Everybody's selling!!! Should you?

No way: swim upstream from the herd.

Fed Data Shows Large Household Selling of Equities

March-31-2008

If you like tables (not the kind you can throw your junk mail on), the Federal Reserve Flow of Funds Z1 publication may be up your alley.

Link: http://www.federalreserve.gov/releases/z1/Current/z1.pdf

Because I’m somewhat of a “numbers nerd”, it is up my alley.

The Z1 report is a quarterly summary of all financial flows within, and to and from, the United States . It shows the aggregate of all money flows made by the household, business, and government sectors each quarter.

Although it is hard to make money by studying economic data, some data is useful to understanding what’s going on.

One thing I find very interesting in the Z1 report is that the household sector has been selling their holdings of U.S. stocks for several years. Net holdings of individual stocks (not including mutual funds or pensions) by households has decreased at an accelerating rate.

The public is selling stocks (net yearly investment in individual stocks by households):

2003: -$86 billion
2004: -$269 billion
2005: -$467 billion
2006: -$761 billion
2007: -$989 billion

While households have been selling their individual holdings, they have been adding an average of $623 billion to deposit and money market accounts, and an average of $257 billion to mutual fund holdings, in the past 3 years. Meanwhile, net foreign acquisition of U.S. stocks has increased from a mere $5 billion in 2003 to $182 billion in 2007. The largest net buyer of stocks in 2007 were companies themselves, who bought $837 billion net stocks. The total value of all stocks in the U.S. is approximately $16 trillion.

If you add together foreigners and companies, they absorbed nearly all the household sector selling in 2007.

Since 2003, household direct ownership of U.S. stocks has fallen from 43% to 33% of the total stock market, while foreign ownership has increased from 12% to 17%. U.S. households have been net buyers of foreign stocks and mutual funds, though.

Adding together all this data one thing that stands out in my mind is that individual investors are, for the most part, becoming less and less interested in holding individual U.S. stocks. They are holding more and more cash, foreign stocks, and mutual funds. As a percentage of total assets, households now have only 7.6% of their money in individual U.S. stocks, down from 10.7% in 2003. Households have 31% of their assets (and 73% of their liabilities) in real estate.

The first quarter of 2008 looks like more of the same, with individual investors selling stocks (and now mutual funds) at a furious pace.

Clearly, the headlines have been bearish. Economic woes are front page news. Yet if the pace at which they have been selling continues, households will not directly own ANY U.S. stocks in another 5 years. While anything is possible, this is completely implausible. The very idea is wacky. Wacky, I say!

So, what good is this information? I theorize that there will be an abatement of selling pressure by households at some point in the not-too-distant future.

First, it is mathematically impossible for direct household selling of stocks to continue at the same rate of 2007 for very long. Directly held stocks by households totaled $5.4 trillion at the end of 2007. Assuming declines in market value have taken that total to around $5 trillion as of this writing, net selling of another $1 trillion by households this year would take the total down to $4 trillion. This would be a 20% reduction in net ownership in 1 year! Even if you think that is possible, another $1 trillion the following year would be a 25% net reduction (from $4 to $3 trillion). The following years would be a 33% and a 50% reduction if the trend continued. No households would own stocks directly by 2012. That isn’t going to happen. There will always be some people in the U.S. that own shares of U.S. companies.

Second, households ended 2007 with $8.3 trillion in bank deposits and money market funds, enough money to buy fully half the U.S. stock market. With yields on deposits declining to sub-inflation rates, a few people will decide enough is enough and start buying stocks for income if nothing else. Rather than putting more money in the bank, I expect them to start looking at blue chips like GE with a 3.7% yield and saying “What the heck!”. GE has paid annual dividends going back over 100 years.

Third, while it is true that retiring baby boomers will need to liquidate some securities for living expenses, the selling period is extended over a long time. A 62 year old baby boomer born in the first “boomer” year of 1946 and retiring in 2008 can expect to live another 20 years or more. It is unlikely that any selling pressure from retiring boomers, who already hold a diminished percentage of the total stock market, will exert much influence over market prices.

Also, I expect some time soon, many U.S. investors will start to understand that their old domestic Dow 30 blue chips such as Coca-Cola, IBM, Hewlett-Packard, 3M, GE, Johnson & Johnson (among others), achieve half or more of their business outside the United States. Why sell Coke to buy a foreign stock when Coke IS a foreign stock for all practical purposes? 70% of Coke’s revenues are earned outside the U.S. In fact, some of these companies are better investments than foreign stocks simply because they are headquartered in the U.S. and as such pay many employees in devalued U.S. dollars. It’s sad but true!

Short term opportunity after PAIN

SGP Schering-Plough Corp:

Dropped 25% today to $14 and change due to a negative RCT on SGP's novel cholesterol drug Vytorin. This is a huge over reaction, leaving SGP one of the cheapest big Pharma players around. The forward P/E multiple is just 8. It has a bit more debt than I'd like to see with the recent $14 Billion Organon acquisition (D:E almost 1); however, the pipeline looks healthy for the future and there is a potential blockbuster anaesthetic drug called Sugammadex nearing release worldwide. A new anti-platelet agent called TRA (for Acute Coronary syndromes) is also promising.

Morningstar has indicated that it feels the FMV of SGP as of today is $31, giving a greater than 50% margin of safety.

Fred Hassan is a CEO with an excellent track record. He has introduced a much leaner infrastructure which should continue to improve operating margins down the line.

I already own a few shares of SGP and have put in a bid to double my stake today.

Addenum:

Summary of Morningstar's take: "Despite our reduced expectations for Vytorin and Zetia, we continue to believe Schering-Plough SGP holds much potential. Outside of what we believe to be an overreaction to the Enhance data, Schering-Plough offers a robust new pipeline of drugs and relatively minimal patent exposure."

Status/Strategy Report

BAM.A Brookfield Asset Management--> I think the market deeply misunderstands this company as a REIT. A relatively small share buyback of 1 million shares was just completed this month (remember the market cap is $17 Billion). I have put in a standing bid for more shares at $25, hoping that this bear market rally will collapse soon and drag BAM down with it to even cheaper levels. It is definitely possible that BAM may find it more difficult to find other equity partners to make their multi-billion dollar deals with in the current environment-- without such a catalyst, I doubt that this stock will take off any time soon, so I'm biding my time to acquire shares in small increments, slowly.

BBSI Barrett Business Services--> Remains debt free despite acquisitions. I went over the annual report in detail and barring one accounting irregularity, the company's prospects appear solid. The irregularity was an internal control problem with the IT dept regarding the cash management and reporting of cash flows between offices and the head office in Vancouver, WA. The remediation procedure was well covered. I'm surprised that the analysts didn't bring it up in the Q4 conference call but it may be possible that this information wasn't available to them at that time. Accounting irregularities of any type do make me nervous so I may wait for another quarter before adding to my position as I previously planned. I doubt that this issue will make a material impact on the company's financial health and it is the only big question mark/vunerability I can find to date. This company is maximally exposed to the turn down in the local California economy, so we are seeing the company remain profitable and debt free during adverse times, something that strongly suggests a large margin of safety despite being a small cap security. I think that the management is top notch.

KMX CarMax--> Wall St. is not enamored with this stock but its customers and employees certainly are. I've been hard pressed to find any negative feedback about it, even on the Motley Fool discussion boards. It's not dirt cheap at a P/E multiple of 20; however, the following issues add to the margin of safety: EPS growth exceeding 16% p.a. over the last 5 years, the lowest leverage in the industry D:E 0.12, a current ratio of 2.4 and committed management with considerable insider ownership (7%) and let's not forget that Berkshire is a major holder (10%). Their business plan (discussed previously) is solid and difficult to replicate.
Like BAM, I don't expect the share price to appreciate much in the next 18 months and I think recession has been already factored into the share price. Despite small-mid cap status, I think it is another good long term hold that I will add to on dips. Morningstar has reaffirmed its fair market value at $32/share recently and since its currently trading at about $19 this gives a P/FMV ratio of 60%. I would buy at any price less than or = to $19.

CKI Clarke Inc--> Definitely not a boring company. Armoyan (the CEO/President/Chair all in one) is aggressively buying back shares personally and through Geosam, a holding company owned by his family. He is still buying up small Canadian trusts and although I can see the strategy he is using paying off over the long term, I am concerned about debt. The annual report suggested a current ratio of over 6; however, recent investments (and share buy backs) will have consumed this readily available cash. It's difficult to estimate CKI's total short and long term debt with the information I have available. The last D:E ratio was 0.67 and I'm guessing it's closer to 1 now. I plan to hold tight with my fairly large stake until the next financial report. Unfortunately, Clarke doesn't host conference calls so the tough questions don't get asked. Armoyan is no dummy and he has a massive stake in this company, so I think that his interests are still aligned with the shareholders--- definitely more so in Clarke Inc that in the trusts he's swallowing up.

Quantitative Investing-- Sorry, you DO have to still use your brain

Fool me once...

by Todd N Kenyon He's back. Back to his old tricks, just not quite as bad. And only because people were willing to give him Billions to play with AGAIN.

No, not Donald Trump. John Meriwether, the infamous founder of the even more infamous Long Term Capital Management, (which strangely enough made highly-levered short term bets on a variety of fixed income and other securities). Of course LTCM lives in infamy due to it's $4B implosion in 1998 which forced a coordinated bailout to avoid a financial market train wreck (ironically, Bear Stearns was the only big investment bank that declined to participate in the bailout).

With merely $5B in capital, Long Term had borrowed about $125B and had off balance sheet positions with notional values of over a trillion dollars. LTCM employed up to 50x leverage because its trades, by design, only returned very small percentage gains, and its roster of rocket scientists and Nobel Prize winners believed that it was impossible for many of their bets to go against them at once - the diversification was too great (hmm - sounds familiar...). History has shown again and again however that so-called diversification works until it doesn't. When things get bad, EVERYTHING correlates. The Russian financial crisis provided another example of stress-induced correlation, and as essentially all of LTCM's trades started going against them, Wall Street vultures piled on and that was that.

The Russian Crisis was one of Nassim Taleb's "Black Swans" - an unprecedented and unlikely event that nonetheless was possible. Mr. Taleb described LTCM's strategy as akin to "picking up pennies in front of a steam roller" - a fairly certain series of small gains with the unlikely but real possibility of a fatal event.

The WSJ featured an article yesterday entitled "A Decade Later, John Meriwether Must Scramble Again". Amazingly, only a year after the LTCM disaster, Meriwether started another firm with LTCM alumni. Once again, investors gave him billions to manage. As the WSJ reports, until this year the funds have had mediocre but positive performance. They have performed well below peers and their benchmarks, but haven't lost money. Now, it is starting to look far worse as one fund is down 28% YTD. Meriwether has told investors he learned his lesson, and hence he now only employs a "mere" 15x leverage. Mere that is, until another black swan shows up. And show up it has in the form of the credit crunch. If investors all decide to bail and his bets continue to go against him, he's finished. Again.

This all begs the question as to why investors would give this guy billions shortly after he precipitated a major financial crisis. Not only that, they pay him 2% of assets + 20% of gains (i.e., $46 million last year just for the management fee!), only to have him underperform an index fund for years and then possibly implode yet again. Here he is back in the same sort of pickle as the one that killed LTCM, albeit with less capital and leverage. Thankfully, he likely won't cause a financial crisis (other than for his investors) this time. Will two times be enough to finally teach investors a lesson? Fool me twice, shame on me, fool me three times...?

Dr. Paul Price's analysis of Cintas CTAS

Caution-- I've still got to do my homework on this one so please don't accept the analysis at face value:

Too Good not to Mention Again - Cintas Corp. - CTAS

by Dr Paul Price Unformly Cheap – Cintas Corporation

Cintas Corporation [Nasdaq:CTAS] March 26, 2008 close: $28.82
52-week range: $27.41 [Mar. 17, 2008] - $41.04 [Jul. 13, 2007]
Yield = 1.60%

Cintas designs, manufactures and distributes uniforms mainly through its rental division (73% of sales). They also rent cleaning equipment. The remaining 27% of revenues comes from distribution of first-aid supplies, fire protection products and document management services.

EPS in their fiscal third quarter [ended February 29] were up 10.4% at $0.53 versus $0.48 year-over-year. Cintas lowered its guidance for the FY ending in May to $2.12 - $2.16 due to the weak U.S. economy. That revised figure still represents all-time record earnings on the highest sales in the company’s history. Current estimates for FY 2009 are now at $2.30/share.

The recent market sell-off has pushed these shares to < 13.5x current earnings – less than half the 10-year median P/E for Cintas. In fact, CTAS shares have only had an average annual P/E of less than 20 once since 1992.
Value Line is assuming a very conservative 18 multiple for CTAS for their
3 – 5 year projections.

Cintas has shown outstanding and consistent growth. Every year since 1992 has seen increased sales and earnings. The dividend has risen in each year during that period also.

Over the past 10 years:
[All figures are split-adjusted]

…………….Sales/share……….EPS………..Annual Dividend
FY 1997……..$5.80…………..$0.64…………….$0.10
FY 1998……..$7.64…………..$0.77…………….$0.12
FY 1999…… $10.64………….$0.99…………….$0.15
FY 2000…….$11.30………….$1.14…………….$0.19
FY 2001…….$12.76………….$1.30…………….$0.22
FY 2002…….$13.36………….$1.36…………….$0.25
FY 2003…….$15.75………….$1.45…………….$0.27
FY 2004…... $16.42...…. …...$1.58…….……….$0.29
FY 2005…….$17.97………….$1.74…………….$0.32
FY 2006…….$20.86………….$1.94…………….$0.35
FY 2007…….$23.36………….$2.09…………….$0.39

10-year CAGRs for all the above were between 13.5% - 15.5%.

As of November 30, 2007 Cintas had only 24% LT debt and total debt coverage of > 11x. Value Line assigns them a B++ financial strength rating and places them in the top 1% of their 1700 stock universe for earnings predictability.

Chairman Richard Farmer holds 11.4% of the shares and other officers and directors held another 3% of the outstanding. They have been actively buying in their own shares since 2004. The common share count has been reduced by over 10% [from 171.4 MM to around 153.5 MM] since then.

How cheap are these shares right now? They trade today dollars below the lows at any time between 2001 and 2007. In that whole period, when fundamentals were nowhere near present levels the absolute low hit in those seven years was $30.60 [and the trailing P/E at that multi-year low point was then over 21x].

A return to even 18x expected 2008 calendar year earnings of $2.20 would bring these shares back to $39.60 or plus 27.4% from today’s quote. Add in the 1.6% current yield and a 29% total return within 12 – 16 months looks to be quite predictable.

Is that crazy? Nope. CTAS shares have peaked at $42.90 and higher in each year since 1998.


Disclosure: Author owns shares and is short puts on Cintas Corp.

The Stingy Investor's Stock list for 2008

Norm Rothery's modified Graham criteria read it here

Ken Fisher's comments on the credit crunch

Other than Walmart, take his stock recommendations with a grain of salt. Arcelor Mittal is very highly leveraged, even by steel industry standards and has grown so much in the past 2 years that the law of large numbers will apply. C's fate remains to be seen. Why speculate when you can invest in known quantities such as Wells Fargo and US Bancorp that have been unfairly dragged down by C's poor stewardship?


Financial Columnists
Portfolio Strategy | Crunch Mythology
Ken Fisher 03.24.08, 12:00 AM ET

If you believe the popular economic myths of the day, you think there's a credit squeeze--less total credit available. This is nonsense. There's indeed less credit available to poor risks, individual and corporate. But that just means there's more for the good borrowers. Blue-chip companies are flush with capital and borrowing power. This is bullish, both for the economy and for stocks, especially stocks of big companies.

Fact: The largest firms have much more credit access in all forms than they did 12 months ago. These are the very firms that can spend it the most and the fastest.

Fact: Total corporate borrowing--that is, total U.S. corporate debt issuance--was higher in 2007 than in 2006. In January 2008 U.S. corporate borrowing was $101 billion, up slightly from the same month a year ago. The majority of this debt was of investment grade, meaning that it was rated BBB or better; within this segment the borrowings were up 12% from a year ago. Some credit crunch!

If there were a squeeze, interest rates would be shooting up. They aren't. Over the past year the yield on investment grade corporate bonds has gone down. At the superprime end, debt rated AAA, the yield is down from 5.18% to 4.63%. Globally, there are only 14 corporate borrowers with that rating (among them ExxonMobil and Novartis). But there are more than 350 A-rated or higher. Recently rates are down, a little, on AA, A and BBB bonds, too.

A parallel myth is that corporations have stopped doing takeovers and stock buybacks. Tell that to Microsoft. It's just that we've changed from a lot of small deals to fewer bigger ones. By the fourth quarter "credit crunch" headlines were ubiquitous, yet fourth-quarter 2007 announced takeovers were $478 billion, the fourth-largest quarter ever. The volume was a $116 billion gain from the third quarter. Share repurchase announcements in January totaled $59 billion, up 16% from a year ago. That's a $700 billion annual rate. The prior four months were also up--collectively, by 63.5%, to $276 billion ($828 billion annualized).

Where do we get all these myths about crises and collapses? From pontificators. The sort of folks who frequent Davos.

Yahoo will cost Microsoft $40 billion or more if it goes through--essentially half cash. It will issue long-term debt for the first time in its existence. Surprise, it will be AAA rated. In one bite, IBM announces a $15 billion stock buyback. Some credit crunch. Think big.

As I detailed last month, the market has shifted, as it did in the mid-1990s, into a period where the biggest stocks do best. We're in the first full correction of the new leg of the bull market. The Asian debt contagion then is the American debt contagion today. This debt crisis is, like the last one, a false alarm. By midyear we will awaken to an ever shrinking supply of equity and a growing economy. The market will be led by big companies.

If you think we're moving toward recession, you might expect steel prices to weaken. So many expect this to happen that recession is already built into the prices of steel shares. Since I see no recession, I expect steel to do well. Hence I like Arcelor Mittal (79, MT), domiciled in Luxembourg but spread across the globe. It operates in 60 nations. Its 115 million tons of annual capacity give it 15% of the world total and three times as much as its largest competitor. Arcelor mines coal and iron, makes coke, has both integrated mills and minimills and has top-notch distribution. In an industry selling at two times annual revenue Arcelor is at just one times. It goes for ten times likely 2008 earnings and two times book value. A little price increase from here could go a long way for this $115 billion market-cap producer.

Still worried about a recession? Then buy Wal-Mart (51, WMT), which retails affordable consumer staples in good times and bad. The world's dominant retailer at a market multiple of earnings isn't a bad way to go when the biggest stocks are doing best. Market capitalization, $204 billion.

It's going to take years for the financial sector to recover from its excesses, just as it took years for energy to recover from the 1980 collapse and for technology to recover from 2000. Still, I like Citigroup (25, C). The stock costs less than half of what it did last year. The market value of $129 billion looks high against earnings of $3 billion. But those earnings reflect the subprime writeoffs. These writeoffs have simply nothing to do with the underlying business. Take them out of the equation and you find Citi going for four times operating earnings. I think this is a $40 stock by mid-2009.

Big Pharma: Buy a basket of drug pushers

This is one sector that I feel it is worth spreading around your capital over 4 companies or so. Because of the massive R & D costs and the uncertainty of regulatory approval and/or late recognition of unacceptable adverse drug reactions, profits from big Pharma can be "lumpy".

The best approach IMHO is to put together a basket of companies' shares who have the following characteristics:

1. large cap (> 10 Billion) with global footprint and hopefully non-US HQ
2. big product pipeline (number of drugs/products coming soon for regulatory approval as well as those that are undergoing evaluation in RCTs)
3. piles of cash and no debt if there is a deficient pipeline, so acquisitions can compensate
4. favourable fundamentals i.e. 5 year low P/E P/B P/FCF
5. a generous dividend (at least 3%)

my favourites are (in no particular order): GSK, SNY, AZN, BMY, SGP, PFE, NVS

I own shares in GSK, SNY, BMY and have a bid on SGP.


Gurufocus has something to say about this topic:

Healthcare Stocks at 52-Week Low: GlaxoSmithKline plc, Novartis AG, UnitedHealth Group Inc, AstraZeneca PLC, Amgen Inc.
GuruFocus News

The S&P500 dropped only slightly last week, although that didn’t stop Pharmaceuticals to plunge deeper into their 52-week lows. Last week’s top five stocks that reached their 52-week lows were GlaxoSmithKline plc, Novartis AG, UnitedHealth Group Inc, AstraZeneca PLC, and Amgen Inc.

Last week’s top two out of favor industries were the Technology Hardware and Equipment industry and the Pharmaceuticals and Biotechnology industry. 93 stocks in the Technology Hardware and Equipment industry have reached their 52-week lows, while 3 have reached their 52-week highs, giving the Technology Hardware and Equipment industry a low/high ratio of 31. 79 stocks in the Pharmaceuticals and Biotechnology industry have reached their 52-week lows, while 4 have reached their 52-week highs, giving the Pharmaceuticals and Biotechnology industry a low/high ratio of 19.75.

Last week’s 52-week lows included many pharmaceutical companies, and all the companies in this article are in this industry. For more information about guru stocks at 52-week lows and more, click here: http://www.gurufocus.com/52weeklow.php.

GlaxoSmithKline plc (GSK) Reached the 52-Week Low of $41.44

The prices of GlaxoSmithKline plc (GSK) shares have declined to close the 52-week low of $40.85, which is 22.3% off the 52-week high of $59.98. GlaxoSmithKline plc is owned by 9 Gurus we are tracking. Among them, 4 have added to their positions during the past quarter. 3 reduced their positions, and two left them unchanged. 1 guru sold out his holdings.

GlaxoSmithKline plc engages in the creation, discovery, development, manufacture, and marketing of pharmaceutical and consumer health-related products. GlaxoSmithKline plc has a market cap of $109.76 billion; its shares were traded at around $40.8499 with a P/E ratio of 10.78 and P/S ratio of 2.42. The dividend yield of GlaxoSmithKline plc stocks is 6.1%.

Many pharmaceutical companies have raised the prices of their drugs. GlaxoSmithKline PLC lifted the prices of six drugs, including its seizure treatment Lamictal and antidepressant Wellbutrin.

Richard Snow owns 193,939 shares as of 12/31/2007 , an increase of 16.95% from the previous quarter. Dodge & Cox owns 77,757,166 shares as of 12/31/2007 , which accounts for 3.1% of the $126.23 billion portfolio of Dodge & Cox. Tweedy Browne owns 1,136,732 shares as of 12/31/2007 , which accounts for 2.36% of the $2.43 billion portfolio of Tweedy Browne CO LLC. Ruane Cunniff sold out his holdings in the quarter that ended on 12/31/2007 .

Most notably, legendary investor Warren Buffett bought 1,510,500 shares in the quarter that ended on 12/31/2007 , which is 0.11% of the $68.77 billion portfolio of Berkshire Hathaway.

Novartis AG (NVS) Reached the 52-Week Low of $48.5

The prices of Novartis AG (NVS) shares have declined to close the 52-week low of $47.05, which is 17.4% off the 52-week high of $60.36. The company provides healthcare solutions that address the needs of patients worldwide. Novartis AG has a market cap of $106.54 billion; its shares were traded at around $47.05 with a P/E ratio of 9.17 and P/S ratio of 2.82. The dividend yield of Novartis AG stocks is 3.1%.

Novartis AG is owned by 8 Gurus. Among them, 3 increased their positions, 2 left them unchanged, and 3 decreased their holdings in the company.

Novartis said outsourcing played a role in cutting $700 million of cost between 2006 and 2007. Some investors may worry that all Novartis is doing is using its strong balance sheet to keep them happy as it struggles against a growing list of problems that threaten to stagger sales and earnings growth.

Charles Brandes owns 1,674,144 shares as of 12/31/2007 , an increase of 414.33% from the previous quarter. Dodge & Cox owns 77,541,650 shares as of 12/31/2007 , which accounts for 3.34% of the $126.23 billion portfolio of Dodge & Cox. Irving Kahn owns 183,368 shares as of 12/31/2007 , which accounts for 1.69% of the $590 million portfolio of Kahn Brothers & Company Inc. Edward Owens owns 12,019,880 shares as of 12/31/2007 , which accounts for 2.71% of the $24224.48 billion portfolio of Vanguard Health Care Fund.

UnitedHealth Group Inc. (UNH) Reached the 52-Week Low of $37.19

The prices of UnitedHealth Group Inc. (UNH) shares have declined to close the 52-week low of $37.19 , which is 25.9% off the 52-week high of $59.46. The company provides healthcare services in the United States . It has a market cap of $46.54 billion; its shares were traded at around $37.19 with a P/E ratio of 10.87 and P/S ratio of 0.64. The dividend yield of UnitedHealth Group Inc. stocks is 0.1%.

UnitedHealth Group Inc. is owned by 13 Gurus. Among them, 3 increased their positions in the company, 2 initiated positions, 1 left them unchanged, and 7 reduced their holdings in the company.

UnitedHealth Group Inc. said its first-quarter and full-year results may be pressured, but says that so early on in 2008, there may not be enough results to jump to a conclusion. The company dropped almost 20% in two days after its competitors outperformed it.

Robert Olstein bought 554,000 shares in the quarter that ended on 12/31/2007 . George Soros bought 9,347 shares in the quarter that ended on 12/31/2007 . Dodge & Cox owns 17,859,862 shares as of 12/31/2007 , an increase of 58.84% from the previous quarter. Ronald Muhlenkamp owns 1,954,580 shares as of 12/31/2007 , a decrease of 20.61% of from the previous quarter. Wallace Weitz owns 3,569,172 shares as of 12/31/2007 , a decrease of 46.92% of from the previous quarter.

Most notably, legendary investor Warren Buffett owns 6,000,000 shares as of 12/31/2007 , which accounts for 0.51% of the $68.77 billion portfolio of Berkshire Hathaway. Glenn Greenberg owns 14,074,705 shares as of 12/31/2007 , which accounts for 24.64% of the $3.32 billion portfolio of Chieftain Capital Management Inc.

Director Richard T. Burke sold 50,000 shares of UNH stock on 12/12/2007 at the average price of $57.71; the price of the stock has decreased by 33.67% since.

AstraZeneca PLC (AZN) Reached the 52-Week Low of $37.55

The prices of AstraZeneca PLC (AZN) shares have declined to close the 52-week low of $36.15, which is 39.4% off the 52-week high of $59.47. AstraZeneca PLC manufactures and markets prescription pharmaceuticals worldwide. AstraZeneca PLC has a market cap of $52.67 billion; its shares were traded at around $36.15 with a P/E ratio of 9.69 and P/S ratio of 1.85. The dividend yield of AstraZeneca PLC stocks is 5.2%.

AstraZeneca has been accused of violating the U.N.'s oil-for-food program, established in around 1990 by Britain 's Serious Fraud Office to relieve the impact on Iraqis of after Saddam Hussein’s 1990 invasion of Kuwait .

AstraZeneca PLC is owned by 4 Gurus. Among them, 2 reduced their positions, 1 initiated his position, and 1 increased his holdings.

HOTCHKIS & WILEY bought 6,527,300 shares in the quarter that ended on 12/31/2007 . Edward Owens owns 14,781,500 shares as of 12/31/2007 , which accounts for 2.62% of the $24224.48 billion portfolio of Vanguard Health Care Fund. Charles Brandes owns 13,009,633 shares as of 12/31/2007 , which accounts for 1.16% of the $47.85 billion portfolio of Brandes Investment.

Amgen Inc. (AMGN) Reached the 52-Week Low of $44.46

The prices of Amgen Inc. (AMGN) shares have declined to close the 52-week low of $44.46, which is 37.7% off the 52-week high of $70.49. Amgen Inc. is owned by 13 Gurus we are tracking. Among them, 1 initiated positions in the company, 5 increased their positions, 2 left them unchanged, and 5 reduced their positions.

Amgen, Inc. engages in the discovery, development, manufacture, and marketing of human therapeutics based on advances in cellular and molecular biology. It has a market cap of $48.36 billion; its shares were traded at around $44.46 with a P/E ratio of 15.77 and P/S ratio of 3.47.

Amgen has price competition from generic drugs, which will hurt the performance of the company. It is slow on blockbuster medicines, and it is also under pressure from competitors.

Dodge & Cox bought 11,972,170 shares in the quarter that ended on 12/31/2007 . Bill Miller owns 5,170,000 shares as of 12/31/2007 , an increase of 209.58% from the previous quarter. Edward Owens owns 9,989,355 shares as of 12/31/2007 , which accounts for 1.92% of the $24.22 billion portfolio of Vanguard Health Care Fund. Richard Pzena owns 9,982,236 shares as of 12/31/2007 , which accounts for 2.2% of the $21.08 billion portfolio of Pzena Investment Management LLC.

Exe VP, Global Commercial Ops George J. Morrow bought 2,025 shares of AMGN stock on 12/07/2007 at the average price of $69.97; the price of the stock has decreased by 36.46% since.

A Mega-cap Global Pick

I've always been amazed that a company of GE's size can be as effectively managed as it has been. I think this is why I've stayed away from it to date. Investors have "sold down" the stock to a historical "low" multiple of 15 because of its large financial division although it appears this was irrational. This interview lends further insight from Morningstar:

From "The Way of the Turtle": Investing Psychology

written by Todd Sullivan

"Way of the Turtle": Overcoming Biases in Investing

To hedge or not to hedge, that's the question

One of the most disciplined investors I have admired for some time is the Torontonian Francis Chou. Below he writes about currency hedging. (excerpt from the 2007 Unitholder letter-- get the full pdf at choufunds.com)

Hedging Currency for the long term

We are long term investors and, in general, our bias has been to concentrate on stock
selections and not worry about currency fluctuations. With years like 2007, the question
arises as to whether there have been major disparities in annualized returns over the long
term between a hedged portfolio and an unhedged portfolio; in other words, does one offer
more advantageous performance results during currency fluctuations? Two studies, one
covering the period from 1975 through 1988 and the other from 1988 through 2003, confirm
that with respect to the long term there have been no material differences in returns.
The study for the period from 1975 to 1988 was conducted by Lee Thomas, and presented in
a paper titled “The Performance of Currency – Hedged Foreign Equities”. I first read about
his findings in an article written by Tweedy Browne, a famous value investment firm in the
United States. Excerpts from the Tweedy Browne article appear below.
“A study by Lee Thomas, ‘The Performance of Currency – Hedged Foreign Equities’,
examined the performance of equities in Germany, France, Canada, the United Kingdom,
Japan and Switzerland from 1975 through 1988, comparing unhedged results to hedged
results for a U.S. dollar investor. These six stock markets accounted for about 88% of the
world market capitalization, excluding the United States. The study used FT-Actuaries
Indices returns, included dividends and assumed that the beginning of each month the
investor hedged by selling forward (for U.S. dollars) for one-month delivery the foreign
currency value of his equity shares. Over the 1975 through June 1988 study period, the
compounded annual returns on hedged and unhedged foreign equities were 16.4% and
16.5% respectively.”

The study for the period from 1988 to 2003 was done by Meir Statman, and Glenn Klimek,
Professor of Finance at Santa Clara University. They wrote, “We examined hedged and
unhedged portfolios during 1988 - 2003 and find that their realized returns and risk were
virtually identical. Portfolio managers who care about the risk and expected returns of policy
portfolios could have chosen to hedge or not to hedge by the toss of the coin. The mean
monthly returns of unhedged global portfolios were higher than those of hedged ones in
eight of the 16 years from 1988 through 2003 and lower in the other eight…. The 8.53%
mean annualized return of the unhedged global portfolio was slightly lower than the 8.60%
mean annualized return of the hedged portfolio during the overall 1988-2003 period.”
While the effect on long term results may be statistically insignificant, on a year-to-year
basis, currency swings can truly distort results. These swings can be heart stopping,
particularly for our unitholders, and especially when the currency goes against them. This
was evident with the Fund in 2007. But in this situation the reactions were mixed. We
received a number of calls regarding the results. Investors from Niagara Falls on the U.S.
side of the border were quite pleased with the 2007 performance (+5.8%), whereas investors
just half a mile away, in Niagara Falls, Canada, expressed concerns about the Fund’s
performance (-10.2%).

We don’t know what the true value of the Canadian dollar is vis-à-vis the U.S. dollar but we
would hazard a guess that it is somewhere between 80 cents and $1.20. Therefore, we
believe that the Canadian dollar is trading in the range of fair value. However, on a short
term basis, it is subject to many variables such as the current price of energy, monetary and
fiscal policies of both countries, carry trades by currency speculators (they can swing it
either way by 30%) and so on.

When deciding to hedge vs. not hedge, it is only in hindsight that there can ever be certainty
that the right decision was made. It is virtually impossible to sustain any reliable degree of
success in predicting which way to go. When measured on a year to year basis we have been
wrong in the past and it is likely that we will be wrong again in the future. But there is little
need for concern. The ramifications of such hedging decisions should only affect short term
performance results for the Fund. We are long term investors and therefore, over the long
term, whether we ‘got it right’ or not should be immaterial.

Our bias at this time is ‘not’ to hedge because we believe that the Canadian dollar is trading
in the range of fair value. In the long run, it will be influenced significantly by energy prices.
Based on the latest trade figures, Canada’s trade with the world is at a deficit net of energy.
With the dollar at parity with the U.S. dollar, all the numbers from exports, tourism,
manufacturing and retail sales look appalling when compared to last year. The only time
where we may be inclined to hedge the currency is during a period of extreme
undervaluation. So for now, be prepared for a bit of a bumpy ride, and some extra volatility,
but take into account the results of the aforementioned studies which indicate that (at least in
the past) it all evens out in the long run. And remember, hedging currencies comes with a
cost…about 1% a year.

Mr. Olstein's shareholder letter

this man is known as the financial disclosure Gestapo in the financial world.

have a look at his annual letter here.

notice that Barrett Business Services BBSI is the largest holding in his strategic fund. You'll see other familiar names like CSCO, HOG, LM, DELL, AXP

Brace yourself

After deep share price valleys in almost every equity yesterday, the same shares are up 5-10% in one day--- all because of the anticipation of a full point shave by the US Fed. I wouldn't be surprised if the market slumps again sometime next week, particularly if there's any more bad news along the lines of Bear Stearns and the like.

My current approach has been to set limit orders for the best quality equities that represent the greatest discount to intrinsic value. If new cash for investment is short (and when isn't it? ;-) ), I allocate capital equally between shares that I already own that I rate based upon (in order):

1. Discount to Intrinsic Value. I do my own calculations by guesstimating discounted future cash flows and compare them to Morningstar's. They are usually pretty close although I'm guessing the model Morningstar is using is more sophisticated than mine. 20%+ discounts get my attention-- this would mean that the company would not have to grow earnings beyond their current growth rates in order for me to profit. example: LM's discount is now 50%. Try it yourself: DCF CALCULATOR.

2. Capitalization: No Debt or if in a capital intensive sector, a current ratio >2.0 and high free cash flows sufficient many times over to cover interest payments. This is the mistake I've made several times in the past, particularly in small to medium cap businesses that did not anticipate the storm coming and it wiped them out despite excellent products, profit margins etc etc. Buffet's favourite saying is, "When the tide goes out, you get to see who's being swimming naked". i.e. KMX, COLM, SEB, BBSI, AXP, DELL, CSCO

3. Committed Management with an excellent track record, double digit ROIC and ROE and high (>10% depending on the market cap) insider ownership. This folks will usually buy more when the stock drops, building in a floor for the share price. i.e. BAM, SEB, BBSI, AXP, CSCO. Notice how BBSI and SEB (both with >30% CEO ownership)'s share price has actually INCREASED over the past 2 months, unlike pretty much everything else, even the oil companies? The management's understanding and commitment to their business is unwavering. This is a strong endorsement for the shareholder.

4. I prefer companies that have a global footprint to take advantage of overseas growth, yet have US SEC oversight and are not so large that they are unmanagable. I quite honestly do not trust Chinese or Indian financial reports. They are only worth the paper they are written on. I prefer the businesses that I have part ownership of to be accountable to the US, where they will happily incarcerate fraudsters for 20 years when they inevitably get caught. This is in stark contrast to Canada, Europe and Asia where executives very, very, very rarely do jail time even after flagrant theft and incompetent stewardship of shareholder's hard earned money. i.e. BAM, COLM, SEB, COV, GSK, BMY, LM, COP, CX, DELL

I suggest that you do not buy on the fed rate cut rally. Wait until the almost inevitable--- Mr. Market will get depressed again and a great buying opportunity will present itself like yesterday.

When will this all turn around? I don't know. Hang tight and enjoy the ride.

Guru buying of LM Legg Mason

it's now the #1 Guru consensus pick

Chou-- Bond Guru

read it here

The world according to GARP: CarMax KMX

I'm not talking about the Robin Williams film from the early 80's, I'm talking about Buffet's type of GARP: Growth at a Reasonable Price. Sometimes you'll see companies that trade at a premium P/E ratio and P/B ratio to its competitors, yet value investors like WB are buying the stock hand over fist. Why? Usually because:

1. The company has a wide economic moat that gives it a durable competitive advantage over its peers and an intimidating (or down right boring!) barrier to entry for future potential competitors. Brand recognition, scale, regulatory hurdles achieved etc etc contribute to the moat Example: Costco COST
2. The company has stellar management with its interest squarely in line with the shareholders. High insider ownership (not options), compensation that is performance based and reasonable corporate governance structure are check boxes here. Integrity of the CEO/CFO are key. Example: American Express AXP. NOTE: As a free market capitalist, I certainly have NO problem with senior executives getting rich as long as they create equivalent shareholder value along the way. Read more about the AMEX example here.
3. The company has a track record of increasing ROIC (Return on invested capital), ROE (Return on Equity) and returning wealth to the shareholders in the form of dividends and share buybacks if it cannot increase these metrics (mostly because it's too big). Example: HOG

Carmax KMX is a rapidly growing, mid cap ($ 4 B) used car dealership chain spun out of Circuit City in 2002. It has 90 stores and has been increasing new store openings at 20% yoy, targeting medium sized urban communities and 10% market share in those areas.

What distinguishes KMX from its many competitors is its business plan that has been very difficult for its peers to reproduce so far:

• customer experience oriented sales: no haggle pricing, flat commission for salespeople who are purposely chosen from fields outside of the auto industry, one person deals with customer from introduction to finish, including financing
• scale of company and innovative IT network allows customers access to larger choice of colours and styles of vehicles than the vast majority of competitors as well as rapid delivery from other stores to the client
• Increasing gross and operating margins despite the recent economic headwind
  

This strategy has paid off as the company keeps winning award after award for consumer and employee satisfaction. It has the highest market share for used car sales in the US at 2% and it only has stores in 40% of the US regionally. The majority of the stores are less than 5 years old and repeat customers usually return on average every 5 years.

Fundamentals and Balance sheet review:

• P/E 20 both 20-30% above comps.
• P/B 2.8
• Debt/Equity 0.2 low v.s. comps
• Current ratio > 2
• revenue growth 16% average 5 year compounded increase. Projected to maintain this by CEO and Morningstar (5 star rating)
• ROE 18%
• Insider buying last 3 months
• Gurus with major stakes: Warren Buffet (21 M shares acquired Sept and Dec 07 at $21), Dodge and Cox, Chris Davis, Chuck Akre and more

I have little doubt that Car Max will experience short term pain with US unemployment rising and a reverse "wealth effect" active as consumers see their house values continue to crumble. I see an opportunity to buy long term growth in a well managed company that can easily weather a downturn. Morningstar research suggests that used car sales don't change much in economic downturns-- new car sales do.

What would attract me even more to this stock: a dividend (even a small one). I understand that the company is focusing on growth right now but I like the fact that dividend payments motivate executives to have fiscal discipline.

I've purchased a small amount at $19 for my RRSP and am hoping for more downside in the share price.

I expect to hold this from 18 months to 5 years and possibly beyond. Once store saturation occurs, the company's strategy needs to be examined again.

l

Some Morningstar Picks for this week

My $.02: As Canadians investing with above par loonies, these equities appear even more attractive.

"Wide Moat" stocks mentioned below that I find attractive include:

1. MCD
2. CSCO
3. HOG
4. WMT

If you can buy them cheap and become comatose for 5-10 years, you will likely do well.

l


WEEKEND EDITION:

Cheap Dollar Reveals Some Bargain Stocks, But It Pays To Be Picky

3-9-08 10:20 PM EDT | E-mail Article | Print Article

NEW YORK (Dow Jones) -- Sorting through the gloom about the beaten down dollar and the slowing U.S. economy, some stock-pickers are finding bargains in companies that actually benefit from a cheaper buck. About 40% of S&P 500 companies derive more than half of their revenue from business overseas. For those companies, the dollar's decline can offset slowing domestic demand. "It's the weak dollar's dirty little secret," said Art Hogan, chief market strategist at Jefferies & Co. General Electric Co. (GE), International Business Machines Corp. (IBM) and Intel Corp. (INTC) stand to gain from higher overseas sales spurred by the decline in the U.S. dollar, Hogan says. So too do retail companies such as McDonald's Corp. (MCD), Las Vegas Sands Corp. (LVS) and Nike Inc. (NKE). Broadly, technology and health care are two sectors that get a leg up when the dollar is down. A large chunk of their revenue comes from overseas customers. More domestic-oriented companies don't get that revenue lift. But some of those U.S.-centric stocks, trammeled by investors this year, are looking tantalizingly cheap. "We're starting to see stocks oversold that are domestically based, that we're taking a deeper look at," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank. Scrounging for deals in equities comes on the back of a sharp sell-off in U.S. stocks and a quickening drop in the dollar, a tumble that both reflects and has fed concerns about the slowing economy. This week, the U.S. dollar hit new lows against the euro, which rose as high as 1.5459 Friday. The buck has lost 13% against a basket of six major currencies in the past year. Friday's employment report, which showed a loss of an estimated 63,000 jobs in February, was the latest blow. That surprise decline in jobs "reflects the ongoing deterioration in the outlook for U.S. growth and employment as the economy tips into recession," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon, in a note Friday. Sour sentiment about the dollar and economy has battered the major indexes as investors have fled equities and parked their cash in commodities. The S&P 500, says Standard & Poor's, has now made an official correction with a decline topping 10% this year. A silicon lining Nevertheless, equities hold some future bright spots. The tech sector is appealing to some. Its overseas sales get help from the cheaper greenback, and it may be partially buffered from what appears to be a consumer-driven recession. "Technology has benefited from the weaker dollar and the fact that global economies and emerging markets are upbeat and expanding," Fitzpatrick said. He named Oracle Corp. (ORCL) and Cisco Systems Inc. (CSCO) as two stocks with "reasonable" prices given their expected growth rates. Investing in tech during a market retreat is risky. The Nasdaq composite has lost more than 18% this year. Plus, the tech sector is vulnerable to a buildup in inventories, which can lead companies to slash prices. But sweetening its attraction are shares that have got a drumming in the past two months: Telecommunications services and technology are two of the worst hit sectors this year, with losses of around 20%. Home grown The sell-off in tech and other sectors has made U.S. equities a value-hunter's paradise. Roland Manarin, who oversees more than $500 million in assets as head of Manarin Investment Counsel Ltd., in Omaha, Neb., says he started buying financial- and home building-related mutual funds about two months ago when he was shopping for bargains. There are plenty. The S&P 500 (SPX) has lost 12% this year, while the Dow Jones Industrial Average (DJI) is down 10%. Manarin, an Italian immigrant who says he is convinced that both the U.S. currency and economy will rise again, says he tells clients to stop watching the news if they call in a panic. "If you feel brave, now is the time to buy -- when the crowd is despondently selling, we should be buying," he wrote to clients recently. For those bold enough to wade into choppy equity markets, some name brands stand out. Deutsche's Fitzpatrick lists paint maker Sherwin-Williams Co. (SHW) and motorcycle maker Harley-Davidson Inc. (HOG) as options once the market settles down. Given the slowing economy, defensive plays can involve investing in companies that produce what is needed, compared to what is desired. Discount retailers and quick-service restaurants, for instance, have continued to do well in the current climate. Shares in Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) have gained more than 4% this year despite warnings from the retail sector about a penny-pinching consumer. "Instead of steak at Outback [Steakhouse] you can go to McDonald's and get a hamburger -- these things are happening," Fitzpatrick said. Though its stock has taken a hit this year, McDonald's said strong international sales boosted revenue in the fourth quarter.

American Guru buying up Clarke Inc.

See my analysis of Clarke Inc below.

This intriguing company continues to fascinate me. The share price has dropped along with the total market from $10 in the fall '07 to the high $5 range recently. The Q4 and 2007 annual financial report didn't reveal anything particularly surprising-- some of Clarke's distressed companies he's picked up on the cheap are getting even more distressed in the current economic downturn. The company's financial health and fundamentals continue to be excellent with a current ratio of almost 7, P/B ratio of 0.7 and a P/E of 3. Clarke isn't going bankrupt anytime soon.

Bruce Berkowitz, the famed value investor of the Fairholm Fund has just declared ownership of 16.7% of the common shares of Clarke (accounting for all the convertible debentures he holds).

It's surprising and somewhat reassuring that Mr. Berkowitz would take such a big stake in such a small (280 M market cap) company.

Go to the SEDAR.com website and put in Clarke Inc to see for yourself.

l

Another view on the big banks

My approach will be to sit on cash until the summer and then consider adding to my bank holdings. I prefer USB and WFC. It's notoriously difficult to pick financial sector market bottoms. If you get a decent dividend to reward you during the waiting period, I don't think it matters much over the long term.

Dick Bove Says Banking Is Sound - Time to Buy Financials?

posted on: March 10, 2008 | about stocks: WFC

Why hot stocks like Google & Research in Motion and hotter commodities always disappoint, eventually

1. Reversion to the mean. A reason to look for great companies in hated sectors i.e. AXP, USB, LM and to stay away from momentum plays like gold, oil and stocks everyone is talking about on CNBC.

2. The law of large numbers. Warren Buffet refers to this on the 2nd page of his letter this year: Berkshire cannot replicate it's past performance simply because it is now too big. Very rapid growth is not sustainable and any share price that prices in sustained growth at non sustainable levels will crash hard at an unpredictable time (i.e. when Wall Street figures out that it really isn't "different this time" and sells their stake). This is why I prefer midcap and small cap companies with established leadership (who are company owners, not employees), a global footprint, little or no debt and cash on hand. i.e. COLM, SEB, BBSI

Pabrai’s Law of Large Numbers

Posted by: Drizzt on Sunday, November 4th, 2007

In 1939, Sir John Templeton borrowed money to buy stock in 104 companies selling under $1, 34 of which were in bankruptcy. In time, four of those stocks ended up worthless, but Templeton turned massive profits on the portfolio as a whole. Should we be looking at small- and mid-cap stocks? Pabrai thinks so.

The S&P 500 vs. The Big Boy In this 2002 article, Mohnish Pabrai examines the effect of buying the biggest and brightest Fortune 500 company (the most valuable business by market cap) each year from 1987 to 2002.

The result: You would have earned just 3.3% vs. 10% for the S&P 500 during that time.

In his study, Pabrai points out that there seems to be a glass ceiling on revenues—none of the top companies got much beyond $100 billion. And so he asks the question…

Is There A Natural Upper Limit On Revenue Or Profitability Of A Business?

According to Pabrai, the answer is yes. From constant attacks by competitors to management’s ability to handle only so much input, the largest companies can only grow so much.

According to Clay Christiansen in The Innovator’s Dilemma, this is a disruptive innovation phenomenon—and the big companies can’t possibly overcome it with speed and great success time and time again.

Pabrai’s Law From where does the best growth come? Pabrai says you should stick with companies generating no more than $3 to $4 billion in annual cash flow—particularly if that company is considered a blue-chip. Indeed, cash flows are most likely to tread water or start dropping almost immediately after your investment. A few companies will buck the trend, but they’re probably not the ones that end up in your portfolio.

Over the years, I’ve taken a pass on many supposedly stellar businesses purely on the basis of the Law of Large Numbers, and I’ve never regretted it. Taking insurance while playing Blackjack seems very logical, but it’s a sucker’s bet. Investing in the most valuable businesses around is no different. Low-Risk, High-Uncertainty:

Another Pabrai Law Is Mohnish saying we should run out and buy every stock under $1? I doubt it. Instead, look for businesses that have been "punished" by Wall Street—stocks that have had their prices beat down or that have experienced massive business growth without a commensurate rise in stock price. Then, Keep It Simple Don’t forget: Stick with simple, easy-to-understand businesses. Your sphere of competence and confidence is built into you, and it is likely different than mine (or anyone else’s sphere).

Going back to Pabrai—when I asked him how he determines a company is in (or out of) his sphere of competence, he meandered a bit before answering. Then, he gave me the "you just kind of know" answer. When you find a business, it will click. If you aren’t sure, let the prospective (and potentially mouth watering) profits go…and start looking for another opportunity. Investing is one of those games where it pays to be a quitter. If something seems too difficult, walk away. Just don’t translate that into your personal life and you’ll be fine.

Excerpt from Hotchkiss and Wiley's Annual Shareholder's letter

The boldface has been added by me.



D E A R S H A R E H O L D E R :

The following investment review and semi-annual report relates to
the activities of the Hotchkis and Wiley Funds for the six months
ended December 31, 2007.

O V E R V I E W

Turmoil in the US mortgage and credit markets continued to create a
volatile environment for US equities during the last six months of 2007.
Several banks and capital market firms took write-downs tied to
mortgage-backed securities and loans to fund leveraged buyout
transactions that were delayed or canceled. Changes in top management
personnel often ensued. Indeed, some financial institutions
posted the first quarterly losses ever endured in their long histories,
and raised capital from outside (usually foreign) sources. With the
lending climate nearly frozen, the housing sector worsened still further.
Worries about a 2008 recession became prominent in investors’
minds. Financial and consumer stocks took the brunt of this, falling
sharply. Meanwhile, hope remained that global economic growth,
combined with a very weak US dollar, would pull forward industries
and companies with such exposure. Gold hit a 27-year high, and
crude oil prices set an all-time record. Stocks in the energy, commodity
and global industrial areas finished up a remarkable year.

In our opinion, many consumer and financial stocks are now grossly
undervalued while many commodity-based companies have poor
valuation support. As price momentum carries the performance of
these sectors further apart, distortions in valuation measures may
grow. History indicates that this type of emotional/irrational environment
invariably reverts to a market supported by fundamental valuation.
We believe it is this shift in the market that should ultimately
provide the patient investor with sizable return opportunities.
Recognizing the stress in the financial and housing markets, and the
potential impact on employment and consumer welfare, both fiscal
and monetary authorities acted to reverse negative trends. The White
House and Congress began discussions on aiding homeowners with
mortgages due to reset or become delinquent. The Federal Reserve
injected liquidity into the financial markets several times, and cut
federal funds rates further, from 4.75% to 4.25%. The fixed income
yield curve has now steepened meaningfully. The profitability of
lending has thus improved for strong credits. This is a very positive
development for well capitalized banks. However, the stock market
appears focused solely on the problem areas of loan delinquency, the
write-downs booked and the potential for more. We believe the stock
price downdrafts in banks have generally been far too severe, and are
comforted that over past periods bank stocks have recovered long
before the cycle of credit losses ends.

We believe that value opportunities arise as the market takes the
current state of affairs and extrapolates these trends too far into the
future. However, over longer periods of time, the laws of economics
should come into play. Expectations can be influenced by short-term
headline news and emotion, and prices can become inefficient. Over
the longer run, stock prices are driven by long-term earnings power
and risk. As a manager, it is our objective to improve the valuation of
the portfolios during periods of irrational pricing. Over the past
months we have shifted the portfolios out of areas that have benefited
from price momentum and reinvested into areas that are out of
favor. Based on these actions, we feel the Hotchkis and Wiley portfolios
currently represent exceptional value. The majority of our portfolio
holdings are reflecting valuations we have rarely seen in the past
20 years.We believe the valuation spread between the stocks we own
and others outside the portfolio are in many cases extremely wide.
For cyclical stocks with global exposure it is typical to see operating
margins at historically high levels. Thus the market seems bifurcated
with some stocks trading at higher multiples on peak earnings than
many stocks in our portfolios trade at on trough earnings.

Own the road

I think the best way to buy a piece of the long term infrastructure boom (over 1 trillion dollars of revenue estimated just for the USA!) is through an ETF-- exchange traded fund. This allows you to own a basket of stocks in this area, many of which you'd have trouble purchasing through a Canadian broker. For example, IGF owns 5 European toll highways.

Have a read of this article and consider making it up to 5% of your portfolio. With an average P/E of 20, these companies/assets are not particularly cheap. OTOH, it's very difficult to imagine (short of apocalypse) a long term scenario where the growth and profit potential of well positioned companies wouldn't pay off.

If you want to focus your bet, read more about Cemex because new and improved infrastructure = more cement (I've analyzed the company at length previously and it's a core holding of mine).

Another to consider is MANITOWOC CO MTW

This company has the global market share for construction cranes of all types as well as a marine and food services unit. It has a forward P/E estimate of 10 and more cash than debt.

l

Why it's better to own the asset managers rather than their crappy mutual funds

... because they don't just have a license to print money- they have their hands in your pocket too! (Read this Economist article)


Despite this sad fact, I think the industry will only grow as the population of the world ages. People are generally bored by money matters and I think they will continue to give their hard earned cash to bozos who happily follow the other Wall Street lemmings over every asset bubble cliff that will come along and then be very smug about "at least matching or slightly beating the Market".

Don't fight 'em-- join 'em!

I own LM, BAM and have a bid in for AIG. I am interested in ORI as mentioned before.

l

Mandatory Reading

Berkshire Hathaway 2007 Shareholder Letter

Mr. Buffet's general comments are amusing and instructive, as always. Most of the companies he discusses are not available to retail investors unless you buy BRK. I own some in the Chou Associates Mutual fund I've discussed previously.

Seaboard SEB revisited: A picture tells a thousand words (click on the chart to enlarge it)

This midcap with very high insider ownership (70%) and superb valuation fundamentals has had its profit margins encroached by increasing corn and grain prices caused by the push to utilize biofuels. Although SEB produces grains in one subsidiary, production and shipping of pork products are the main area of expertise. The feed for the swine is getting much more expensive and the company is taking steps to reduce their costs (see the annual report's management discussion). The feeling is that this will moderate to some degree as many activist groups raise the alarm regarding the impact of of dramatically increasing food prices on developing nations. I've done a full analysis on the company previously in this blog.

This is still a relatively small company that has found its niche and has produced a fantastic ROIC for shareholders. Look at $100 of stock would have returned to you in the chart above.

I'm hoping for a drop in the share price back to $1300 so I can add to a position.

l

Great video on recent opportunities, particularly AIG (trading at 50% of it's intrinsic value)

also from Motley Fool

My disclosure: my wife owns USG. I own LM.

The Best Opportunity This Decade

http://www.fool.com/investing/value/2008/02/12/the-best-opportunity-this-decade.aspx

Jim Mueller
February 12, 2008

Over the past 60 years, the United States has seen, and survived, 10 recessions (not counting the one we may or may not be in at present). From the shortest one of six months in 1980 to the two that spanned 1973-1975 and 1981-1982, we've muddled through and come out the other side. In between each, we've experienced, on average, almost five years of expansion.

So while we may be entering another recession right now, I'm excited!

Pardon me while I wipe my chin
First, we have a whole bunch of people running around in panic mode crying, "The sky is falling!" They don't want to hold stocks during a recession, so they're willing to sell them -- cheap.

Second, the news media fans the flames of panic with constant stories about weakening consumer spending and the specter of recession.

Third, we've got a handful of really hated companies. Specifically, I'm talking about the banks, thrifts, and builders that caused and are feeling the fallout from the mess we're in.

What does that add up to? Bargains.

Like a kid in a candy store ... and the candy's on sale
One option is an investment company -- like Goldman Sachs (NYSE: GS), which has pretty much steered clear of bad collateralized debt obligations and mortgage-backed securities, yet its price has dropped 20% alongside others in the industry (Merrill Lynch (NYSE: MER), for example) that were entwined in the current crisis. Heck, if Merrill gets cheap enough, I'll even take a look at it. (Even bad companies can be good investments if you get them at the right price.)

Then there are homebuilders. While some might go bankrupt, conservative and well-capitalized firms will survive. MDC Holdings (NYSE: MDC) is clearly in the latter category.

Then there are the materials suppliers, such as USG (NYSE: USG), which have declined along with the sector. But this is another strong company that Warren Buffett owns and that we recommended in our Motley Fool Inside Value investing service. So while the sector is volatile on the whole, there are some very intriguing individual opportunities.

Finally, there are retailers. All that talk about lower consumer spending in 2008 has driven prices way down. It doesn't matter if you're a building retailer such as Home Depot (NYSE: HD) or a teeny-bopper supplier such as American Eagle Outfitters (NYSE: AEO). But really, who cares about 2008? For my money, I'm more interested in companies I can buy and own in 2013 -- so thanks for the bargains!

"When Miller and Nygren speak, people listen."
Investing in the above industries might seem counterintuitive now, but Bill Miller of Legg Mason says au contraire.

[Several] years ago, everyone wanted tech and Internet and telecom stocks. ... The time to buy them was in 1994 or 1995, when they were cheap. But in 1994 or 1995, people wanted banks and small and mid caps, which should have been bought in 1990, and well, you get the picture.

Bill Nygren, another great value investor, agrees. Looking at the current economic situation, he wrote, "What usually happens is that suffering industries begin to recover, the next crisis comes from somewhere least expected, and the cycle of creating new investment opportunities starts anew. We have no reason to believe it will be different this time."

What these gentlemen know is that investing today in areas that aren't well-liked will position your portfolio for when we come out of this bear market. There will be another bull market. What we have now is the chance to grab some good companies while they're cheap.

So what are you going to do? Stop investing in stocks altogether, worried that things will be different this time? Or listen to master investors (not me -- Miller and Nygren!) and look at some opportunities?

I know what I'm doing and I can hardly wait.

Jim Mueller owns shares of USG and American Eagle, but no other company mentioned. The Motley Fool also owns shares of American Eagle. USG, Legg Mason, and Home Depot are Inside Value recommendations. American Eagle is recommended in Stock Advisor. MDC Holdings is a Motley Fool Hidden Gems pick. The Fool has a disclosure policy.

Motley Fool on Dell

The Q1 conference call suggests that the company's execution is coming on more slowly than many investors would like. Cash flow and balance sheet are enviable. My low ball mid at $18.90 stands to be filled-- hopefully this week if the market crashes further.

Dell Is Building a Global Comeback

By Anders Bylund February 29, 2008

0 Recommendations

Like everybody else, Dell (Nasdaq: DELL) is sidestepping the slow domestic economy by growing at breakneck speed abroad.

Dell just reported earnings of $0.31 per share on $16 billion of revenue, which translates to a decent 10% year-over-year sales boost but slightly lower earnings. But the international growth story can still redeem the ailing giant, if you give it some time and TLC. Every piece of the geographic puzzle has its place in Dell's big strategic picture.

The Americas remain the mainstay of the company's operations with around 60% of total revenue. More specifically, North America contributes 49% of the global sales. That cash makes for a stable operating platform from which Dell can reach for higher-risk, greater-opportunity markets.

The Asia-Pacific region is the fastest-growing market, with 28% year-over-year revenue growth, but it's still the smallest contributor to sales at a modest 14% share. It's arguably the arena with the heaviest competition, as well: Everybody from Sun (Nasdaq: JAVA) to Hewlett-Packard (NYSE: HPQ) wants a serving of that sweet pie. Also, local heavyweights like Lenovo -- which took the personal computing division off IBM's (NYSE: IBM) hands a few years ago -- and Acer have a strong home-field advantage here.

Europe, the Middle East, and Africa hold the middle ground with a 26% contribution to sales, but this group also boasts the highest operating margins of the bunch. Dell is taking advantage of that situation by starting a manufacturing plant in Poland. That's smack in the middle of a region where labor is cheap but the middle class is growing in both size and affluence, and there aren't any local-hero competitors to speak of. Good move, Mike.

Dell is knee-deep in a year-long turnaround effort, and there is still a lot of work left to do before claiming any kind of victory. But there's an enviable balance in Dell's operations across geographic regions and product categories alike -- think Cisco (Nasdaq: CSCO) with tougher competition. In a few years, we should be able to look back at today's low, low share price as the best buy-in point in years. Dell has the tools, the vision, and the chutzpah to get it done.