One of my favourite value investors. He makes specific comments about real estate and health care sector investing as a deep contrarian strategy. I love it.
Saturday, June 28, 2008
Friday, June 27, 2008
Gurufocus: Buffett's cheapest stocks
Low P/E Warren Buffett Stocks: Ingersoll-Rand Company Ltd., Gannet Co. Inc., UnitedHealth Group Inc., Wells Fargo Co., and SunTrust Banks Inc.
Posted by: gurufocus (IP Logged)
Date: June 26, 2008 05:27PM
Stock market had a big down day. Are you fearful? If you are, maybe it is time to get greedy. Buy good companies at undervalued prices provides best rewards for long term investors. These are some of Warren Buffett stocks that are at very low P/E ratios. It might be a good place to start. Warren Buffet is arguably the most respected and successful investor in history. Following a value investing strategy that is an adaptation of Benjamin Graham’s approach, his investment strategy of discipline, patience and value consistently outperforms the market and thousands of investors worldwide follow his moves. Ingersoll-Rand Company Ltd., Gannet Co. Inc., UnitedHealth Group Inc., Wells Fargo Co., and SunTrust Banks Inc. are only some of the companies that he has chosen to invest in. Ingersoll-Rand Company Ltd. (IR) Ingersoll-Rand Company Limited, is a large and diversified industrial technology company that provides it's services both in the United States and internationally. Its products include Ingersoll Rand industrial equipment, Hussmann refrigeration equipment, Club Car golf carts, and Trane air conditioning services. In recent headlines, the company experienced a recent shake up in its executive team, and is reported as one of few companies that has been paying dividends without interruption for the last 50 years. Warren Buffet has owned shares of Ingersoll since the third quarter of 2007 and he just recently increased his position in IR as the number of shares increased from 636,600 in 2007 to 936,600 shares as of March 31, 2008 , an increase of 47.13% from the previous quarter. This position accounts for 0.06% of the $66.46 billion portfolio of Berkshire Hathaway, valued at $41.7 million at the end of the first quarter of 2008. Mason Hawkins has also increased his position while Glenn Greenberg and Michael Price both initiated positions in Ingersoll-Rand. Kenneth Fisher, NWQ Managers and Dodge & Cox remained steady in their share ownership. On the other hand, both John Keeley and Richard Snow decreased their positions. As recently as June, there has been activity within IR with regards to their shares. Director Gary D Forsee bought 1,000 shares of IR stock in mid-May at the average price of $46.42, the price of the stock has decreased by 14.35% since then. In contrast, Director Richard J Swift sold 9,000 shares of IR stock in early June at the average price of $43.89 and the price of the stock has since decreased by 9.41%. Finally, Director Tony L White sold 4,500 shares of IR stock in early May at the average price of $43.27 but since then the price of the stock has decreased by 8.11%. IngersollRand Company Ltd. has a market cap of $10.85 billion; its shares were traded at around $37.07 with a P/E ratio of 3.20 and P/S ratio of 1.18. The dividend yield of Ingersoll-Rand Company Ltd. stocks is 1.7%. Gannett Co. Inc. (GCI) Gannett Co., Inc. is a leading international news and information company that operates both in the United State and the United Kingdom . In the United States , the company publishes 85 daily newspapers, including USA TODAY, one of the most popular sites on the web, and nearly 900 non-daily publications. Along with each of its daily newspapers, the company operates Internet sites offering news and advertising. Gannett operates in two segments, Newspaper Publishing and Broadcasting and has a market cap of $5.85 billion; its shares were traded at around $21.96 with a P/E ratio of 6.2 and a P/S ratio of 0.81. The dividend yield of Gannett Co. Inc. stocks is 6.2%. Recently, the newspaper industry has experienced a consistent decline as advertising sales trail the slumping economy and the overall industry revenue is down 12 percent this year, on top of 2007's 8 percent drop. Gannet Co. Inc. has also felt the deceleration in the industry as it is down 55 percent in the last twelve months, a 13 year low for the company. Warren Buffet has had shares in Gannet since the second quarter of 2000, owning 3,636,800 shares in 2000 and 3,447,600 shares in 2008. His number of shares decreased after the third quarter of 2003 when the stocks were at their highest value of $304.7 million at a price of $88.14 per share. Although the value of the stock has decreased steadily since 2003 to a value of $100.2 million, Warren Buffet has remained unchanged in his ownership. In his recent interviews and shareholder meetings, Warren Buffett indicated that the era of newspapers has passed and that traditional news mediums are being interrupted by the internet. John Rogers and Brian Rogers have both increased their shares in Gannet Co. Inc. while Charles Brandes, NWQ Managers, and Arnold Van Den Berg have followed the footsteps of Warren Buffet and kept slightly adjusted or unchanged positions in Gannet. On the other hand, Davis Dreman sold shares to decrease his position with the company and Jean-Marie Eveillard sold out his holdings after the first quarter of 2008. Senior VP & Chief Digital Officer Christopher D Saridakis bought 5,000 shares of GCI stock on April 23, 2008 , at the average price of $25.55; the price of the stock has increased by 0.08% since. UnitedHealth Group Inc. (UNH) UnitedHealth Group Incorporated provides healthcare services in the United States to individuals, families, seniors, and businesses. The company's Health Care Services segment offers consumer-oriented health benefit plans and services plus administrative and other management services to customers. UnitedHealth Group Inc. has a market cap of $36.86 billion; its shares were traded at around $26 with a P/E ratio of 7.7 and P/S ratio of 0.48. The dividend yield of UnitedHealth Group Inc. stocks is 0.1%. Recently, Ron Muhlenkamp has lowered his holdings in UNH, his firm's largest holding at the end of the first quarter of 2008. Reuters reports that a recent bill that that was voted on in the U.S. House also impacts UNH as it proposes budget cuts to health companies which hold private health plans that contract with the government for patients on Medicare. Warren Buffet’s holdings in UNH have gone from 1,021,400 shares at the end of 2006 to 6,400,000 shares in 2008. The value of the stock has risen from $47.6 million at the end of 2006 to a high of $349.2 million at the end of 2007 Like Warren Buffet, most Gurus that own UNH have kept their shares of stock unchanged or only slightly adjusted, including Chris Davis, Edward Owens, George Soros, Dodge & Cox, Wallace Weitz, Kenneth Fisher, Glenn Greenberg, Ronald Muhlenkamp, David Dreman, and Bill Miller. In contrast, Robert Olstein and Ron Baron sold out their holdings in the quarter that ended on March 31, 2008 . Both Director Michele J Hooper and EVP, Human Capital Lori Sweere bought shares of UNH stock recently while Director Richard T Burke, Director James A /dc/ Johnson, and Director Thomas H Kean have recently sold shares of UNH stock. The price of UNH stock has decreased by an average of 9% since the start of the third quarter in 2008. Wells Fargo Co. (WFC) Wells Fargo & Company is a large and successful financial institution in the United States that provides banking, investment, insurance and mortgage services. It operates in three segments: Community Banking, Wholesale Banking, and Wells Fargo Financial. Wells Fargo & Company has a market cap of $83.89 billion; its shares were traded at around $24.07 with a P/E ratio of 10.38 and P/S ratio of 2.54. The dividend yield of Wells Fargo & Company stocks is 4.8%. Although recently small banks are predicted to experience a downward slump in the market, larger banks, such as Wells Fargo, are said to be reasonably secure, according to Business Week. Yahoo! Finance reports however, that despite the security Wells Fargo & Co. spent $640,000 in the first quarter to lobby on credit card regulation and mortgage reform, among other issues. Warren Buffet has had shares in Wells Fargo Co. since 2001, owning 110,142,760 shares in 2000 and 290,654,868 shares in 2008. His number of shares has increased steadily even as the value of the stock has decreased after reaching their highest value of $9.9 billion at a price of $35.62 per share in 2007 to $8.5 billion at a price of $29.10 per share in 2008. While Warren Buffet’s holdings have remained relatively unchanged, similar to Chris Davis, David Dreman, Kenneth Fisher, Tweeney Browne, Ruane Cunniff, NWQ Managers, Chuck Akre, and Arnold Van Den Berg, stock guru Richard Snow just initiated his holdings in the company. Brian Rogers, Dodge & Cox, Ron Baron, and George Soros however, chose to increase their positions while Wallace Weitz and Ken Heebner chose to decrease their positions. Both President & CEO, Director John G Stumpf and Director Richard M Kovacevich bought shares of WFC stock despite a recent decline in value. SunTrust Banks Inc. (STI) SunTrust Banks, Inc. is a diversified financial services company that provides personal finance, business banking, and institutional financial services to various to consumer and corporate customers in the United States . SunTrust Banks Inc. has a market cap of $14.26 billion; its shares were traded at around $37 with a P/E ratio of 9.43 and P/S ratio of 2.30. The dividend yield of SunTrust Banks Inc. stocks is 7%. Smaller banks are predicted to face a more difficult year this year due to the national economic downturn and SunTrust Banks Inc. is no exception. It has dropped 29.7 percent within the last four weeks. Warren Buffet has been a long term holder of SunTrust Banks, Inc. Currently, Warren Buffett owns 3,204,600 shares of STI as the first quarter of 2008 a number which accounts for 0.27% of the $66.46 billion portfolio of Berkshire Hathaway. Like Warren Buffet, Brian Rogers, David Dreman, Chris Davis, Kenneth Fisher, Dodge & Cox and Ruane Cunniff all kept steady shares in STI. Recently, Corp. EVP and CFO Mark A Chancy bought shares of STI stock while Chairman William R Jr Reed sold his shares while prices were declining.
Posted by: gurufocus (IP Logged)
Date: June 26, 2008 05:27PM
Stock market had a big down day. Are you fearful? If you are, maybe it is time to get greedy. Buy good companies at undervalued prices provides best rewards for long term investors. These are some of Warren Buffett stocks that are at very low P/E ratios. It might be a good place to start. Warren Buffet is arguably the most respected and successful investor in history. Following a value investing strategy that is an adaptation of Benjamin Graham’s approach, his investment strategy of discipline, patience and value consistently outperforms the market and thousands of investors worldwide follow his moves. Ingersoll-Rand Company Ltd., Gannet Co. Inc., UnitedHealth Group Inc., Wells Fargo Co., and SunTrust Banks Inc. are only some of the companies that he has chosen to invest in. Ingersoll-Rand Company Ltd. (IR) Ingersoll-Rand Company Limited, is a large and diversified industrial technology company that provides it's services both in the United States and internationally. Its products include Ingersoll Rand industrial equipment, Hussmann refrigeration equipment, Club Car golf carts, and Trane air conditioning services. In recent headlines, the company experienced a recent shake up in its executive team, and is reported as one of few companies that has been paying dividends without interruption for the last 50 years. Warren Buffet has owned shares of Ingersoll since the third quarter of 2007 and he just recently increased his position in IR as the number of shares increased from 636,600 in 2007 to 936,600 shares as of March 31, 2008 , an increase of 47.13% from the previous quarter. This position accounts for 0.06% of the $66.46 billion portfolio of Berkshire Hathaway, valued at $41.7 million at the end of the first quarter of 2008. Mason Hawkins has also increased his position while Glenn Greenberg and Michael Price both initiated positions in Ingersoll-Rand. Kenneth Fisher, NWQ Managers and Dodge & Cox remained steady in their share ownership. On the other hand, both John Keeley and Richard Snow decreased their positions. As recently as June, there has been activity within IR with regards to their shares. Director Gary D Forsee bought 1,000 shares of IR stock in mid-May at the average price of $46.42, the price of the stock has decreased by 14.35% since then. In contrast, Director Richard J Swift sold 9,000 shares of IR stock in early June at the average price of $43.89 and the price of the stock has since decreased by 9.41%. Finally, Director Tony L White sold 4,500 shares of IR stock in early May at the average price of $43.27 but since then the price of the stock has decreased by 8.11%. IngersollRand Company Ltd. has a market cap of $10.85 billion; its shares were traded at around $37.07 with a P/E ratio of 3.20 and P/S ratio of 1.18. The dividend yield of Ingersoll-Rand Company Ltd. stocks is 1.7%. Gannett Co. Inc. (GCI) Gannett Co., Inc. is a leading international news and information company that operates both in the United State and the United Kingdom . In the United States , the company publishes 85 daily newspapers, including USA TODAY, one of the most popular sites on the web, and nearly 900 non-daily publications. Along with each of its daily newspapers, the company operates Internet sites offering news and advertising. Gannett operates in two segments, Newspaper Publishing and Broadcasting and has a market cap of $5.85 billion; its shares were traded at around $21.96 with a P/E ratio of 6.2 and a P/S ratio of 0.81. The dividend yield of Gannett Co. Inc. stocks is 6.2%. Recently, the newspaper industry has experienced a consistent decline as advertising sales trail the slumping economy and the overall industry revenue is down 12 percent this year, on top of 2007's 8 percent drop. Gannet Co. Inc. has also felt the deceleration in the industry as it is down 55 percent in the last twelve months, a 13 year low for the company. Warren Buffet has had shares in Gannet since the second quarter of 2000, owning 3,636,800 shares in 2000 and 3,447,600 shares in 2008. His number of shares decreased after the third quarter of 2003 when the stocks were at their highest value of $304.7 million at a price of $88.14 per share. Although the value of the stock has decreased steadily since 2003 to a value of $100.2 million, Warren Buffet has remained unchanged in his ownership. In his recent interviews and shareholder meetings, Warren Buffett indicated that the era of newspapers has passed and that traditional news mediums are being interrupted by the internet. John Rogers and Brian Rogers have both increased their shares in Gannet Co. Inc. while Charles Brandes, NWQ Managers, and Arnold Van Den Berg have followed the footsteps of Warren Buffet and kept slightly adjusted or unchanged positions in Gannet. On the other hand, Davis Dreman sold shares to decrease his position with the company and Jean-Marie Eveillard sold out his holdings after the first quarter of 2008. Senior VP & Chief Digital Officer Christopher D Saridakis bought 5,000 shares of GCI stock on April 23, 2008 , at the average price of $25.55; the price of the stock has increased by 0.08% since. UnitedHealth Group Inc. (UNH) UnitedHealth Group Incorporated provides healthcare services in the United States to individuals, families, seniors, and businesses. The company's Health Care Services segment offers consumer-oriented health benefit plans and services plus administrative and other management services to customers. UnitedHealth Group Inc. has a market cap of $36.86 billion; its shares were traded at around $26 with a P/E ratio of 7.7 and P/S ratio of 0.48. The dividend yield of UnitedHealth Group Inc. stocks is 0.1%. Recently, Ron Muhlenkamp has lowered his holdings in UNH, his firm's largest holding at the end of the first quarter of 2008. Reuters reports that a recent bill that that was voted on in the U.S. House also impacts UNH as it proposes budget cuts to health companies which hold private health plans that contract with the government for patients on Medicare. Warren Buffet’s holdings in UNH have gone from 1,021,400 shares at the end of 2006 to 6,400,000 shares in 2008. The value of the stock has risen from $47.6 million at the end of 2006 to a high of $349.2 million at the end of 2007 Like Warren Buffet, most Gurus that own UNH have kept their shares of stock unchanged or only slightly adjusted, including Chris Davis, Edward Owens, George Soros, Dodge & Cox, Wallace Weitz, Kenneth Fisher, Glenn Greenberg, Ronald Muhlenkamp, David Dreman, and Bill Miller. In contrast, Robert Olstein and Ron Baron sold out their holdings in the quarter that ended on March 31, 2008 . Both Director Michele J Hooper and EVP, Human Capital Lori Sweere bought shares of UNH stock recently while Director Richard T Burke, Director James A /dc/ Johnson, and Director Thomas H Kean have recently sold shares of UNH stock. The price of UNH stock has decreased by an average of 9% since the start of the third quarter in 2008. Wells Fargo Co. (WFC) Wells Fargo & Company is a large and successful financial institution in the United States that provides banking, investment, insurance and mortgage services. It operates in three segments: Community Banking, Wholesale Banking, and Wells Fargo Financial. Wells Fargo & Company has a market cap of $83.89 billion; its shares were traded at around $24.07 with a P/E ratio of 10.38 and P/S ratio of 2.54. The dividend yield of Wells Fargo & Company stocks is 4.8%. Although recently small banks are predicted to experience a downward slump in the market, larger banks, such as Wells Fargo, are said to be reasonably secure, according to Business Week. Yahoo! Finance reports however, that despite the security Wells Fargo & Co. spent $640,000 in the first quarter to lobby on credit card regulation and mortgage reform, among other issues. Warren Buffet has had shares in Wells Fargo Co. since 2001, owning 110,142,760 shares in 2000 and 290,654,868 shares in 2008. His number of shares has increased steadily even as the value of the stock has decreased after reaching their highest value of $9.9 billion at a price of $35.62 per share in 2007 to $8.5 billion at a price of $29.10 per share in 2008. While Warren Buffet’s holdings have remained relatively unchanged, similar to Chris Davis, David Dreman, Kenneth Fisher, Tweeney Browne, Ruane Cunniff, NWQ Managers, Chuck Akre, and Arnold Van Den Berg, stock guru Richard Snow just initiated his holdings in the company. Brian Rogers, Dodge & Cox, Ron Baron, and George Soros however, chose to increase their positions while Wallace Weitz and Ken Heebner chose to decrease their positions. Both President & CEO, Director John G Stumpf and Director Richard M Kovacevich bought shares of WFC stock despite a recent decline in value. SunTrust Banks Inc. (STI) SunTrust Banks, Inc. is a diversified financial services company that provides personal finance, business banking, and institutional financial services to various to consumer and corporate customers in the United States . SunTrust Banks Inc. has a market cap of $14.26 billion; its shares were traded at around $37 with a P/E ratio of 9.43 and P/S ratio of 2.30. The dividend yield of SunTrust Banks Inc. stocks is 7%. Smaller banks are predicted to face a more difficult year this year due to the national economic downturn and SunTrust Banks Inc. is no exception. It has dropped 29.7 percent within the last four weeks. Warren Buffet has been a long term holder of SunTrust Banks, Inc. Currently, Warren Buffett owns 3,204,600 shares of STI as the first quarter of 2008 a number which accounts for 0.27% of the $66.46 billion portfolio of Berkshire Hathaway. Like Warren Buffet, Brian Rogers, David Dreman, Chris Davis, Kenneth Fisher, Dodge & Cox and Ruane Cunniff all kept steady shares in STI. Recently, Corp. EVP and CFO Mark A Chancy bought shares of STI stock while Chairman William R Jr Reed sold his shares while prices were declining.
Wednesday, June 25, 2008
Kenyon and Cramer
Mr. Market: Revealed!
June-23-2008
Yup, that mysterious stock market metaphor dreamed up by Ben Graham many many years ago is in fact a living, breathing (hyperventilating?) human being. This may come as a shock to other value junkies out there who know Mr. Market simply as the incarnation of the entire stock market's fear and greed. But I am here to tell you, Mr. Market lives. And he's been right here in front of us for years, in plain sight. Any guesses as to who he is?
Ben Graham, the father of value investing, wrote about Mr. Market more than 60 years ago in his seminal value investing tome "The Intelligent Investor" (Buffett's favorite investing book):
"Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him. and the value he proposes seems to you a little short of silly."
Many times Mr. Market has been described as manic depressive, or even schizophrenic. Have you figured out Mr. Market's identity yet?
Booyah! It's Jim Cramer of course! The walking, talking, screaming, ranting incarnation of fear and greed, high priest of the "Church of What's Working Now"!
The problem is, people listen to him. They watch him and follow his "investing" "advice" (both in quotes, each a euphemism) every day.
If we in fact agree that JC is actually Mr. M, perhaps his viewers should heed Buffet's advice:
"Once you think the market is telling you whether you're right or wrong, once you're looking to the market for guidance, you're in trouble"
Charles Ellis has this to say:
"If you can't control your emotions, being in the stock market is like walking into a heated area wearing a backpack full of explosives."
Nobody would accuse JC/Mr. M of controlling his emotions. One more from Ellis:
"If you go to the stock market because you want excitement, then sooner or later you will lose. Everyone who thinks the stock market is a game loses - everyone, to the last man, woman and child..."
JC/Mr. M is all about excitement! BUY BUY BUY! SELL SELL SELL! Unfortunately, no one, not even he, can predict short-term market moves with consistency. Don't believe me? Well check this out: he can't even predict his OWN short-term moves! The following video shows JC/Mr. M completely contradicting himself, flip-flopping 180 degrees, in one week's time:
[url=http://www.youtube.com/watch?v=_nkZ3eHeXlc]Cramer Flip-Flop[/url]
The lessons are simple. Again, no one knows what the market will do in the short term. If someone does, they are not on TV telling you about it, they are sitting on an island somewhere counting their billions. I certainly have no idea - as a value investor I buy when things looks cheap, but I have no idea how long it will take for the value to be realized. I simply believe that it will, at some point, in a reasonable amount of time (i.e., it could take years).
Secondly, Cramer is not an investor and has no special knowledge of what the market will do. He is an entertainer, a speculator, a gambler, an emotional ball of contradictions, some would even say a snake-oil salesman. If you had listened to him on Friday the 13th, a week later he tells you to do the complete opposite, without even acknowledging his previous call. I sure hope that some of his viewers caught this and saw the light.
We are in a VERY tough market environment right now, with emotions running wild, and nothing but black (sticky?) clouds on the horizon. Many of the best value managers out there are getting their heads handed to them. Yet it is just these kinds of environments that produce ultimately rewarding investment results.
There are many many companies selling at 10 year (or longer) low valuations. The painful thing is that just when you think something can't get much cheaper, it does. Maybe a lot cheaper. For how long, no one knows. But if your time horizon is long (as it should be for any investor), and you hold quality companies at attractive valuations, you will ultimately benefit when the cycle turns. Stay the course, and don't pay attention to every tick or every headline. Remember that you own pieces of good companies that are diligently working to grow your shareholder value. Most of all, pay no heed to Mr. M's emotional rants, unless you plan on using them to your advantage.
(Thanks to "andybird" for his comment on YouTube that Cramer is "Mr. Market in flesh & bones", which gave me the idea for this post)
Pzena on the beleagered financial sector
Read his concise comments here.
Financial/Insurance equities I am watching VERY closely over the summer:
AXP: if it drops to $40 or below, it would be a classic low risk high uncertainty opp that rarely comes in a lifetime. For an exhaustive analysis mentioned before about AXP read this.
LM: mid 40's would be tempting. Trading at 60% discount to FMV because of extreme short term uncertainty. Higher risk than AXP, for sure despite being one of the most respected asset managers in the world.
AIG: currently trading at 0.9 book value (if that can be believed). I plan to make small additions to an existing position as it dips into the $20's.
Y: Low risk and intermediate uncertainty. Off the Wall St. radar. Acquire more in the $330's.
MKL: low risk and low uncertainty. I'm currently buying at $380.
LYG: hoping to add more shares in the mid 20's. Lots of insider buying and an interesting acquisition tender for a German bank (Dresdner Bank) in the offing, showing that Lloyds is exploiting its relatively strong balance sheet versus its competitors current weakness to produce shareholder value for the long term. Dividend 15% with a 60% payout ratio (?sustainable).
Saturday, June 21, 2008
More on KMX: Au contraire.....
Have a look at this seekingalpha.com article about CarMax's most recent quarter. Read it here.
This type of reasoning is commonplace amongst most analysts, media moguls and the general public, in fact. A profitable, extremely well managed company with the largest market share in an industry sector and a proven business plan suffers margin contraction because of hard economic times and other variables out of its control (fuel prices etc). The share prices drops, usually by a disproportionate amount because of fear and uncertainty about the near term future earnings.
So these guys will tell you, "Sell now-- the price is dropping! Who knows how low it will go and when it will turn around?" When it does turn around and all the "smart money" has jumped back in, they will tell you, "Everything looks rosy for KMX: strong buy!" Isn't this exactly what were supposed to avoid doing.... selling low and buying high?
Momentum investing is almost irresistible, isn't it? The problem is that it requires exquisite market timing, something that even George Soros cannot do consistently over any length of time.
For us mere mortals, we need to ask ourselves the following about Car Max:
I am convinced that this company will emerge down the line as an even stronger market leader. It's pretty clear that the competition will suffer greatly in these dire times for auto resellers.
l
This type of reasoning is commonplace amongst most analysts, media moguls and the general public, in fact. A profitable, extremely well managed company with the largest market share in an industry sector and a proven business plan suffers margin contraction because of hard economic times and other variables out of its control (fuel prices etc). The share prices drops, usually by a disproportionate amount because of fear and uncertainty about the near term future earnings.
So these guys will tell you, "Sell now-- the price is dropping! Who knows how low it will go and when it will turn around?" When it does turn around and all the "smart money" has jumped back in, they will tell you, "Everything looks rosy for KMX: strong buy!" Isn't this exactly what were supposed to avoid doing.... selling low and buying high?
Momentum investing is almost irresistible, isn't it? The problem is that it requires exquisite market timing, something that even George Soros cannot do consistently over any length of time.
For us mere mortals, we need to ask ourselves the following about Car Max:
- Does the business have favourable long term prospects? Can you imagine a world without used car lots? Check
- Does the business have a consistent operating history? Check
- Plausible easy to understand business plan? Check
- Can and has the management shown they can execute? Check
- Is management rational and do they have "skin in the game' (insider ownership)? Check
- Is the reason for the share price decrease and/or earnings depression due to a temporary condition? Almost certainly Check
- Is management candid with its shareholders? I say Check. Read the most recent conf call and see how the CEO and CFO respond to the analyst's grilling session. Definitely candid. Some are not happy that Mr. Folliard refused to give earnings guidance for the remainder of the year but I think he's simply telling the truth--- he doesn't know! If he was like many other execs I will not name here, he would reassure us.
- Does management resist the "institutional imperative"? Check. (by this term, Buffet means that they're not afraid to go against the crowd, destroy unproductive corporate culture and be free thinking i.e. lead rather than follow the rest of the industry). There isn't the slightest doubt that KMX fits this criteria-- go to my original analysis months back for an explanation of how KMX differs from its competitors.
- trading at discount to FMV? Check. Well, at $15, probably a 25% discount calculated ultra-conservatively. If we're lucky the share price will drop to the low teens.
- ROE double digits? Check 13.3%
I am convinced that this company will emerge down the line as an even stronger market leader. It's pretty clear that the competition will suffer greatly in these dire times for auto resellers.
l
Wednesday, June 18, 2008
Buy when others are fearful: Keep an eye on CarMax KMX
I've outlined the bull call on this business earlier (do a search).
After two poorly performing sequential quarters mostly caused by margin squeeze in the entire industry, KMX has increased its market share and remained profitable (albeit 55% down yoy) in a dreadful economic environment. Consumers are looking to purchase more fuel efficient newer vehicles rather than older used gas guzzlers. If the economy worsens further, they may find that all they can afford are the older cars at any rate.
KMX has traded at a premium multiple to its competitors for a number of years i.e. twice the P/E ratio of Ashbury mostly due to its unique and difficult to reproduce business plan. It is growing organically, even now. It is a favourite of many value gurus and has been bought and held by Dodge & Cox, Warren Buffett (who owns 10% of the company) and Chris Davis (holding 15%). Davis, Buffett and D&C tend to batten down the hatches and hold on when they invest in these companies so I expect that will help put a intermediate term bottom in the share price. Not much insider buying or selling going on so this is an indeterminate indicator-- we should watch for this over the next few months.
The Achilles heel of both used and new vehicle dealers during capital market tightening periods, is the financing division. KMX has been pretty conservative about financing its vehicle sales in the past;however, a large amount of car loans remained on the books in Q1. Fortunately for KMX, Moody's and S&P both signed off on their car loans securitization move and they were able to sell off the debt and shore up the companies liquidity. This will allow them to continue to open new stores as per their strategy while the competition hunkers down.
Caveat: I expect short term weakness in the share price that could make investors stomachs collectively turn. I think that any shares less than $15 are cheap and it's definitely possible that the shares will get considerably cheaper than this. I would be surprised if the industry turns around before 2009 and as the dividend yield is 0, there are more conservative places to put your money right now.
I've put in a small limit order at $15 to add to an original position. I plan to watch the insiders activities carefully. History has shown that when they start buying (particularly the CFO and the more junior officers who have a bit less money to put at risk as opposed to the CEO), the bottom is here or near.
l
Tuesday, June 17, 2008
Dr. Price's suggested play on SNY
I am a "long only" investor as of yet but this particular strategy seems plausible:
Sanofi-Aventis [NYSE:SNY] Play Along with Buffett with this Low-Risk Combination:
Posted by: stockdocx99 (IP Logged)
Date: June 17, 2008 12:49PM
Sanofi-Aventis [NYSE:SNY]___ Play Along with Buffett with this Low-Risk Combination:
Sanofi –Aventis is the 4th largest drug company in the world and a big holding of Berkshire Hathaway. They've earned an ‘A+’ financial strength rating and an 85th percentile ‘stock price stability’ grade from Value Line.
2008 sales, earnings, cash flow and dividend payout are all expected to hit all-time highs. Despite that, the ADRs hit a new four-year low yesterday and now trade at $32.62 /ADR.
That’s well off their 2006, 2007 & 2008 highs of $50.10, $48.30 and $49.00 respectively.
This year’s annual dividend was $1.604 per ADR [before foreign tax withholding] for a pre-tax current yield of 4.50% - the highest ever for SNY.
Here’s a very conservative way to play with a Warren Buffett favorite while it appears to be very undervalued.
Buy 1000 SNY @ $32.62 …….........………….…….. -$32,620
Sell 10 SNY Dec. $32.50 Puts @ $2.55 ……………........…………………… +$2,550
Sell 10 SNY Dec. $32.50 Calls @ $3.00 ……………........…………………… +$3,000
Net Cash Outlay ……………………….............……….- $27,070
If Sanofi-Aventis ADRs stay above $32.50 until expiration date on Dec. 19, 2008:
[The ADRs are slightly above that price right now.]
Your stock will be called [sold] for $32,500.
Your $32.50 puts will expire worthless [a good thing for you as a seller].
You will have $32,500 cash - no ADRs and no option obligations.
That’s a $5,430 net profit on a cash outlay of $27,070 or + 20% in just over 6 months.
Not too bad on a stock that did not need to move up at all to achieve this result.
Risk?
Break-even on the shares is $32.62 less the $3.00 call premium = $29.62.
Break-even on the puts is the $32.50 strike price less the $2.55 put premium = $29.95.
In a worst case you will be forced to own 2000 ADRs of SNY at an average net cost of $29.79. That’s lower than the lows for these ADRs since early 2004 and way cheaper than Mr. Buffett’s cost basis.
GuruFocus.com noted that Berkshire Hathaway increased its SNY position by 69.6% during the March quarter (at an average price of $44) and held 828,500 total ADRs at that time.
Sanofi-Aventis [NYSE:SNY] Play Along with Buffett with this Low-Risk Combination:
Posted by: stockdocx99 (IP Logged)
Date: June 17, 2008 12:49PM
Sanofi-Aventis [NYSE:SNY]___ Play Along with Buffett with this Low-Risk Combination:
Sanofi –Aventis is the 4th largest drug company in the world and a big holding of Berkshire Hathaway. They've earned an ‘A+’ financial strength rating and an 85th percentile ‘stock price stability’ grade from Value Line.
2008 sales, earnings, cash flow and dividend payout are all expected to hit all-time highs. Despite that, the ADRs hit a new four-year low yesterday and now trade at $32.62 /ADR.
That’s well off their 2006, 2007 & 2008 highs of $50.10, $48.30 and $49.00 respectively.
This year’s annual dividend was $1.604 per ADR [before foreign tax withholding] for a pre-tax current yield of 4.50% - the highest ever for SNY.
Here’s a very conservative way to play with a Warren Buffett favorite while it appears to be very undervalued.
Buy 1000 SNY @ $32.62 …….........………….…….. -$32,620
Sell 10 SNY Dec. $32.50 Puts @ $2.55 ……………........…………………… +$2,550
Sell 10 SNY Dec. $32.50 Calls @ $3.00 ……………........…………………… +$3,000
Net Cash Outlay ……………………….............……….- $27,070
If Sanofi-Aventis ADRs stay above $32.50 until expiration date on Dec. 19, 2008:
[The ADRs are slightly above that price right now.]
Your stock will be called [sold] for $32,500.
Your $32.50 puts will expire worthless [a good thing for you as a seller].
You will have $32,500 cash - no ADRs and no option obligations.
That’s a $5,430 net profit on a cash outlay of $27,070 or + 20% in just over 6 months.
Not too bad on a stock that did not need to move up at all to achieve this result.
Risk?
Break-even on the shares is $32.62 less the $3.00 call premium = $29.62.
Break-even on the puts is the $32.50 strike price less the $2.55 put premium = $29.95.
In a worst case you will be forced to own 2000 ADRs of SNY at an average net cost of $29.79. That’s lower than the lows for these ADRs since early 2004 and way cheaper than Mr. Buffett’s cost basis.
GuruFocus.com noted that Berkshire Hathaway increased its SNY position by 69.6% during the March quarter (at an average price of $44) and held 828,500 total ADRs at that time.
Friday, June 13, 2008
AIG
Despite a short term gloomy outlook, I have a penchant for insurance companies with wide economic moats, strong balance sheets and long term track records for increasing shareholder value.
I've mentioned some of my favourites that are currently trading at large discounts to fair market values (using discounted cash flow modelling):
AIG's current management is likely to change soon and for good reason. Rather than focusing on short term mistakes/misjudgements that have a relatively small material effect on the intermediate term bottom line, one needs to look at strong free cash flows, global footprint (particularly well positioned in emerging markets) and a rock bottom share price. Dr. Paul Price's article summarizes how the market is irrationally discounting the stock due to short term uncertainty. A forward P/E of under 6 and trading just above book value, it doesn't come cheaper than this for a wide moat 5 star giant company being bought up aggressively by 14 value gurus.
Morningstar analyst has a few words to say about AIG:
I've mentioned some of my favourites that are currently trading at large discounts to fair market values (using discounted cash flow modelling):
- Y Allegheny Corp.
- BRK.B Berkshire Hathaway
- MKL Markel Corp
- AIG
AIG's current management is likely to change soon and for good reason. Rather than focusing on short term mistakes/misjudgements that have a relatively small material effect on the intermediate term bottom line, one needs to look at strong free cash flows, global footprint (particularly well positioned in emerging markets) and a rock bottom share price. Dr. Paul Price's article summarizes how the market is irrationally discounting the stock due to short term uncertainty. A forward P/E of under 6 and trading just above book value, it doesn't come cheaper than this for a wide moat 5 star giant company being bought up aggressively by 14 value gurus.
Morningstar analyst has a few words to say about AIG:
Health Care Stocks are getting hammered!
Despite good product pipelines, free cash flow and balance sheets. This is a classic setup where wall Street wrongly discounts low risk, high uncertainty (remember they are different!) investments along with the well justified high risk high uncertainty ones.
I've bought some UNH at $30 at less than 50% of fair market value. A concise and accurate analysis of UNH is here.
Other health care stocks I either own and looking to add to positions that all have a large margin of safety (30% discount to FMV or more):
1. SNY (forward P/E is almost 6 and trading just above book!). I suspect this will be a take over target. Buffett owns a significant stake.
2. BMY also trading a deep discount. Great dividend and takeover target. Gurus are buying aggressively including that awfully clever value investor, Bruce Berkowitz. Buy below $20
3. GSK (buy below $40)
4. SGP (but I wouldn't buy above $17 only because better opps are probably coming...
5. COV (only buy at $40 or below though)
6. UNH P/E = 8 P/S 0.51 ROE 23% and Buffett recently adding to his position along with Edward Owens and Chris Davis.
I own SNY, BMY, UNH, SGP and COV.
Wednesday, June 11, 2008
from Kiplinger
entertaining reading but the stocks described aren't the most attractive to me in the current conditions. They simply aren't cheap enough... except maybe MHK.... that one deserves a bit more research.
Stocks Buffett Would Love
He didn't ask us, but we found five great companies that fit his criteria.By Elizabeth Ody
From Kiplinger's Personal Finance magazine, July 2008
Warren Buffett's sweet tooth was old news long before he signed on as a partner in Mars's deal to buy Wrigley for $23 billion. Buffett bought See's Candies more than three decades ago for Berkshire Hathaway, the company he heads, and Dairy Queen is another prized possession. Coca-Cola and Kraft, the maker of Oreos, rank among Berkshire's largest stock holdings.
But judging by the jingle in his pocket, Buffett may be looking for a few more sweet deals. Berkshire had a bulging $35.6 billion in cash at the end of the first quarter. Subtracting its $6.5-billion commitment to the Wrigley buyout still leaves some $29.1 billion with which the master can indulge. So what kind of company does Buffett, who steered Berkshire from its 1965 share price of $15 to a mid-May price of $125,200, like to buy?
It takes more than empty calories to whet Buffett's appetite. He wants substantial companies, those with stock-market values between $5 billion and $20 billion. He likes companies with strong defenses, or "moats," around their businesses. Potential acquisitions must have a track record of generating superior returns on invested cash without taking on a lot of debt. And honest, level-headed leaders are a must because "Berkshire lets its businesses continue in the same successful manner with encouragement, not interference," as Buffett noted at Berkshire's annual shareholder meeting in May.
Buffett won't pay through the nose, but he'll pay extra to own the whole pie: In 2001, he shelled out 56% more than Shaw Industries' pre-deal share price to acquire the carpet maker.
Buffett hasn't asked for our help, but we've identified five companies to lighten his pocketbook. Even if he doesn't buy them, the stocks should appeal to mortals, too.
It's all about the blue box
Buffett knows a bit about bling. Berkshire owns three jewelry businesses, the best-known of which is Borsheims, an Omaha, Neb., jewelry store. So adding Tiffany & Co. to Berkshire's roster is hardly a stretch.
Tiffany's branding power is virtually unassailable. The company has been building the brand since its founding in New York City in 1837 -- the same year Tiffany introduced the blue box. "When customers buy a diamond ring, they don't really know the stone's value, so it's important that they buy from a trusted provider," says Larry Coats, co-manager of Oak Value fund. "Tiffany is able to charge a premium price for a comparable product because of that."
The little blue box has exported well. Tiffany, which generates 38% of its revenues in 17 foreign lands, added 11 overseas stores in the fiscal year that ended January 31 (it operates 192 stores worldwide). Company spokesman Mark Aaron says Tiffany is on target to add 20 international stores in 2008, including its first shops in Belgium, Ireland and Spain.
At home, the company is balancing its highbrow image with more-affordable products. A new format of smaller "Tiffany Collections" stores will carry only merchandise that sells for $15,000 or less (regular Tiffany stores carry items that cost up to $1 million). The first store will open this October in Glendale, Cal.
Despite weakness in the retailing sector, Tiffany reported a 29% boost in earnings, to $2.33 per share, and an 11% rise in sales, to $2.9 billion, in the fiscal year that ended January 31. At a mid-May price of $42, the stock (symbol TIF) trades for 16 times the $2.72 per share that analysts, on average, estimate the company will earn in the current fiscal year.
Strong moat, huge float
Get to know Paychex and you'll start to think you've died and gone to Buffett heaven. Businesses outsource their payrolls to Paychex (PAYX), which cuts checks and charges a fee per check -- a bit like the "tollbooth" business model that Buffett favors. Another peculiar Buffettism? Like Berkshire's core insurance business, Paychex makes money off the "float" -- in its case, the money that its clients send to Paychex for paying salaries. Between the time it receives the money and the time it disburses it, Paychex can invest the money.
The Rochester, N.Y., company takes 10% of the payroll-services market, putting it in second place, behind Automatic Data Processing. But Paychex dominates the market for small-to-midsize businesses; 81% of its clients employ fewer than 20 people. "They are the go-to people in the small-to-midsize market," says Matthew Gershuny, an analyst for the Parnassus funds. That not only grants Paychex a defensible niche, it also grants dibs on much of the remaining unclaimed market. "A large portion of the unclaimed market is in the under-ten-employee segment," says chief financial officer John Morphy. Paychex has also been expanding into complementary services -- such as workers' compensation administration and 401(k) record-keeping -- that it can market to its 561,000 existing clients.
If the numbers offer any clues, Paychex's defenses are strong. Client retention is at an all-time high, and two-thirds of the company's new business comes from referrals. "Payrolls are not something companies like to switch often, because if there's one thing you can't screw up, it's paying your employees correctly and on time," says Morningstar analyst Joel Bloomer. Morphy says the company has been able to raise prices by 3% to 4% in each of the past 25 years without encountering much resistance from clients.
Paychex, which is debt-free, has generated record sales and profits in each of the past 17 years. At $36, the stock carries a market value of $13 billion and trades for 21 times estimated profits of $1.70 per share for the fiscal year that ends in May 2009. The shares yield an above-average 3.3%.
They've got it covered
Competing against Berkshire's own Shaw Industries, Mohawk Industries is one-half of a duopoly in the flooring business. "Buffett would love to buy Mohawk but most likely couldn't" because of antitrust concerns, says Bruce Berkowitz, co-manager of Fairholme fund. But that shouldn't deter you from picking up a few Mohawk shares.
Mohawk is actually a nose ahead of Shaw. Mohawk's chief financial officer, Frank Boykin, says the most recent figures show Mohawk with 24% of the U.S. flooring market, which includes hardwoods, carpet and tile, compared with 21% for Shaw. And Mohawk is better diversified, with a major presence in every type of flooring.
Management has deftly snatched up some smaller companies to gain that edge. In 2005, Mohawk, headquartered in Calhoun, Ga., acquired Belgium's Unilin, the global leader in laminate flooring. Other recent acquisitions include Dal-Tile, a maker of ceramic and stone tile, and hardwood manufacturer Columbia Flooring.
The housing crunch has bruised business. Sales fell 4% in 2007, to $7.6 billion. Earnings in the first quarter of 2008 sank 23%, to 95 cents per share, from the year-earlier period. But only 15% of sales come from new residential construction, the segment hardest hit by the housing downturn; another 25% comes from new commercial construction and 60% from replacement business. At $76, the stock (MHK) is off 27% from its 52-week high and trades for 14 times estimated 2008 profits of $5.41 per share. But as Buffett recently said, "The lower things go, the more interesting things get."
Utterly predictable
You know what you'll find when you walk into a Bed Bath & Beyond store, and therein lies the company's strength. Other than rival Linens 'n Things, whose parent company recently filed for bankruptcy reorganization, "there's no company that offers the same level of selection," says Eric Schoenstein, co-manager of Jensen Portfolio.
Smart management of inventory has been a key reason for the Union, N.J., company's success. "Not only do you know what the stores purport to offer you, you know it'll be in the stores," says Peter Sapino, an analyst for the Weitz funds. Store managers have a high degree of independence in deciding which items to stock so they can better serve their clientele. For instance, some New York City stores sell window fans in the winter, catering to renters who don't have control over the heating in their apartments.
BB&B hasn't been immune to the housing slowdown. Profits per share dipped 2%, to $2.10, in the fiscal year that ended March 1. At $32, the stock (BBBY) trades at 18 times estimated profits of $1.82 per share for the year that ends next March.
But the company's leaders aren't the kind to sit back and whine about a weak economy. BB&B plans to open 50 to 55 new stores in the U.S. and Canada in fiscal 2008, as well as remodel and expand existing stores. With no debt on its balance sheet and its chief rival struggling, there's nothing holding the company back.
All nuts and bolts
Take a look at Berkshire's core businesses -- insurers, furniture stores, restaurants -- and you'll notice Buffett's penchant for the boring-yet-reliable. Well, it doesn't get much more boring than nuts and bolts, which just so happens to be Fastenal's bread and butter.
But Fastenal has built a daunting presence in its humble niche of industrial and construction supplies. The Winona, Minn., company has more than 2,100 stores in the U.S. and Canada. Fastenal offers ten product lines, from threaded fasteners -- the core product throughout Fastenal's 41-year history -- to pneumatic power equipment. Tally it up and it comes to 800,000-plus products.
Growth has been remarkable. From 1998 through 2007, the debt-free company's revenues expanded at an 18% annualized clip, and profits per share rose at a 19% pace. At $50, the stock (FAST) trades for a rich 26 times 2008 earnings estimates of $1.91 per share.
The company is striving to improve profitability. In July 2007, Fastenal announced a plan to slow new-store growth, from 14% per year to between 7% and 10%, and to invest the savings in extra salespeople. Chief executive Willard Oberton says he's happy with the results so far, as first-quarter revenues climbed 16% and profits rose 26% from the year-earlier period.
Would the nuts-and-bolts retailer ever want to join the Berkshire fold? "We like being independent, and close to 20% of the company is owned by the founders," Oberton says. He doubts that the parsimonious Buffett would offer a big-enough premium to persuade the founders to sell. But who knows? The market values Fastenal's shares at $7.4 billion. Even if Buffett paid $10 billion, he'd still have nearly $20 billion left for other deals.
Buffett's menu
You'll find a lot of financial stocks and a number of steady growth companies, such as Coca-Cola and Procter & Gamble, among Berkshire's biggest holdings. But you won't find any tech stocks -- not even Microsoft, whose chairman, Bill Gates, is a bridge-playing buddy of Buffett's. Reason: Buffett doesn't invest in companies he doesn't understand.
| BERKSHIRE HATHAWAY'S BIGGEST HOLDINGS | |||
| Company | Symbol | Shares held (in millions) | Value (in billions) |
| American Express | AXP | 151.6 | $7.4 |
| Anheuser-Busch | BUD | 35.6 | 1.8 |
| Burlington Northern Santa Fe | BNI | 60.8 | 6.3 |
| Coca-Cola | KO | 200.0 | 11.2 |
| ConocoPhillips | COP | 17.5 | 1.6 |
| Johnson & Johnson | JNJ | 64.3 | 4.3 |
| Kraft Foods | KFT | 124.4 | 3.9 |
| Moody's Corp. | MCO | 48.0 | 1.9 |
| Posco | PKX | 3.5 | 2.2 |
| Procter & Gamble | PG | 101.5 | 6.6 |
| Sanofi-Aventis | SNY | 17.2 | 1.3 |
| Tesco | TESO | 227.3 | 1.9 |
| U.S. Bancorp | USB | 75.2 | 2.5 |
| USG Corp. | USG | 17.1 | 0.6 |
| Wal-Mart Stores | WMT | 19.9 | 1.1 |
| Washington Post | WPO | 1.7 | 1.1 |
| Wells Fargo | WFC | 303.4 | 8.9 |
| White Mountains Insurance Group | WTM | 1.7 | 0.8 |
Tuesday, June 10, 2008
SNY Sanofi-Aventis at 52 week low today
This premium, European based health care company is unrealistically cheap. It represents a rare opportunity to engage in a low risk/high return investment IMHO.
I've reviewed SNY in detail previously. It has one of the most attractive pipelines in the industry. It is currently trading at 1.3 book value (!) and a forward P/E multiple of 7 (!!). Dividend yield is 3.1%
The company is a significant holding of Warren Buffett and many other gurus with a value orientation.
The downside risk is the potential for increasing regulation from the incumbent US administration. I think that this concern is overblown. SNY has thrived in the European environment at any rate. The D:E ratio is slightly higher than comps; however, the extremely high operating cash flow (9 billion Euros/y) is allowing the company to aggressively pay down the 7 B euros of long term debt.
Morningstar gives the equity 5 stars and a fair market value of $50/share. It is currently trading at $33 and change, providing a 34% margin of safety.
I own some shares in my RRSP and will happily add to the position at $33/share or below.
Note that Mr. Buffett has advised that a basket of health care stocks should be held in a portfolio because product pipelines are difficult to predict. This is an exception to his usual concentrated asset allocation strategy.
I've reviewed SNY in detail previously. It has one of the most attractive pipelines in the industry. It is currently trading at 1.3 book value (!) and a forward P/E multiple of 7 (!!). Dividend yield is 3.1%
The company is a significant holding of Warren Buffett and many other gurus with a value orientation.
The downside risk is the potential for increasing regulation from the incumbent US administration. I think that this concern is overblown. SNY has thrived in the European environment at any rate. The D:E ratio is slightly higher than comps; however, the extremely high operating cash flow (9 billion Euros/y) is allowing the company to aggressively pay down the 7 B euros of long term debt.
Morningstar gives the equity 5 stars and a fair market value of $50/share. It is currently trading at $33 and change, providing a 34% margin of safety.
I own some shares in my RRSP and will happily add to the position at $33/share or below.
Note that Mr. Buffett has advised that a basket of health care stocks should be held in a portfolio because product pipelines are difficult to predict. This is an exception to his usual concentrated asset allocation strategy.
Monday, June 9, 2008
MUST READ
Vitaliy Katsenelson's presentation on valuation in range bound markets along with an analysis of Jos A. Bank Clothiers, a deep contrarian pick.
Brilliant, IMHO.
Brilliant, IMHO.
Sunday, June 8, 2008
Hamburger, anyone?
I'm shamelessly stealing an investment idea from an insightful Canadian investor, Randy McDuff. He has 2 portfolios registered on Marketocracy.com that perform in the top ten--- and he has VERY high powered competition. He regularly contributes to an investment newsletter that I subscribe to.
I read his bull pitch about the company "Hamburger Hafen und Logistik" HHULF.PK a few weeks again in Investor's Digest. You can read the highlights as he presented it (for free) here. A very informative presentation about the company, its corporate structure and its financial performance metrics is available in english here.
HHLA is a company that operates through four segments: Container, Intermodal, Logistics, and Real Estate. The Container segment operates container terminals that handle containers, 56% of which come from Asia. The Intermodal segment offers rail, road, and sea transport network linking German seaports to the hinterlands as well as north and central Europe. It also organizes feeder services with Finland and Russia from Lubeck. The Logistics segment combines various special services in the consultancy, special cargo handling, and storage logistics fields. The Real Estate segment develops projects for logistics premises and office properties.
Note: the real estate segment has spun off from the other 3 Jan 08 and is owned solely by the city of Hamburg, so it should be ignored by potential investors when analyzing the financials.
The company was founded in 1885 as Hamburger Freihafen-Lagerhaus-Gesellschaft and changed its name to Hamburger Hafen-und Lagerhaus-Aktiengesellschaft in 1939. Later, it changed its name to Hamburger Hafen und Logistik Aktiengesellschaft in 2005. The initial public offering was in November 2007 at 53 Euros. The company is based in Hamburg, Germany.
This isn't a conventional investment and I like that. I'll explore the upside and downside of owning a part of this business.
Here's what attracted me to this company:
- hard asset and infrastructure play--- chance of bankruptcy virtually nil.
- leveraged to emerging markets growth without actually be located in those countries (I think that the people in India and China are fantastic, I just don't trust their governments and I don't think the financial reports coming out of those places are worth the paper they are printed on.)
- virtual monopoly. The only real competition for access of goods to central/north Europe is the Port of Rotterdam. This allows the company to pass along capital cost increases to the customers i.e. if oil keeps spiking like it has been.
- excellent free cash flow (increasing 100% from 2006 to 2007) allowing Capex/infrastructure improvements to be self-financed
- German corporate tax reform (i.e. a significant DECREASE in corp tax rates) to the company's short and long term advantage
- improving cost controls (German efficiency!)
- cheapest large publically traded port in the world. Trades at 12 x EV/EBIDTA.
- carefully designed growth and expansion plan in place (see presentation above for details)
- impressive profitability that has improved year over year. Return on Capital 23% ROE 29% increasing yoy. EBIDTA margins increasing yoy to 32.4% as the higher margin container business makes up a larger component of revenue.
- largely undiscovered by the investment community in North America. Do a google search and search all the usual investment websites-- see how much you can find out about it! Not much internet chatter and no analyst interest yet.
- is a boring, predictable, slowly changing business with easily projected cash flows and is easy to understand. Benjamin Graham and W. Buffett would approve, I think.
- excellent liquidity Current ratio just under 2 Quick ratio 1.7
- My discounted cash flow calculation yields an intrinsic value of 6B euros v.s. a current market value of 4 B euros. I think that it easily deserves an enterprise multiple of 15-18 x versus 12 today. This approx 50% discount to fair market value provides an excellent margin of safety for this investment. I suspect that the current "oil shock" situation may provide an impetus for the share price to drop below current levels and make it even more of a bargain.
- Dividend yield is currently 1.6% and management commitment is to increase this on a regular basis by paying out 50% of profits annually in dividends.
Now, the down side:
- trades "over the counter" OTC or pink sheets in North America, very significantly impairing liquidity of this investment. This may or may not change in the future if management decides to list the company on a major North American stock exchange. Most investors are justifiably scared of investing in pink sheet/OTC companies and for good reason: they are usually tiny companies or enterprises with horrible credit records. Obviously HHLA doesn't fit in this group, but beware-- this investment should be designated for the very long term i.e. in a RRSP.
- Vunerable to a global recession. As with all recessions, this should be temporary but would adversely affect the share price.
- Currency risk i.e. most experts feel that the Euro is currently overvalued and the USD may be undervalued. A correction could impair future profits.
- Capex intensive-- labour costs, maintenance of the port, equipment etc.
- management's ability and integrity is difficult to judge from a North American vantage point. Executive scandals cloud several German companies lately, diminishing investor confidence. German securities rules and shareholder protection legislation is unfamiliar to most investors.
I think that HHULF.PK is definitely worth further study. As I've said above, I suspect it will get slightly cheaper over the course of the summer. I plan to put in a bid for a relatively small amount of shares at 50 euros and hopefully add to the position over time. I strongly suspect that Mr. McDuff is correct in his prediction that revenues in the expanded physical plant of the Port of Hamburg will double in the next 4 years, with the share price likely to follow. I also suspect that the more mainstream investment community will discover the stock before long and this may be a catalyst for share price appreciation.
Friday, June 6, 2008
The Big Sell off may be beginning
As I anticipated recently, the bear market rally has been crushed today and may well carry on for awhile, providing some great bargains for great companies.
I'm watching the following very carefully:
I've sold GGC for a considerable loss and am fascinated to see that the price/share actually went UP today when almost every other quality company has taken a dive. GGC is teetering on the brink of bankruptcy and is just edging it's debt covenants. Go figure.
I'm watching the following very carefully:
- LYG (actually my bid was filled today at $29.50 but I'd buy more with the 13% yield)
- MKL (have a bid in for $399)
- HHULF.PK This is a logistics/real estate/container handling company that operates the Port of Hamburg. More on this intriguing opportunity later.
- BBSI
- MCO
- AEO
- LM
- AXP
I've sold GGC for a considerable loss and am fascinated to see that the price/share actually went UP today when almost every other quality company has taken a dive. GGC is teetering on the brink of bankruptcy and is just edging it's debt covenants. Go figure.
When to sell your stocks
I find this the most difficult topic in investing. Phil Fisher's masterpiece book, "Common Stocks, Uncommon Profits" has been very helpful to me.
One of Joe Ponzio's Best Articles Ever on When to Sell
Joe summarizes Mr. Fisher's concepts so that you don't need to buy the book.
One of Joe Ponzio's Best Articles Ever on When to Sell
Joe summarizes Mr. Fisher's concepts so that you don't need to buy the book.
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