Watch BAM closely over the next week

As you're probably aware, in the USA and Europe short selling has been banned by the SEC for 799 financial sector companies. This is a temporary measure due to expire in 10 days.

Let's ignore the wisdom or folly of this move for a moment. Who are we to question the thoughts of giants? lol.

Brookfield Asset Management BAM and Brookfield Properties BPO are conspicuously absent from this list. I've written quite a few blog posts about BAM in the past and it remains one of my favourite long term holdings. Marty Whitman has described BAM as a company that he is "extremely bullish on". Tom Gayner, Chris Davis and recently Ken Fisher are adding to their stakes. Insider buying is steady and the insiders own about 17% of the company. Most of BAM's investments are not attributable back to the parent company so it is very well capitalized. It's a bit curious that BPO is not covered by the SEC edict as it doesn't even trade on the TSX. BAM owns 40% of BPO's shares (last time I read the financial report anyway). BPO owns premium Manhattan real estate (i.e. part of the World Financial centre) amongst other stuff. Its share price has been hammered as traders worry about leaseholders such as Merrill Lynch who may default/terminate the juicy payments.

Unfortunately, BAM has not been cheap and I've been looking for an opportunity to add to my position. The long term survival of this company is not in question here-- it's the contraction of the capital markets reducing opportunities for the type of investments BAM specializes in and a reduction in value of their considerable real estate and lumber stand holdings eating into their intermediate term profitablity. I wonder that if the short interest rises in the next few days (bored traders?) it might create an opportunity to own more of one the best managed companies in the world.

For the best presentation of the bull case for BAM, take a look at the Sept 08 webcast for Investor's Day.

For a sense of important balance, I need to include some of the bear concerns, well summarized here.

I'd buy below $25 enthusiastically and hold for the very long term.

l

TKO for BAM

BAM Brookfield Asset Management has been discussed and analyzed fully in previous posts (use the search function in the upper left corner of the screen).

In an extremely hostile credit market long with irrationally negative views towards all types of property investment (both commercial and residential), BAM is thriving. The details are in Bruce Flatt's shareholder's letter.

The renewable power sector investment is driving the company's growth and the carefully selected commercial properties' performance has more than offset the residential property portfolio's under performance.

A 2 million share buyback was completed this quarter. The balance sheet has improved as well.

BAM's share price has reflected these observations by increasing from just above $25 to
just under $33 today. Morningstar and I agree that adding to an existing position on negative dips that are almost sure to come over the summer would be an excellent choice for a long term investment i.e. in a RRSP. I hold BAM and am planning to do exactly this in my RRSP.

l

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.

The markets are boring these days, eh?

9 industrial sectors (not just financials) are demonstrating volatility comparable to a roller coaster ride.

The credit crisis, housing slump, bank liquidity crisis/deleveraging phenomenon seemed to be an isolated domestic US problem a year ago and time has proven that rot is global in scope. It's ironic that the US is one of the few developed countries in the world that has shown GDP growth recently despite the trifecta of grief.

When the markets move, opportunities arise that come along only once or twice in a generation. IMHO, the key principles to invest wisely when blood is still fresh on Wall St. and Bay St are:

• think like a business owner. If you wouldn't want to be the owner of the whole company (if you could afford it and had the ability to manage it), why would you want a partial share?
• buy what you understand. Particularly with respect to the quarterly and annual financial reports and with special attention to the "Notes" section at the back of the report . They are usually confusing for a reason. Put these shadowy companies in the "Too hard" pile like I should have done with AIG. Read BBSI's reports and you will follow them easily. Even a very complicated company like BAM can be methodically worked through, section by section, by almost anyone even if they are not a CFA. HHULF.PK (Hamburger Hafen Logistik) is extraordinarily simple and clearly laid out in their publications--- and these have been translated into english from german!!
  
• make sure the management has "skin in the game" (i.e. significant insider ownership >10% IMO) to assure that their decisions are aligned with your interests. The management's behaviour should be rational and independent of the "institutional imperative". One of the advantages of owning a business with a high degree of insider ownership is that most insiders cannot (due to company or SEC rules) or will not trade their stock for short term gains and this builds a bottom into the share price. It also acts as a partial protective shield against "bear raids" like what happened recently to Bear Stearns, Lehman and AIG. It's hard to manipulate the stock when you can't buy a large portion of the float. Examples: SEB, COLM, BRK, BBSI, BAM.
• try to buy the best balance sheet in the business v.s. competitors. It's easy to say you want companies with no debt and lots of cash on hand; however, in many cyclical industries this is not an efficient use of working capital. Just make sure that when the unexpected happens, your company will be the last one (or one of the last) standing and positioned to wrest away market share from the much weakened competition when the dust settles.
• focus on boring businesses in slowly changing industries with predictable cash flows and high barriers to entry for potential future competition i.e. insurance companies like Markel MKL, booze manufacturers like Diageo DEO.
• do your scuttlebutt (non-quantitiative research)-- go to the mall, talk to customers and to salesmen. My wife and I have done this with AEO: watching the stores full of teenagers, buying up their products while the rest of the mall is barren.
• watch for companies that have great fundamentals but a poor short term outlook or are irrationally hated by investors i.e. Cemex CX is currently priced as if another highway, bridge or apartment block will never be built in North America or Europe. Everyone hates DELL and simply won't hear any of the upside now that it is a different company than when it was a growth stock.
• when looking at such metrics as ROE, use 5 year averages as these numbers can easily be distorted by short term, non-repeatable events in one quarter or two. i.e. LYG, AXP have astounding 5 yr ROEs in the 30's.
• buy the asset managers not the mutual funds themselves. i.e. AGF, BAM, LM
• holding companies often have unlocked value, high insider ownership and are managed for the long term i.e. IVSBF.PK, POW.TO, TYIDF.PK
• choose to delve into the areas where hundreds of thousands of brilliant minds are not. I don't invest in oil or gold stocks because a lot of very smart people with far greater resources than I are spending 24/7 trying to figure out what the catalyst will be that will push commodity prices such as these up or down. What's the chance you'll get an edge on these guys? Pretty nominal, IMHO. The way the market works is that once the "smart money" has it figured out, the market follows seconds later and becomes priced into the stock ahead of time through the influence of futures/forwards/warrants exchanges. Instead of competing with these guys, take it easy on yourself and choose stocks that are extraordinarily boring, not traded on the NA exchanges, thinly traded and/or not covered much by NA analysts. These equities are conveniently often the same ones that have high insider ownership. Examples: Seaboard Corp SEB, Hamburger Hafen Und Logistik HHULF.PK, Investor AB IVSBF.PK, Toyota Industries TYIDF.PK
• Watch for consensus and bargain guru stocks for new ideas. Don't blindly follow them-- instead consider them an elite stock filter. My favourite (free) resource for this is gurufocus.com.
• Watch what the insiders are doing. Selling is of uncertain circumstance but large scale insider buying should be noticed and factored into your buying decision making. I use Yahoo's financial page for the US stocks and canadianinsider.com for the Canadian equities.
  

Happy hunting and enjoy the process. If you don't, buy ETFs, using dollar cost averaging, rebalancing once or twice and year and then forget about it. My favourite undervalued ETF is DIA "The DOW Diamonds" at <$110/share.

Watch BAM carefully...

Brookfield Asset Management (BAM on NYSE and BAM.A on TSX) is heading towards 52 week lows. I've been waiting for an opportunity to enter a position in this superbly managed commercial real estate/timberland/utility/infrastructure holding company with $75 Billion worth of global assets under its control. The co has been aggressively acquiring undervalued companies and other assets recently, particularly in Brazil. It has been compared to Berkshire Hathaway many times; however, it has outperformed BRK handily over the last 5 years.

I'll do a full analysis later. I feel that the downside risk is very low and the long term upside potential for capital gains is excellent at this point. Marty Whitman (amongst many other gurus) is a major stakeholder and admirer of Mr. J. Bruce Flatt.

I strongly recommend studying this stock carefully.

l

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.

More BAM: cash flow analysis

from Desjardins Securities: read it here

BAM is one of my favourite longterm investments: wide moat real estate (both residential and commercial), "green" power generation assets along with prolific management fees, keeps the cash coming in. 17% of shares are insider owned. Capital allocation is carefully and intelligently considered: read CEO Bruce Flatt's comments regarding that topic in the Q3 2008 conference call transcript.

I have a low ball bid in for $10/share (below book value of approx $11/share!).

l

BAM revisited

This article presents a rare (for seekingalpha.com, anyway) balanced view of the current investment status of Brookfield Asset Management.

I agree with the poster that the long term view for BAM is excellent. I'm hoping for the share price to drop back to 52 week lows (around $25/share) and then I intend to double my position.

Read the article here.

l

Buffett pulls the trigger again.

one may view it as material proof of his belief that the global economy will improve. It looks like the bail package will be finally voted in on Friday (with a little pork being passed around as usual). Doomsday may be averted, this time. lol.

IMHO, there are a few opportunities developing that "bear" close observation if you have capital on the sideline:

1. American Express-- heading to the low 30's. a guru favourite with a great business plan that will almost certainly survive to fight another day.
2. Brookfield Asset Management BAM-- a personal favourite. Still hasn't hit my target entry price of $25 CDN or lower (for the BAM.A.TO equity traded on the TSX, anyway). I have a standing bid at this level and am waiting patiently.
3. Diageo DEO-- has hit my target entry of $69 or below, but my capital evaporated in that account (tax bill). I think this is a very safe long term investment with an excellent upside. I agree with Morningstar that it is trading at a 30-40% discount to FMV.
4. Conocophillips COP-- I'm not as bullish on oil as many others but the fundamentals, management, Buffett stake and exposure to nat gas makes this company compelling. It is approaching my original entry price over 2 years ago!
5. Seaboard Corp SEA-- if it were to drop below $1200, it would be irresistible.
6. Hamburger Hafen HHULF.PK-- still hanging in there about 40 euros/$57 USD. I'm holding out for an entry stake at $55.
7. Lloyds TSB Bank LYG-- the very large acquisition of HBOS and apparently opaque back room deals with the UK gov't is making the risk assessment of this investment a bit tough. I'm holding tight on my stake and considering add a bit when and if I get enough information about the bank's financial situation/liquidity status.
   

Great Ideas from Businessweek: buy the deep value investors

Have a read of the article below. Not only can you be a deep value investor, but you can also buy shares of holding companies (usually also involved in insurance, much like WB's Berkshire) that specialize in buying discounted gems and holding them for the long term. Since they have considerably more resources and experience than most of us do, they often have an edge. Look for the following:

• a long term track record of double digit ROIC and at least 10% insider ownership in the small to mid caps
• low to no debt and leverage that is on the low end for the industry
• trading at or near book value (current bargain)

BAM is well covered in my other posts and a core holding of mine.

I am doing further research in to PICO (where I see there is big time insider buying, short term misery and long term good prospects being water suppliers in the US Southwest) and Y where there is no debt, respected conservative management, attractive fundamentals and a Morningstar endorsement that says, "For the long-term investor, we endorse buying this stock any time it settles into 5-star territory". Y is solidly 5 star-- trading at $349 and FMV at $518.

How to Feast with the Vultures

by Anne Tergesen

A credit crisis. A volatile stock market. A projected wave of corporate bankruptcies. To most people it sounds like hell. But for investors who specialize in distressed assets it's just the opposite. "Bear markets are often when these guys plant the seeds for their next big winners," says Chris Mayer, editor of Capital & Crisis, a newsletter that focuses on contrarian investments.

Such scavengers scour the market for stocks, bonds, or whole companies to buy on the cheap, paying less than they think the company's assets are worth. A subspecies, known as vulture investors, aims even lower. These investors pick at carcasses of companies in or approaching bankruptcy, often amassing sizable stakes in order to wield influence in a restructuring or liquidation.

While some of these high-risk investments fail, others can be "monster home runs," says Mayer. His favorite "deep value" players—chiefs of little-known companies such as Leucadia National (LUK) and Brookfield Asset Management (BAM)—boast average annual returns of 15% or more over the past 10 years.

The most obvious way to get into the action is to buy a value-oriented mutual fund (tables). A more rewarding approach may be to invest in companies such as Leucadia. Like Berkshire Hathaway, these are publicly traded holding companies run by managers with histories of sniffing out value. Yes, the risks are more concentrated. But returns, on average, exceed those of the typical value fund over the past decade. Patience is crucial, since returns can fluctuate unpredictably, rising in years when managers sell profitable investments and stagnating when they hold a lot of cash.

Because of the stock market sell-off, share prices of many of these players are cheap vs. historic norms. And after largely sitting on the sidelines during the bull market, many of the companies are flush with cash. They are positioned to take advantage of lower stock prices as well as a projected spike in the default rate for U.S. speculative grade bonds. BusinessWeek's guide to leading publicly traded value players is a good place to start your research.

LEUCADIA NATIONAL

New York-based Leucadia owns everything from a biopharmaceutical company to wineries to a 38% stake in Light & Power Holdings of Barbados. Once weighted toward insurance, the company's portfolio now tilts toward natural resources, including Australian iron ore producer Fortescue Metals Group and Goober Drilling, a Stillwater (Okla.) oil-and-gas concern.

Chairman Ian Cumming and President Joseph Steinberg practice "the epitome of distressed investing," says Steven Rogé, whose Rogé Partners (ROGEX) and Rogé Select Opportunities (RSOFX) funds are shareholders. After Hurricane Katrina nearly destroyed the Hard Rock Hotel & Casino Biloxi, Miss., in 2005, for example, Leucadia bought about half of parent Premier Entertainment Biloxi. In 2001, with Berkshire Hathaway (BRK), it purchased half of bankrupt financial-services company Finova Group. More recently it bought some 25% of subprime auto lender AmeriCredit.

Cumming and Steinberg are often compared to Warren Buffett—and not just for their strict value approach to investing. Like the Oracle of Omaha, the two write engaging letters to investors. "Shareholders who gamble are encouraged to come visit the [Hard Rock Hotel & Casino Biloxi] and leave some money behind!" the most recent one reads. "As always, the odds favor the house, but in this case you own the house." Also like Buffett, Cumming and Steinberg tend to be shareholder-friendly. In 2006 each earned a relatively modest $678,362, in addition to stock-based compensation linked to Leucadia's performance. Between the two, they own some 25% of outstanding shares.

Leucadia trades at 46, and Morningstar analyst Ryan Lentell is in the process of revising his fair-value estimate of 39 upward. "If you're going to buy and hold for a long time, you'll do well," he says. Since 1979 the stock price has appreciated a compounded 25% a year, on average.

WHITE MOUNTAINS INSURANCE

White Mountains Insurance Group (WMT) in Hanover, N.H., buys troubled insurers and then engineers turnarounds. The insurance properties throw off cash White Mountains can use to finance acquisitions. But when markets get frothy, management hoards cash rather than risk overpaying. "Intellectually, we really don't care much about leaving our capital lying fallow for years," the company says on its Web site. "Better to...wait for the occasional high-return opportunity. Frankly, sometimes shareholders would be better off if we just all went to play golf."

With insurance experts, including Buffett, predicting an industrywide profit decline this year, White Mountains's stock is down 6% since Jan. 1. It trades at 476, a hair above its per-share book value (assets minus liabilities), a measure often used to value financial-services firms. Consistent with Buffett's outlook on insurance, Berkshire Hathaway recently sold its 16% stake in the company. CEO Raymond Barrette cited the growing rivalry between the firms. Other value investors see an upside: Shareholders include Mutual Beacon Fund. Morningstar analyst Jim Ryan estimates fair value at 625.

ALLEGHANY

Like many in the deep-value camp, Alleghany (Y) shuns publicity. It doesn't hold quarterly conference calls. Wall Street coverage of the New York company is virtually nonexistent, in part because with lots of cash and little debt, it doesn't often hire investment bankers. Alleghany, which focuses on insurance, also has seen its shares beaten down. That has attracted bargain hunters at fund companies Franklin Mutual Advisers and Royce & Associates. At 342 a share, the stock, up an average 20% a year over five years, trades at a hefty discount to its 518 fair value, Ryan figures.

Alleghany, founded as a railroad holding company in 1929, also owns a portfolio of stocks and bonds. A big winner: Burlington Northern Santa Fe Railway (BNI), on which it has earned over 500% since 1994. Recently, Alleghany bet successfully on energy stocks, which comprise 32% of its equity portfolio.

PICO HOLDINGS

Small-cap PICO started out as a medical-liability insurer in 1981. Now about 70% of assets are in the rights to underground aquifers and other water resources in Southwestern states. "It's one of the better water-asset plays," says Jesse Herrick, who follows alternative-energy technologies for San Francisco institutional broker Merriman Curhan Ford (MERR). PICO also has a portfolio of big-stakes investments that enable it to play a role in management. They include 23% of Jungfraubahn Holding, a railway in the Swiss Alps.

In the 14 years that current management has been at the helm, the stock has delivered compounded average annual gains of 18%—more than twice that of the Standard & Poor's 500-stock index. But housing woes have raised concerns about water demand, sending the La Jolla (Calif.) company's shares down 7% this year, to 31, just above its book value of 27. Herrick puts fair value at 62 to 67.

BROOKFIELD ASSET MANAGEMENT

Over the past five years, Toronto's Brookfield has transformed itself from a wide-ranging conglomerate into a company largely focused on real estate, power, and infrastructure properties. Those include prime London office buildings, millions of acres of timber, and hydropower generating plants around the world. The rationale? Such assets generate steady returns and last a long time without requiring large ongoing investments.

Managing partner J. Bruce Flatt recently invited institutional investors such as pension funds to invest alongside Brookfield. In return for managing the money, Brookfield pockets a small annual fee. The stock, up an average 36% a year since Flatt took over in 2002, has pulled back, partly on concerns about real estate. At 27, it trades below Morningstar's 34 fair-value estimate. Among the shareholders betting on Flatt: vulture Martin Whitman of Third Avenue Value Funds.

Tergesen is an associate editor for BusinessWeek in New York .

This month's focus

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

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

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

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

l

Wow

the streets (Bay and Wall) are running with blood.

I put in a bid for more BAM.A shares at $20 after a prior bid was filled at $25.

I'm trying to shore up some capital to buy initial stakes in PKX and DEO, both excellent wide moat long term plays that will survive a severe and protracted global slowdown IMHO.

Time to buy the survivors

I'm buying businesses today with the following "safe and cheap" characteristics:

• ample liquidity
• wide moat
• manageable or no debt
• trading at or less than tangible book value P/E <8
  
• high insider ownership (15% or higher)

Wow-- never in my life has there been so many opportunities. Rather than reel with the sheer number of them I've chosen to concentrate on a few:

BAM-- on sale like it never has been. I don't use conventional metrics to value this company.
SEB-- same
MKL
BBSI
PHG

I'm spending hours pouring over financial reports so I can decide the best way to allocate my limited capital. I may sell BPOP as its share price has been propped up by an improbable upgrade. I would love to own more CX, LYG, AXP and CKI.TO; however, these companies are being conspicuously quiet (well, other than Cemex) and there is a palpable opacity to their current liquidity situation that makes me nervous. All four have potential to be great investments and I'm monitoring them closely.



I'm putting in bids for some or all of them today and adding slowly over the next year to my stake in DIA, the diamonds of the DOW. I think the DOW has potential to drop into the 7000's and that would be great.

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

BAM-- Technical Knock out from the G&M

My confidence in the management and position of this company continues to grow. In an awful environment for financing and raising capital, they continue to outperform all their competitors.

I'll buy at <$20 with conviction. I'm also very interested in some of the preferred offerings.


The Canadian Press
November 7, 2008 at 9:53 AM EST
TORONTO — Brookfield Asset Management Inc., formerly known as Brascan, reported Friday a sharply higher net profit and rising revenue.
Its third-quarter net profit was $171-million (U.S.), or 27 cents a share, up from earnings of $93-million, or 13 cents for the same 2007 period.
Overall revenue jumped to just under $1.3-billion from $980-million, said the company, which reports in U.S. dollars.
In breaking down its quarterly results, Brookfield said increases in operating cash flows were offset by higher non-cash charges, including depreciation on assets bought since the 2007 second quarter.


“Our operating performance in the quarter reflected the durability of our cash flows, most of which are supported by long-term contractual arrangements with credit-worthy counterparties, the high quality of our asset base and operating platforms, and the stability of our long duration investment grade capitalization,” said Bruce Flatt, the company's senior managing partner.
“In the last few months we increased our overall cash holdings and liquidity to more than $3.5-billion, most of that at the Brookfield corporate level.”
“This is one of the highest levels of liquidity we have ever held, but given uncertainty in the markets we want to be prepared for the unknowns, and opportunities which may present themselves in this environment.”
Mr. Flatt said although Brookfield is “exercising caution during these turbulent times, and preserving a high level of liquidity, we are exploring a number of potential opportunities to expand our operating platforms and create additional shareholder value.”
Brookfield Asset Management is focused on property, power and infrastructure assets and has about $90-billion of assets under management.

Invest in the Investors: LUK Leucadia National Corporation

I'm attracted to holding companies that are:

1. trading below book value
2. have management with "skin in the game" (significant insider ownership) and a long term track record
3. little or manageable debt

I've admired Leucadia for a long time but much like BAM, held off actually owning shares because of inflated valuations. This clearly is no longer the case.



Run by gifted mavericks Ian Cumming and Joseph Steinberg, Leucadia National corp is an eclectic, diversifed holding company that was founded over 150 years ago. Its investment portfolio is quite focused and includes small cap biotechs, wineries, copper mines and boutique investment banks. They are deep value investors with a penchant for the "cigar butt" approach. To quote the duo in a shareholder's letter:

“We tend to be buyers of assets and companies that are troubled or out of favor and as a result are selling substantially below the values which we believe are there. From time to time, we sell parts of these operations when prices available in the market reach what we believe to be advantageous levels.”


Bull Case for LUK

• masterful capital allocation has produced a 21.4% CAGR increase in book value/share since 1979!
• average ROE is 21% over 29 years
• being mid cap (5 B) has allowed it to outperform Berkshire Hathaway's stock over the last 20 yrs
• high insider ownership. Steinberg and Cumming each own 13% of the outstanding shares.
• high degree of guru ownership, with many recently increasing their stakes including Bruce Berkowitz, Tom Gayner and David Winters.
• Mr. Steinberg and Mr. Cumming have signed a 10 year contract to stay with the company and in the last AGM they said they would work there as long as they physically could. Apparently they are both in excellent health.
• historically trades at 2 x book value, currently trading at 0.7
• plenty of liquidity current ratio> 3
• mostly long term debt with a low D:E ratio v.s. peers of 0.29 and leverage ratio of 1.38.
• currently P/E ratio 10 x P/B 0.7 = 7 (far below Ben Graham's 22 criteria)
• using an aggregate sum-of-the-parts, P/B value analysis and DCF analysis, they came up with a FMV of about $40/share roughly double what the shares are currently trading at.
  

Bear Case for LUK

• shareholders need to rely on the expertise of only 2 aging individuals as the company is a specialist in picking unprofitable and troubled investments and fixing them up as opposed to Buffett's strategy of picking wonderful businesses that essentially run themselves, with or without him
• heavy exposure to commodities and overseas ones to boot. These will suffer in the global slowdown and may well not survive
• a concentrated portfolio magnifies bad investment decisions as well as good ones
  
• recent heavy investment in JEF, a small investment bank they bailed out of trouble. It may have a rough run before the credit squeeze runs its course.
• LUK's assets under management has shrunk by almost half (9 B-->5.3B) since Jan 2008 due to dwindling valuations
• as the company grows, it will likely grow more slowly due to more competition for distressed potential investments and the law of large numbers
• dividend yield is very modest at 1%; however, the managers are considering increasing this
  

IMHO, this is an excellent long term opportunity to own a company with a superb track record at an affordable price. It would be appropriate for a 3+ year time horizon in an RRSP.

I've put in a low ball bid at $19/share and hope it gets filled on a really nasty day in the stockmarket!

More on BAM- Brookfield Asset Management

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

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

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

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

l

Update on some portfolio stocks

The last 2 weeks have produced some tangible gains across the entire portfolio with the exception of DELL-- Wall St. and individual investors tire of waiting for Mr. Dell to execute his turn around and cost cutting measures.

My take on some recent information concerning stocks discussed earlier in this blog:

• DELL-- worth waiting for as its balance sheet only improves from a previously strong position and it grows overseas. I intend to double my stake at $19 or below and it's hanging just above that now.
• COLM-- was downgraded by a Citi analyst a few days ago on speculation that back orders have fallen off. Fundamentals and balance sheet are both extremely strong as is the opportunities in Europe and Asia. A senior officer (the COO) resigned recently and it's difficult to attach significance to this, but it always gets my attention. Very strong insider buying going on. Holding for 18 months+
• Schering-Plough SGP-- has spiked up from $14 (my entry point) to just under $17 after the market realized that the huge 26% sell off reaction to the cardiology panelists' comments on Vytorin was not justified. Several analysts (including Morningstar, my favourite) models suggest that SGP is worth $30/share with Zetia and Vytorin sales dropping to zero-- which they will not. What academic cardiologists/pharmacologists don't seem to realize is that adverse drug affects are much more important to patients than they are to doctors and many patients are prepared to pay more in order to avoid even nuisance side effects like cough and swollen ankles, particularly when these drugs need to be taken life-long. Many patients cannot tolerate statins, the cheaper and possibly slightly more effective competitive drug class. I doubled my stake at $14 and will hold for the long term in my RRSP.
• Legg-Mason LM--- despite Bill Miller having the worst quarter in 26 years in his Value Trust fund, LM has rebounded from $50 to $60. The new CEO recently bought $1000000 worth of common shares out-of-pocket and the gurus are buying LM aggressively. I have a fairly large stake in my RRSP and intend to hold for the long term.
• Brookfield BAM-- just completed a billion dollar share buy back. It continues to make careful acquisitions. It has increased slightly from a support level of $26 to $28 currently. I will happily buy more if and when it drops to $24 or less. This is also a very long term hold.
• Georgia Gulf GGC-- the Royal acquisition debt weighs heavily on the company's balance sheet and with many of its plants idled, cash flow is an issue. The share price has rallied on a hope and a dream that the US recession has peaked-- from $4 at its nadir to just under $8. It wouldn't take much bad news for the banks to call in their covenants/loans. I am hoping that the share price will come up to $10 (Morningstar's FMV) and then I will sell one third of my stake. After another quarter, I'll reassess whether to hold on to the remainder. If the economy turns around, I suspect that GGC will be acquired.
• Popular BPOP-- has rallied from it's nadir at $8 up to close to $12 and has continued to pay a generous dividend, while divesting itself of its underperforming mainland assets to pay down debt. It is still trading at below book value and has a "forward" P/E of 11 (estimates are duly pessimistic. Reasons to hold on to this one include the 5.65% dividend and the fact the bank is essentially a monopoly in its region (Puerto Rico). If it can survive the downturn, and it looks like it will as it is extremely well capitalized, one can expect the stock to increase by 50% or so to its FMV. I will hold for 18 months to 3 years. If the bank has not learned its lesson and starts to make stupid and expensive acquisitions on the mainland again, I will sell before that.

I have just read the Q4 BBSI conference call and the annual report for SEB and am more convinced than ever that they remain excellent long and intermediate term investments. As they have both made relatively large share price gains very recently, I hope to wait for a pull back to add to existing positions.

HOG, PHG, SPLS, COV commentary to come soon.

l

Time is the friend of the wonderful company, the enemy of the mediocre.

In times like these, one needs to think like an owner rather than a generic shareholder. Do you consider selling your house every time your annual assessment drops or stays flat? Do you check the market value of your house every hour, day or week and fret when it doesn't go up steadily?

One should think the same way about quality wide moat companies as the homeowner's house. Most people actually only own a small share of their home (the bank owning the balance) so the analogy to the partial ownership of a public company through common shares holds.

One such company is Onex Corporation: OCX (TSE) a company that I view as Clarke Inc. (CKI)'s big brother

Profile: Legendary value investor Gerry Schwartz is the largest shareholder as well as the CEO and Chairman of the board of directors for this diversified Canadian holding company. It has a private equity arm which utilizes leverage heavily to buy out undervalued companies and 2 others subsidiaries which own various private and public companies such as Spirit AeroSystems, Sitel and Celestica. It also has developed an asset management firm that raises third party capital through limited partnerships and generates income for the parent company (OCX) by generating management/performance fees.

Like Clarke Inc (CKI) discussed at length previously, one has to be cautious using traditional valuation metrics to assess investment holding companies like Onex.
P/E, P/B, P/S ratios can easily be distorted by realizing one time gains from a previous investment. Thus when financial holding companies sell what they feel is an overvalued investment in a bull market, the P/E ratio drops because a large capital gain shows on the balance sheet and is calculated into the earnings. OTOH, during a bear market such as we are seeing now, the company is buying undervalued assets and holding their previous investments to sell later, in better times. The P/E ratio will rise, assuming their is not a huge sell off of the company's shares at that time (unlikely because of the high % of insider ownership), making the valuation look more expensive. So unlike many secular businesses with more or less continuous cash flow, the P/E multiple is often HIGHER when the company is a good value and LOWER when it is cheap. The use of NAV (net asset value) for valuation is a more appropriate metric and for value investors, the larger the discount to NAV, the cheaper the security is.

Bull Case for Onex Corp:

1. Remarkable track record for creating shareholder's value-- see chart at the top of the page. 10 year share price growth is 422% v.s. TSX of 147%.
2. Management's interests squarely aligned with shareholders. 28 Million shares = $1.4 Billion owned by insiders market cap $4 B. Options can only be exercised if 25% strike price and 25% of the carry realized must be reinvested in Onex stock and held until retirement---> management is highly motivated to make LONG TERM, sustainable profits.
3. No attributable debt for parent company. Individual debt attributable to each major investment is non-recourse to Onex-- a similar setup as with BAM (see previous posts).
4. Current portfolio is well diversified: 22% cash ($770 million), 14% private companies, 20% public companies, 44% limited partnerships. Healthcare and US industrials overweighted. Onex has set up funds to invest in distressed debt and US real estate-- a contrarian move that impresses me particularly since they initiated this strategy earlier than competitors-- August 07.
5. NAV conservatively calculated to be $32.86/share (10% discount). RBC analyst calculates FMV at $44 mostly due to overlooked profits from 3rd party management fees.
6. Aggressive stock buy backs when shares trading at discount to NAV. Has bought back and cancelled 34.2 million shares at an average share price of $19/share over the last 2 years. Another buyback is occurring right now.
7. Income from recent divestures and cash flow from 3rd party management fees plus a large surplus of cash on hand positions OCX to snap up more deep values plays.

Bear case for Onex Corp:

1. Cash balance is in US$ and high degree of US equity exposure. As the US bear market unravels further, this could diminish NAV accordingly.
2. Credit for near term large private equity finance deals will be trickier to arrange.
3. A large proportion of the company's direction and prospects rely on a single individual-- the CEO Gerry Schwartz. He is the controlling shareholder and is essentially immune to activist investor influence due to the share structure of this company.
4. Possible acquisition valuations are in flux so short term NAV/book appreciation uncertain.


Onex is definitely a stock to study. I've put in a small bid for $30 and hope to add to it over the next 12 months. Target price-- $60--$70

l

Bruce Flatt from BAM talks about investing

see the video here

Brilliant insight from a very, very smart Canadian.