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
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