcan Materials Company, For the complete stock picks of Dodge & Cox , go to http://www.gurufocus.com/StockBuy.php?GuruName=Dodge+%26+Cox

Mason Hawkins: The fourth quarter volatility gave long-term investors terrific opportunities to pursue

Mason Hawkins’s Longleaf Partners’ Fund lost 0.4% during 2007. He must be seeing a lot of opportunities as he reopened his fund to new investors.

About the recent economic issues and financial crisis, he wrote: “How long will these issues remain, and more importantly, are they properly reflected in stock prices? Stability will return at some point, although we have no ideas of the timing. The uncertainly of what the next six months will look like has Wall Street in knots. While we may appear stupid in the short run, our long-term time horizon and that of our partners gives us the luxury to act based on how business will look several years from now, not based on whether fear will grip markets next quarter.”

Regarding to opportunities, he wrote: “In the business we are buying, we believe short-term fears are more than reflected in the stock prices… This environment is not dissimilar to that of the fall of 2002, and as most of you remember, the aftermatch in 2003 was particularly rewarding.”

What is Mason Hawkins buying? Beaten down retailers and banks including Walgreen Company, Ltd. Brands Inc., The First American Corp etc. For the complete list, go to http://www.gurufocus.com/StockBuy.php?GuruName=Mason+Hawkins

Wallace Weitz: We think this is a very good time for investing.

Wally Weitz had a bad year in 2007, his Value Fund lost 10.3%, as CountryWide was one of his largest holdings. He wrote: “We are glad that 2007 is history. The U.S. stock market showed a modest aggregate gain (S&P 500 +5.5%), but the market had a distinctly split personality. The housing, mortgage finance and consumer sector stocks were very weak, while others, seen as beneficiaries of booming Asian economies, were very strong. We were positioned squarely on the wrong side of the 2007 market and as a result, both our relative and absolute performance were poor.” Over past 20 years, Wally Weitz’s Value Fund outperformed the market by 1.4% a year.

Regarding the current environment, Weitz wrote: “In this environment, the stocks of companies with real problems have been punished severely. Unfortunately, the stocks of many other companies that have been impacted in minor or temporary ways have also been subject to heavy selling pressure. The potential rewards for successfully navigating this kind of market are great. However, to earn these rewards, investors must have the courage of their convictions so they can stick with their investments during extended periods of uncertainty. This can be painful... For those with the courage and patience to buy good assets when nobody else wants them or can afford to buy them, we think this is a very good time for investing. Terrific assets and companies with strong franchises are available at very attractive prices. We believe that it takes very little imagination to envision the possibility of 50% appreciation in most of our stocks over the next 2-3 years.”

Wally Weitz likes Berkshire Hathaway, AIG, American Express, Fannie Mae and Freddie Mac, etc. For the complete list, go to http://www.gurufocus.com/StockBuy.php?GuruName= Wallace+Weitz

Bill Miller: I believe equity valuations in general are attractive now

After beating the S&P500 consecutively for 15 years, Bill Miller wrote “We had a bad 2007, which followed a bad 2006. Over this two-year span, we underperformed the S&P 500 by around 2000 basis points 2 , our worst showing since the two-year period 1989 and 1990, where we underperformed by 2500 basis points.”

However, he continues to wrote: ‘It is not an accident that our last period of poor performance was 1989 and

1990. The past two years are a lot like 1989 and 1990, and I think there is a reasonable probability the next few years will look like what followed those years.” In which he outperformed the market average by 15 consecutive years.

What does he think about the market: “Investors seem to be obsessed just now over the question of whether we will go into recession or not, a particularly pointless inquiry. The stocks that perform poorly entering a recession are already trading at recession levels. If we go into recession, we will come out of it. In any case, we have had only two recessions in the past 25 years, and they totaled 17 months. As long-term investors, we position portfolios for the 95% of the time the economy is growing, not the unforecastable 5% when it is not… I believe equity valuations in general are attractive now, and I believe they are compelling in those areas of the market that have performed poorly over the past few years. Traders and those with short attention spans may still be fearful, but longterm investors should be well rewarded by taking advantage of the opportunities in today’s stock market.”

Big Pharma with a Buffett twist

a quick note-- both GSK and SNY have drifted 10-15% below where Buffett bought them.

A full analysis later; however, I believe that this is an excellent long term buying opp. I have put bids in for a small number of shares of each for my personal RRSP.

Clarke Inc and the CEO George Armoyan: Corporate Raider of the North? A narrative analysis

Clarke Inc. is a small Canadian diversified catalyst/activist investing company predominated driven by a larger-than-life personality: CEO George Armoyan-- a man often compared to Carl Icahn. From a quantitative perspective, this company's balance sheet and growth makes it very attractive (remember to ignore the "sales" number-- this company profits from selling investments). On the other hand, the nature of its business and the undisclosed debt accumulation that must be present for all the recent aggressive share purchases makes the business very difficult to value.

Like many asset management companies I'm interested in (i.e. Legg-Mason, Brookfield Asset Management, Berkshire-Hathaway), the shareholder puts a disproportionate amount of trust/faith in the abilities of the management. This unlike some businesses where the margins are so fat and the competition so sparse that even a bunch of idiots can run the company and make a profit and often do (some infrastructure oriented companies fit the bill here). In this analysis it's important for a potential shareholder to understand the senior management's motivations, management skill and track record. This is why I'm taking the time to discuss Armoyan et al in more detail than usual. For entertaining reading, put his name on google and read what comes up. A Globe and Mail article here.

Mr. Armoyan is no stranger to controversy and litigation. He's taken on a premier and won in the past. The Nova Scotia SEC has investigated him at least once before (and found no security violations) and just yesterday the same organization has announced that it is investigating about a purported violation committed in 2005 in the Advanced Fiber Technologies Income Fund trade. I know that he has also been criticized for using Geosam Inc (a family trust) in his maneuvers such that a potential conflict of interest may exist between the shareholders of Clarke Inc. and Geosam. To Mr. Armoyan's credit is the fact that he immediately set up a third party trust admin for Geosam so it would operate at arm's length to him.

My take is that he is a hard-nosed value hound and isn't afraid to shake people up and bend the rules a bit to get his way. He is admired and sometimes hated by more than a few folks, particularly out East. His strategy is to find small to medium sized Canadian companies (often income trusts) that are struggling despite relatively strong balance sheets, considerable tangible assets and reasonable future prospects post turnaround. Clarke Inc and sometimes Geosam Inc (a holding company with his sons designated as beneficiaries) will buy 10-15% of the outstanding shares. Then he or one of his officers will ask nicely to be invited for a seat on the board of directors. If the company balks, then George forces a shareholder vote. Armoyan's reputation for creating shareholder value and crushing anything in his way usually precedes his coming, so shareholders wisely vote with him. Once he is in place, the firing and resignations begin. Costs are slashed and company is either turned around or liquidated or sold. George has been immensely successful in doing this. Two companies that he is in the process of doing this currently are Quebec's Shermag and Granby. Some of the Shermag story is in this CBC article.

The story behind this $200 M market cap company is reminiscent of the beginning of Berkshire Hathaway. BRK started off as a failing textile business that Buffett saw as a potential turnaround situation. He had retired from his partnership a few years prior (as he saw no investable companies in the mid to late 60's overheated market) but had become bored and was looking for a new challenge. After acquiring a controlling interest in the company he soon found that the competition was fierce and the margins were slim in that particular industry. After some attempts to restructure, he gradually shut down the textile business and diverted funds into investments--- predominantly in the area of his greatest expertise, insurance. The rest of BRK and Buffett's success is well known history.


Clarke Inc. started as a failing maritimes based trucking specializing in brokering North/South freight transport. In 2000/01 Armoyan and a friend started buying up stock, got onto the board and fired pretty much everybody. I believe he realized quite soon that the trucking part of the business wasn't going to perform to meet his goal of > 15% ROE. The charts on the top of the page tell the rest of the story (click on them to enlarge the graphics so you can read them). Clarke's recent acquisitions are well documented on Yahoo. Prior to Sept 2007 an excellent presentation of the companies' accomplishments is here.

As I mentioned above the numbers for Clarke are VERY impressive:

P/E of 4 (!!)
P/B 0.93 (!)
ROE of 36% (!!)
Current ratio of 6.6 (lots of cash to service debt, pay wages etc)
Debt:Equity 0.6 (double what I'd like to see)
Major insider ownership 42% ... 17% being the CEO's family
insider buying last 4 months
share buy back December ?amount
dividend 2% yield (not bad for a small cap company!)

These numbers need to be interpreted with caution. By the nature of the business, "one time sales" tend to skew the numbers for quarters in which they occur. With the downtrend in the Canadian market, Clarke is unlikely to be divesting any of their investments anytime soon. Some of the income trusts do provide cash flow to finance other projects and cover short term expenses.

The long term success of this company pretty much relies completely on the skill of the management. Despite being a micro/small cap company, the balance sheet suggests that bankruptcy is very unlikely even if a true recession strikes this country.

The share price has recently been beaten back from $10 to just above $6 (adjusted for share splits) due to the perception of high risk investments George is undertaking of late and the SEC announcement. I suspect Mr. Armoyan and the shareholders will be rewarded for the long term. I doubt the SEC issue will stick. I do suspect that the next couple of quarters will most likely show a decrease in EPS and the share price is likely to be punished disproportionately. Having said that, I feel that at the current price of $6, the risk:reward ratio is favourable.

I do own a disproportionate number of shares of CKI.TO in my portfolio acquired from $10-$7 in increments. I have a lowball bid in for $5.99/share that I hope will be filled over the next month.

l

BBSI Barrett Business Services Inc.

I've reviewed this US micro-cap HR/PEO outsourcing firm a few times before. As I gather more due digilence, I am more and more impressed with this company's prospects, particularly when the US economy eventually turns around.

I am always particularly cautious with small cap equities-- as I've mentioned before, they can be very risky and when things go poorly you can lose all your capital very quickly. The reward is usually proportionate to the risk and it is common for small companies like Barrett to increase their share price ten fold in five years or less (a "ten-bagger" thanks to Peter Lynch).

If you are still interested I strongly recommend listening to Bill Sheretz's webcast.

In addition to the analysis I've done previously in this blog, the key investment points include:

1. Superb balance sheet and 23% 3 year average growth (dropping to 3% last year) --> we are seeing BBSI still remain profitable and completely debt free in a the worst operating environment for the last 17 years (mostly in California where the bulk of BBSI's work is)
2. 3 new strategic acquisitions made in the last year, paid for in cash
3. 90% employer retention rate, highest in the industry
4. roughly 1/3 of the company's outstanding shares are owned by the CEO-- a man well known for his integrity and management skill (this is his competitor's opinion!).
5. pays a 2% dividend (rare for a microcap) and makes regular share buy backs. This point and the above fact strongly aligns the management's interests with the shareholders and you should like that- a lot.
6. US Gov't will need to tackle the "immigration problem". With demographics skewing to the elderly side of the population curve and a strong possibility that legislation will shut down the "illegals" employment supply, Barrett is positioned to grow rapidly in either case.
7. an emphasis on scalability to attract organic growth and de-emphasize acquisitions (avoid "diworseification")

This is a solid, boring business that is easy to understand-- Lynch/Buffett mandatory requirement for all investments.

I put in a bid for a small quantity and hope to build on the position before the turn around occurs, whenever that will be.

l

A question about Buffet's recent purchases

Just in the last week (while I was away) Berkshire acquired a huge stake in Kraft and also added to his position in USB and Wells Fargo banks. He took on a new small (for him, anyway) position in Glaxo-Smith-Kline, a pharma company that I've been studying for a year or so now. These investments were registered with the SEC Dec 31, 2007.

The thing I find hard to understand is how he made the statement just a few weeks ago that he didn't find the current market particularly attractive from a valuation perspective, yet his cash flow suggests otherwise....

Can anyone explain this?

Pozio on asset allocation

This blog is oriented towards the non-conventionalist investors, obviously.

What Is The Best Asset Allocation Strategy?
by Joe Ponzio

A common question among investors — both conventional and non-conventional — is: How should I allocate my portfolio so I am best prepared to capitalize on (or protect myself from) the coming years in the markets? Mutual fund, which were designed to, in part, shield people from volatility, aren't living up to their promises and even "well-diversified, long-term" mutual fund investors are finding it difficult to "stay the course" like their advisers instructed.

Here's how to do it.

If you are new to F Wall Street, allow me to present to you the four types of investors that are striving for long-term growth:

1. The general conventionalist is looking for long-term, steady growth and can not, or does not want to, stomach the stock markets. 50% of the population falls into this category.
2. The enterprising conventionalist is also looking for long-term growth but is willing to tolerate minor fluctuations in stock prices. 35% of investors are enterprising conventionalists.
3. Safety-seekers can tolerate market fluctuations...to a point. Daily and minor fluctuations are largely irrelevant; large price changes are still gut-wrenching. >14% of investors are safety-seekers.
4. Non-conventionalists could care less about market or price fluctuations and look to find value and opportunities in every market. <1%>15%
The Non-Conventionalist Approach to Buying

Buying workouts is fairly straightforward. To lift a bit from Benjamin Graham, if, upon thorough analysis of the deal, you see an opportunity for both safety of principal and a satisfactory return, you should buy. The greater the opportunity (for both return and safety), the more you should buy.

When approaching businesses, you should have a definite price in mind. Then, you should begin buying in 10%-20% chunks — once a week or so. That is, if you plan to commit 20% of your portfolio to a particular opportunity, begin buying in 2%-4% increments over five to ten weeks. This serves two purposes: (1) it allows you to capitalize even more if the price continue to drop, and (2) it prevents you from guru-itis, the belief that you are always right and everyone else is always wrong. (You will be wrong from time to time.)
Come on Joe, I'm not working with millions here!

How much is enough? Assuming you are putting 10% of your portfolio into each opportunity, that you intend to buy over five weeks, and that you pay an average of $10 in commissions for each trade, a non-conventionalist investor should have at least $50,000 so that no single transaction costs more than 1% of his or her investment.

If you are working with less than $50,000, then you'll have to make some sacrifices. Your purchases will have to be made over just two or three weeks or in a single transaction. You'll be forced to engage in less workouts and have to be much more careful in your selection.

Still, don't be disheartened if you currently have just a few thousand dollars. Put money aside every month and keep in mind that my kids collectively own just two stocks as I build their portfolios. For them, workouts are out of the question right now. I hope they each have 80 years of investing ahead of them so I'm not concerned with capitalizing on every opportunity I see today. The next 80 years should present a few more.
A Final Note/Disclaimer

The "Expected return" assumptions above assume that the next forty years are substantially the same as the last forty. That is, through wars, recessions, high and low federal funds rates, elections, housing booms and busts, tech bubbles, inflation, deflation, leveraging, deleveraging, and salad oil scandals, our economy and country will survive. If I'm wrong, your money will be worthless, all the stocks and bonds in the world won't save you, and the General Conventionalists buying Australian bonds will look like geniuses!

The Great One speaks...

A brilliant man who needs a new barber.

Boring, undervalued, high yield ing Big Cap Pharma stocks for your RRSP

Morningstar interview

my favourite picks for the LONG TERM include SGP, NVS, and GSK.

Morningstar's take of HOG after the rough last quarter

Read the article below. I hope that the stock falls into the low 30's so I can add to my position. My wife also holds HOG in her RRSP.

Harley-Davidson's HOG fourth-quarter results reflect the reality of souring consumer discretionary spending--a trend that has been echoed across the domestic economy. We are making some adjustments to our model, but the changes won't materially affect our fair value estimate.

Total revenue declined 8% during the quarter--a result that was generally expected since Harley temporarily shut down its assembly line to reduce pipeline inventories. Domestic shipments were weak, down 20%, while international shipments showed continued strength, up more than 20%. With production cuts, Harley's profit margins are slipping due to fixed cost deleveraging. In addition, the firm is stepping up its sales and marketing efforts to bring in new Harley enthusiasts, both domestically and internationally. As a result, operating income excluding financial services declined 26% in the quarter. For 2008, management will keep production constrained, manufacturing fewer motorcycles than dealers are expected to sell.

Given turmoil in the financing markets, there have been growing questions about the health of Harley's financial services group. By all indications, the group continues to have access to the commercial paper market; however, management expects that gains on securitization transactions will be lower going forward. Harley's financial services group recently issued $400 million in medium-term notes to maintain flexibility but expects to continue utilizing the securitization market as its main vehicle. Losses on its retained portfolio of loans have ticked up, but are still below quarterly loss provisions. Plus, management has tightened its loan-to-value ratios, while performing additional performance and risk management diligence to sustain its credibility in the debt markets. Moreover, we value the financing segment at 2 times 2006 book value, which is a relatively conservative figure as it essentially excludes any of the gains that were made during 2007. Barring a complete meltdown of the economy, we think Harley has sufficient provisions to handle an uptick in credit losses.

During the year, Harley managed to increase both its operating and free cash flow. As a result, the firm increased its dividend payout 22% year over year and repurchased over $1 billion worth of shares. Harley's management expects to continue buying back shares throughout 2008, and with the stock currently yielding about 3%, shareholders are essentially getting paid to wait for the macroeconomic environment to improve.

Our long-term projections for the company's sales growth remain on the conservative side, below inflation over our 10-year discrete forecast period. We continue to think that the firm's strong cash-flow generation and brand strength make it a company worth sticking with over the long haul.

Morningstar: An objective analysis of Chou Associates Mutual Fund-- the only MF I own

Chou Associates	Fund Analyst Pick

David O'Leary | 11 Sep 07 |

Chou's prescient call on subprime lending is yet another example of why we highly recommend this manager. In recent months, much of the financial world's attention has centered on the U.S. subprime lending market. Francis Chou had been waiting patiently for the fallout we've witnessed recently. While we know other managers who had forecasted an event like this, Francis Chou attempted to capitalize on his forecast in a somewhat unusual manner. With a history of similarly impressive investment decisions, Chou has clearly demonstrated his remarkable investment acumen, and Chou Associates remains one of our very favourite equity offerings. In prescient fashion, Chou stated in his 2006 annual report that subprime lending practices in the U.S. could result in dark days ahead for global stock markets. The combination of potential interest rate increases, over-extended homebuyers and falling real estate prices were a recipe for disaster according to Chou. More importantly, he argued that the market wasn't properly accounting for these risks. Specifically, Chou believed that credit default swaps (CDS), a form of insurance against a bond's default, were trading at bargain basement prices given the risks looming over the market. Unfortunately, at the time he wanted to begin buying CDS's -- which are a type of derivative -- for this fund, securities regulations prevented him from doing so. In order to buy these, he was required to give unitholders 60 days notice. And even after the required 60 days, Chou experienced a further delay as he waited for clarification from the Ontario Securities Commission on the issue. Essentially by the time he was clear to trade, a large chunk of the opportunity in the CDS market had evaporated. Chou illustrates the size of this opportunity by pointing to mortgage insurer Radian's five-year CDS. In early 2007 it was trading at roughly 50 basis points before peaking around 1000 basis points when market fears over the subprime market escalated last month. Most recently, it has traded down to the 550 basis points range. Although the fund's 11.9% annualized return over the past three years is lacklustre compared to many other funds in the Global Small/Mid Cap Equity category, we're not too concerned. Chou typically underperforms in hot markets. And despite missing this latest opportunity, his foresight is commendable. As Chou awaits further opportunity, sitting on a cash position of nearly 50%, investors can take comfort in the fact that their investment should be protected well if markets continue to deteriorate. And with an MER of just 1.75%, investors aren't paying much while they wait. Of Note Despite the fact that Chou Associates has over 20 years of performance history, the fund's 3-star rating only reflects its performance over the past three years. There are not enough funds in the Global Small/Mid Cap Equity category with a five or 10-year performance history to factor these time periods into the star rating. Chou stepped down from his role at Fairfax Financial in the spring of 2007 since he was no longer drawing a salary from Fairfax and his time had been exclusively devoted to running the Chou funds. And although he did not feel there was a conflict of interest between his dual roles, officially ending his employment with Fairfax eliminates any questions altogether. Although this fund has typically resided in the U.S. Equity category, Chou has included a number of non-U.S. names over the years. Furthermore, he has stated that he plans to make this the most global fund in his line-up. Chou currently doesn't hedge the fund's currency exposure, and doesn't normally do so. However, he will put hedges in place opportunistically. The fund currently has no exposure to energy and holds marginal positions in the materials and technology sectors. The fund's largest weightings are in telecommunications and consumer services. All of Chou's offerings can be purchased in U.S. dollars.

Morningstar Rating (as of 31 Jul 07) Strategy Francis Chou is a deep value manager who insists on receiving a "margin of safety" when buying securities. He requires a 40% to 50% discount to fair value. After screening for securities that appear attractive on a quantitative basis, he conducts detailed research on the individual companies that make his first cut. He also incorporates macroeconomic analysis into his investment process, but this plays a relatively minor role. Management Francis Chou, CFA, is president and CEO of Chou Associates Management Inc. in Toronto. He founded his firm in 1981 as an investment club for several Bell Canada employees. Chou Associates was first offered to the public in October 1986. Chou also manages four other funds: Chou RRSP, Chou Asia, Chou Bond, and Chou Europe. Kudos Chou gets top marks for corporate governance and stewardship. This comes as no surprise as Chou invests heavily in his own funds. The fund's MER, at 1.75%, is lower than all other mutual funds in the category with a minimum investment lower than $100,000. The fund's performance is remarkably consistent. It rarely produces a negative three-year return and has never posted a losing four-year return. By comparison, the S&P 500 currently has a negative eight-year return. Anyway you care to measure it (absolute, relative or risk-adjusted), the fund's long-term performance has been nothing short of spectacular. Question Marks The fund's success is exclusively dependent on Francis Chou. If Chou were unable or unwilling to run the fund any longer, it would be unreasonable to expect a replacement manager to post the outstanding results that he has managed to deliver over the years. Fairfax's 26.3% ownership of this fund could present a challenge for Chou if they were to liquidate this position.

Legg Mason-- an update on LM

The new CEO replacing Chip Mason has just bought $1 million dollars of shares on the open markets at $71.00.

Brian Rogers recently purchased $71 Million worth of stock as well, adding to the list of prominent gurus who have been averaging down recently.

I'm planning to look for an opportunity in the mid 60's sometime this year for a very long term holding.

Ron Baron's Annual Shareholder Letter-- A must read

Brilliant insight

In particular, read his commentary regarding emerging markets investments.

More on BAM- Brookfield Asset Management

For an honest, insightful and succinct view of this amazing company and it's view going forward read J. Bruce Flatt's shareholder's letter here.

Note: Infrastructure oriented companies can't be assessed by the standard metrics like P/E and P/B ratios. Cash flow/share is the best fundamental number for comparison when you have a company that owns toll bridges, hydroelectric dams and entire forests as well as malls in Brazil and the Middle East.

The truly global footprint, superb management, strong balance sheet and share price hanging close to 52 week lows makes this one of the safest and most attractive long term investments I've seen in a long time.

I plan to accumulate a position in small quantities over the next year and hold them in my personal RRSP.

l

A tech value stock??? From Gurufocus.com

CSCO Cisco Systems Ltd

Cisco Systems & Value? Who'd a thunk it? CSCO

by Dr Paul Price Cisco Systems [NDQ:CSCO] Feb. 4, 2008 close: $23.82
52-week range: $22.30 - $34.24

Cisco is the leading supplier of networking products for LANs and WANs. Products include routers, switches and netwotrk management software. Domestic revenues were 52.5% last FY out of total sales of about $35 billion. FY 2008 revenues are expected to hit over $40 billion.

Who would have thought CSCO would turn up as a 'value' stock? Yet with current FY estimated earnings of $1.59 [ends July 2008] and $1.82 forecast for FY 2009, these shares are offered at just 14X calendar year earnings for 2008. CSCO's 10-year median P/E has been 35X but that includes the tech insanity of 1998 - 2000. The lowest average annual P/E since 2002 was 21.3X [in 2006].

Cisco held almost $25 billion in cash as of late October against total debt of just $6.6 billion. It is rated A++ for financial strength by Value Line. Every year since FY 2001 has seen rising sales, cash flow, and EPS.

These shares hit $34.20 as recently as November yet their estimates have been raised since they posted October period earnings of $0.35 v. $0.26 year-over-year. Value Line is assuming a 3 - 5 year P/E mulitple of 23X. Even 20X this year's $1.70 calendar year expectation leads to a target price of $34 or + 42% from today's quote.

Risk? Cisco's earnings predictability is not high. It rates only 40th percentile, making all estimates less than binding. All techology companies have 'leapfrogging' risk should alternate systems be developed that would steal market share. That said, CSCO is the world leader in its field and continues to make complementary acquistions to broaden and refresh their market penetration.

At today's price the risk/reward looks very favorable. The recent pullback has given us a chance to own a world class company at a very ordinary valuation.

How cheap is Cisco right now? At its absolute low [split adjusted] $5 price in 1997 the P/E was 21.8X and the shares were set to surge to $82/share by 2000. At 2002's low price of $8.10 [set in a horrible market environment] their P/E was 20X. Cisco's share price then skyrocketed from $8.10 to $29.40 in about 16 months.

From a 14X forward multiple who knows how high these shares can go in the next year or two?

A bear's eye view of the current economic conditions

A bit overly pessimistic in my view but the data is presented well here. The importance of the dividend yield and cash reserves/low debt balance sheets in uncertain economic times (or all times?) is a good take-home lesson from that presentation.

If you are looking for a simple way to provide downside protection (hedging) in your portfolio and don't want to mess around with the complexity of options and/or margin accounts you can use specially designed ETFs that use derivatives to reduce trading costs and effectively short entire sectors of your choice.

The ETF's that might be of interest:

1. SDS Ultra Short S&P 500 (US) (gives approx double the negative return of the S&P)
2. EEV Ultra Short Emerging Market index
3. HXD Horizon Beta Pro double short TSX

Look carefully at the graph on the page for number 3. Despite all the downward action of the TSX in the last 6 months, you still will be ahead if you had bought the Bull ETF rather than the Bear one.

IMHO, these ETFs belong in a trader's toolbox and really have no place for the long term investor. I think the solution is to follow Mr. Buffett's oft quoted advice:

"The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective."

and

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

Grahamian Stock List

Of these the only one I knew well was OSG. I owned it for approx 6 months 2 years ago after it quickly appreciated over 50% and I had trouble grasping the business metric (the Baltic Dry Shipping Index) in order to objectively decide when to sell.

See the chart and a review of Ben Graham's criteria here