Below is the 10-year performance through 12/31/11 of the funds that Donald Yacktman and his team manage:
The Yacktman Fund (YACKX) had a cumulative 10-year return of 174.52%.
The Yacktman Focused Fund (YAFFX) did even better returning a cumulative 194.07% over the past 10 years.
For a comparison, the S&P 500 was up 33.35% over the same time frame.
From their 2011 Year-End Shareholder Update:
Old Tech
Last year, the shares of many more established technology companies were out of favor, allowing us to
increase our weighting to a group which we call "old tech". At the end of 2011, Microsoft and Cisco were
our largest "old tech" positions and in the top six holdings of each fund.
Consumer Staples
Our largest positions in consumer staple companies produced solid results in 2011, with PepsiCo, Procter &
Gamble, Coca‐Cola, and Clorox appreciating in the mid‐to‐high single digits. These businesses tend to be
fairly stable and predictable, with a strong ability to handle uncertain economic periods. We reduced our
weightings in Coca‐Cola and Clorox during the year due to their strong price performance.
Consuelo Mack recently interviewed Donald Yacktman. Some excerpts from that interview:
High Quality, Profitable Businesses
I've been doing this for over 40 years, and I can't remember another period of time where I've seen so many high-quality, profitable businesses selling at prices relative to the market this cheaply. And just to give you an illustration, a 30-year Treasury today has a lower yield than many of these companies, like Pepsi or Johnson & Johnson or Procter & Gamble...
Behaving Like a Bond Buyer
...it's like behaving like a bond buyer. So you put a forward return, and then you put a quality rating on it. And what we're seeing now is, in effect, the so-called AAAs of equity, things like Coke and Pepsi and things like that, have these very high returns, relative to other things. And so, why would one go to lower grades when they can stay with these so-called AAA-type bonds? Only they're really equities.
Beach Balls Pushed Underwater
Conceptually, what we're doing is buying beach balls being pushed underwater, and the water level is rising. And so, if one has the patience to stay with that, then eventually the pressure will come off, and the longer it takes, because the water level's rising, the more the bounce will be.
The full interview with Donald Yacktman is certainly worth checking out.
The top holdings in the funds managed by Yacktman at year-end include Pepsi (PEP), News Corp (NWSA), Procter & Gamble (PG), Microsoft (MSFT), and Cisco (CSCO).
Adam
The performance data quoted for The Yacktman Fund and The Yacktman Focused Fund represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that the investor's shares, when redeemed, may be worth more or less than their original cost.
Interview with Donald Yacktman
Friday, February 17, 2012
Thursday, February 16, 2012
Facebook, Google, or Apple?
Some excerpts from this Barron's article that looks at Facebook as an investment:
The best businesses can be poor investments, if you pay the wrong price.
It's easy to understand the excitement around Facebook, but it's not like competitors have lousy prospects.
Facebook has a unique franchise with a great growth outlook. Yet much of its potential already is reflected in the private-share price of around $38. The company is likely to come public at roughly 100 times trailing earnings. That compares with trailing price/earnings multiples of 16 for Google (ticker: GOOG) and Apple (AAPL), two great growth companies with far more cash on their balance sheets.
...and Facebook's valuation implies hyper-growth.
Google has a dominant business driven by still-robust search advertising that isn't fully appreciated on Wall Street. Apple, which has been growing about as quickly as Facebook, trades at just 10 times forward earnings estimates.
As Google demonstrates, it's tough to sustain hyper-growth, and that's what Facebook's likely price implies.
It's certainly possible, even likely, that Facebook may grow into it's valuation but...
Excluding net cash, Google's forward P/E would be 12, and Apple's P/E falls below 8. Facebook would need to double its net income for three straight years to grow into a similar valuation.
Even the very best businesses have risks and uncertainties. The only protection for an investor is to pay a price that doesn't reflect high hopes and rosy expectations.*
Facebook, Google, and Apple all certainly seem to have very good prospects. Yet, each obviously has a unique set of risks, uncertainties, and challenges. Every time capital is put at risk, there ought to be a high probability of being compensated with an appropriate return for the trouble.
Pay too much and, even if things work out reasonably well for the business itself, the reward may end up being too small compared to lower risk alternatives.
Adam
Long positions in AAPL and GOOG established at much lower than recent prices
* Quite a few stocks have run up an awful lot in price lately. There are exceptions, of course, but I won't be buying much of anything in the near term until something sours the market mood a bit. The time to buy is when the headlines are awful. Stocks with momentum inevitably attracts bandwagon "owners". I'd rather buy when something has scared some of them off the bandwagon. I understand some like to trade the hot stock of the moment with a great story. For those involved in that sort of thing, I have no particular skills or opinion whatsoever.
The best businesses can be poor investments, if you pay the wrong price.
It's easy to understand the excitement around Facebook, but it's not like competitors have lousy prospects.
Facebook has a unique franchise with a great growth outlook. Yet much of its potential already is reflected in the private-share price of around $38. The company is likely to come public at roughly 100 times trailing earnings. That compares with trailing price/earnings multiples of 16 for Google (ticker: GOOG) and Apple (AAPL), two great growth companies with far more cash on their balance sheets.
...and Facebook's valuation implies hyper-growth.
Google has a dominant business driven by still-robust search advertising that isn't fully appreciated on Wall Street. Apple, which has been growing about as quickly as Facebook, trades at just 10 times forward earnings estimates.
As Google demonstrates, it's tough to sustain hyper-growth, and that's what Facebook's likely price implies.
It's certainly possible, even likely, that Facebook may grow into it's valuation but...
Excluding net cash, Google's forward P/E would be 12, and Apple's P/E falls below 8. Facebook would need to double its net income for three straight years to grow into a similar valuation.
Even the very best businesses have risks and uncertainties. The only protection for an investor is to pay a price that doesn't reflect high hopes and rosy expectations.*
Facebook, Google, and Apple all certainly seem to have very good prospects. Yet, each obviously has a unique set of risks, uncertainties, and challenges. Every time capital is put at risk, there ought to be a high probability of being compensated with an appropriate return for the trouble.
Pay too much and, even if things work out reasonably well for the business itself, the reward may end up being too small compared to lower risk alternatives.
Adam
Long positions in AAPL and GOOG established at much lower than recent prices
* Quite a few stocks have run up an awful lot in price lately. There are exceptions, of course, but I won't be buying much of anything in the near term until something sours the market mood a bit. The time to buy is when the headlines are awful. Stocks with momentum inevitably attracts bandwagon "owners". I'd rather buy when something has scared some of them off the bandwagon. I understand some like to trade the hot stock of the moment with a great story. For those involved in that sort of thing, I have no particular skills or opinion whatsoever.
Wednesday, February 15, 2012
Berkshire Hathaway 4th Quarter 2011 13F-HR (BRKa, DVA, LMCA, IBM, DTV, WFC, V, CVS, INTC, GD, VRSK, KFT, JNJ, XOM, KO, AXP, PG)
The Berkshire Hathaway (BRKa) 4th Quarter 2011 13F-HR was released yesterday.
Compared to the 3rd Quarter 2011 13F-HR, Berkshire added some new positions and continued to build upon several existing positions.
Here is a post that summarizes changes made in the previous Berkshire Hathaway 13F-HR.
A summary of the changes:
New Positions
DaVita (DVA): 1.7 million shares worth $ 145 million*
Liberty Media (LMCA): 2.7 million shares worth $ 227 million
Added Positions
IBM (IBM): added 6.6 million shares worth $ 1.3 billion (11% increase), total stake $ 12.3 billion
DirectTV (DTV): 16.1 million shares worth $ 738 million (379% increase), total stake $ 933.2 million
Wells Fargo (WFC): 22.3 million shares worth $ 679 million (6% increase), total stake $ 11.7 billion
Visa, Inc. (V): 573 thousand shares worth $ 215 million (25% increase), total stake $ 329.5 million
CVS (CVS): 1.4 million shares worth $ 63 million (26% increase), total stake $ 308.3 million
Intel (INTC): 2.2 million shares worth $ 58 million (23% increase), total stake $ 307.8 million
General Dynamics (GD): 813 thousand shares worth $ 57 million (27% increase), total stake $ 272 million
Verisk (VRSK): 1.3 million shares worth $ 55 million (64% increase), total stake now $ 140 million
In my previous summary, I mentioned some Berkshire 13F filings have the following statement:
"Confidential information has been omitted from the Form 13F and filed separately with the Commission."
Not this one.
From time to time, the SEC allows Berkshire Hathaway to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.
Reduced Positions
Kraft (KFT): sold 2.7 million shares worth $ 104 million (3% decrease), total stake now $ 3.3 billion
Johnson & Johnson (JNJ): sold 8.4 million shares worth $ 544 million (23% decrease), total stake now $ 1.9 billion
Sold Positions
Exxon Mobil (XOM) was sold outright.
The small positions are likely not the work of Buffett himself. Both Todd Combs, hired in 2010 and Ted Weschler, hired last year and expected to join in early 2012, are responsible for a portion of Berkshire's portfolio. So expect any changes involving the small positions to generally be the work of the new portfolio managers.
Top Five Holdings
After the changes, Berkshire Hathaway's stock portfolio** is made up of ~ 34% consumer goods, 31% financials, 18% technology, 7% consumer services, and 4% healthcare. The remainder is spread across industrials and energy.
1. Coca-Cola (KO) = $ 13.8 billion
2. IBM (IBM) = $ 12.7 billion
3. Wells Fargo (WFC) = $ 11.7 billion
4. American Express (AXP) = $ 7.9 billion
5. Procter and Gamble (PG) = $ 4.9 billion
As is almost always the case it's a very concentrated portfolio. The top five often represent 60-70% of the equity portfolio or more.
The top five now make up more like 74%.
The equity portfolio, of course, excludes all the operating businesses that Berkshire owns. This includes: GEICO, General Re, National Indemnity, MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Mansville, Acme Building, MiTek, Fruit of The Loom, Russel Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candy, Dairy Queen, The Pampered Chef, Business Wire, Iscar Metalworking, and Lubrizol among others.
In addition, Berkshire will likely have $ 80-90 billion of cash and cash equivalents, fixed income, and other investments. There'll be more details on all these other holdings and the operating businesses when Berkshire's Annual Report is released later this month.
Adam
* All values based upon yesterday's closing price.
** Berkshire Hathaway's holdings of ADRs are included in the 13F-HR. What is not included are the shares listed on exchanges outside the United States. The status of those shares (BYD, POSCO, Sanofi-Aventis, Tesco PLC etc.) is updated in the annual letter. Things like the preferred shares in Bank of America are also not included in the 13F-HR. Last month, Berkshire disclosed a substantial increase to their position in Britain's dominant supermarket chain, Tesco PLC. So even if that increase had occurred in 4Q 2011, stocks like Tesco PLC are not covered in the 13F-HR unless Berkshire happens to buy the ADR.
Compared to the 3rd Quarter 2011 13F-HR, Berkshire added some new positions and continued to build upon several existing positions.
Here is a post that summarizes changes made in the previous Berkshire Hathaway 13F-HR.
A summary of the changes:
New Positions
DaVita (DVA): 1.7 million shares worth $ 145 million*
Liberty Media (LMCA): 2.7 million shares worth $ 227 million
Added Positions
IBM (IBM): added 6.6 million shares worth $ 1.3 billion (11% increase), total stake $ 12.3 billion
DirectTV (DTV): 16.1 million shares worth $ 738 million (379% increase), total stake $ 933.2 million
Wells Fargo (WFC): 22.3 million shares worth $ 679 million (6% increase), total stake $ 11.7 billion
Visa, Inc. (V): 573 thousand shares worth $ 215 million (25% increase), total stake $ 329.5 million
CVS (CVS): 1.4 million shares worth $ 63 million (26% increase), total stake $ 308.3 million
Intel (INTC): 2.2 million shares worth $ 58 million (23% increase), total stake $ 307.8 million
General Dynamics (GD): 813 thousand shares worth $ 57 million (27% increase), total stake $ 272 million
Verisk (VRSK): 1.3 million shares worth $ 55 million (64% increase), total stake now $ 140 million
In my previous summary, I mentioned some Berkshire 13F filings have the following statement:
"Confidential information has been omitted from the Form 13F and filed separately with the Commission."
Not this one.
From time to time, the SEC allows Berkshire Hathaway to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.
Reduced Positions
Kraft (KFT): sold 2.7 million shares worth $ 104 million (3% decrease), total stake now $ 3.3 billion
Johnson & Johnson (JNJ): sold 8.4 million shares worth $ 544 million (23% decrease), total stake now $ 1.9 billion
Sold Positions
Exxon Mobil (XOM) was sold outright.
The small positions are likely not the work of Buffett himself. Both Todd Combs, hired in 2010 and Ted Weschler, hired last year and expected to join in early 2012, are responsible for a portion of Berkshire's portfolio. So expect any changes involving the small positions to generally be the work of the new portfolio managers.
Top Five Holdings
After the changes, Berkshire Hathaway's stock portfolio** is made up of ~ 34% consumer goods, 31% financials, 18% technology, 7% consumer services, and 4% healthcare. The remainder is spread across industrials and energy.
1. Coca-Cola (KO) = $ 13.8 billion
2. IBM (IBM) = $ 12.7 billion
3. Wells Fargo (WFC) = $ 11.7 billion
4. American Express (AXP) = $ 7.9 billion
5. Procter and Gamble (PG) = $ 4.9 billion
As is almost always the case it's a very concentrated portfolio. The top five often represent 60-70% of the equity portfolio or more.
The top five now make up more like 74%.
The equity portfolio, of course, excludes all the operating businesses that Berkshire owns. This includes: GEICO, General Re, National Indemnity, MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Mansville, Acme Building, MiTek, Fruit of The Loom, Russel Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candy, Dairy Queen, The Pampered Chef, Business Wire, Iscar Metalworking, and Lubrizol among others.
In addition, Berkshire will likely have $ 80-90 billion of cash and cash equivalents, fixed income, and other investments. There'll be more details on all these other holdings and the operating businesses when Berkshire's Annual Report is released later this month.
Adam
* All values based upon yesterday's closing price.
** Berkshire Hathaway's holdings of ADRs are included in the 13F-HR. What is not included are the shares listed on exchanges outside the United States. The status of those shares (BYD, POSCO, Sanofi-Aventis, Tesco PLC etc.) is updated in the annual letter. Things like the preferred shares in Bank of America are also not included in the 13F-HR. Last month, Berkshire disclosed a substantial increase to their position in Britain's dominant supermarket chain, Tesco PLC. So even if that increase had occurred in 4Q 2011, stocks like Tesco PLC are not covered in the 13F-HR unless Berkshire happens to buy the ADR.
Tuesday, February 14, 2012
Buffett: Why Stocks Beat Gold
Some thoughts from Warren Buffett on gold from his recent Fortune Magazine column.
Warren Buffett: Why stocks beat gold and bonds
In the column, Buffett talks about what he describes as the three major categories of investments. The first category he covered was currency-based investments. That category includes money-market funds, bonds, mortgages, and bank deposits among other things.
In a nutshell, his view of currency-based investments pretty much came down to this:
Most of these currency-based investments are thought of as "safe." In truth they are among the most dangerous of assets. - Warren Buffett
Below are some excerpts on what he describes as the second major category.
Category II: Non-productive Assets Like Gold
Shortcomings Of Gold & Other Non-productive Assets
The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future. - Warren Buffett
The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. - Warren Buffett
68 Foot Cube vs 16 Exxon Mobils & All U.S. Cropland
Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.
Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B? - Warren Buffett
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. - Warren Buffett
In a typical year, the 16 Exxon Mobils and U.S. cropland shouldn't have much trouble putting more than $ 700-800 billion of earnings in the owners pocket.
That's year after year.
So these productive assets will likely earn every 12-15 years the entire current value of a gold. During that time and thereafter, the gold will produce nothing. In contrast, whatever the oil and crop bounty happens to be during the first 12-15 years, the productive assets will continue to benefit owner and society thereafter.
With technological advancements and mostly self-funded further investments, there'll likely be quite a bounty of crops and energy resources for a very long time coming from these assets.
Gold will produce nothing and is only worth what the next buyer will pay (if you couldn't find a buyer for Exxon Mobil or the U.S. cropland you'd still collect the income stream). In fact, gold costs an owner money to store, protect, and insure (negative carry). A good business has the capacity to fund those costs from operations and still generate income for owners.
Now, the stream of income produced by productive assets has more than decent odds of growing over time. Year in and year out, the additional income could be wisely invested by the owner into more productive assets.
Let the compounding effects begin.
The growing earnings stream from the Exxon Mobils and the U.S. cropland, even as the inevitable degradation in currency value proceeds, has a very good chance of compensating the owner at least enough to maintain purchasing power. There's also a high probability that the earnings stream, as the value of it is reinvested and allowed to compound, will actually increase purchasing power.
The only problem with commodity businesses is, as a currency is debased, knowing how the price of each individual commodity will change over time to compensate for the debasement isn't always predictable. In a commodity business the owner frequently has little control over price in the long run (there are some obvious exceptions, of course).
That's where pricing power comes in.
Now, imagine owning a business with actual pricing power. As a currency is debased, the management of a good business with pricing power has little trouble adjusting the price to compensate.
I'd still rather own a productive asset like an oil company or cropland than a non-productive one like gold but it's just that better alternatives exist.
Finally, don't forget about that other $ 1 trillion of walking-around money Buffett mentions above. Those dollars can also be put to productive use.
Still want the gold?
Check out the full Fortune Magazine column for Buffett's thoughts on the other two major investment categories.
Adam
Related posts:
Buffett: Why Stocks Beat Gold and Bonds
Edison on Gold: Fictitious Value & Superstition
Munger on Buying Gold
Thomas Edison on Gold
Grantham on Gold: The "Faith-based Metal"
Buffett: Forget Gold, Buy Stocks
Gold vs Productive Assets
Grantham: Gold is "Last Refuge of the Desperate"
Warren Buffett: Why stocks beat gold and bonds
In the column, Buffett talks about what he describes as the three major categories of investments. The first category he covered was currency-based investments. That category includes money-market funds, bonds, mortgages, and bank deposits among other things.
In a nutshell, his view of currency-based investments pretty much came down to this:
Most of these currency-based investments are thought of as "safe." In truth they are among the most dangerous of assets. - Warren Buffett
Below are some excerpts on what he describes as the second major category.
Category II: Non-productive Assets Like Gold
Shortcomings Of Gold & Other Non-productive Assets
The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future. - Warren Buffett
The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. - Warren Buffett
68 Foot Cube vs 16 Exxon Mobils & All U.S. Cropland
Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.
Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B? - Warren Buffett
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. - Warren Buffett
In a typical year, the 16 Exxon Mobils and U.S. cropland shouldn't have much trouble putting more than $ 700-800 billion of earnings in the owners pocket.
That's year after year.
So these productive assets will likely earn every 12-15 years the entire current value of a gold. During that time and thereafter, the gold will produce nothing. In contrast, whatever the oil and crop bounty happens to be during the first 12-15 years, the productive assets will continue to benefit owner and society thereafter.
With technological advancements and mostly self-funded further investments, there'll likely be quite a bounty of crops and energy resources for a very long time coming from these assets.
Gold will produce nothing and is only worth what the next buyer will pay (if you couldn't find a buyer for Exxon Mobil or the U.S. cropland you'd still collect the income stream). In fact, gold costs an owner money to store, protect, and insure (negative carry). A good business has the capacity to fund those costs from operations and still generate income for owners.
Now, the stream of income produced by productive assets has more than decent odds of growing over time. Year in and year out, the additional income could be wisely invested by the owner into more productive assets.
Let the compounding effects begin.
The growing earnings stream from the Exxon Mobils and the U.S. cropland, even as the inevitable degradation in currency value proceeds, has a very good chance of compensating the owner at least enough to maintain purchasing power. There's also a high probability that the earnings stream, as the value of it is reinvested and allowed to compound, will actually increase purchasing power.
The only problem with commodity businesses is, as a currency is debased, knowing how the price of each individual commodity will change over time to compensate for the debasement isn't always predictable. In a commodity business the owner frequently has little control over price in the long run (there are some obvious exceptions, of course).
That's where pricing power comes in.
Now, imagine owning a business with actual pricing power. As a currency is debased, the management of a good business with pricing power has little trouble adjusting the price to compensate.
I'd still rather own a productive asset like an oil company or cropland than a non-productive one like gold but it's just that better alternatives exist.
Finally, don't forget about that other $ 1 trillion of walking-around money Buffett mentions above. Those dollars can also be put to productive use.
Still want the gold?
Check out the full Fortune Magazine column for Buffett's thoughts on the other two major investment categories.
Adam
Related posts:
Buffett: Why Stocks Beat Gold and Bonds
Edison on Gold: Fictitious Value & Superstition
Munger on Buying Gold
Thomas Edison on Gold
Grantham on Gold: The "Faith-based Metal"
Buffett: Forget Gold, Buy Stocks
Gold vs Productive Assets
Grantham: Gold is "Last Refuge of the Desperate"
Munger's Daily Journal Corp: Investment Portfolio Equals Nearly 80% of Market Capitalization
A follow up to this post. The Daily Journal (DJCO), a publisher that relies on Chairman Charlie Munger when selecting investments, has substantially expanded its investment portfolio over the past five years.
The investment portfolio value is now nearly 80% of market capitalization (the company has no debt). As I'll cover below, subtract the portfolio's value from market capitalization and the business itself sells for roughly 3x earnings.
Daily Journal Expands Portfolio Eight-Fold in Five Years
As I mentioned in the prior post, the company took what was less than a $ 10 million portfolio back in 2006, combined it with very solid free cash flow from the core business, then wisely reallocated into marketable securities when prices were low.
(Obviously, the marketable securities didn't go up in value eight-fold, it was the combo of capital appreciation and five years of free cash flow invested wisely.)
As far as allocation goes, the portfolio has moved from being 100% in cash, U.S. Treasury notes and bills in December of 2006 to now being almost entirely in marketable securities. The company's latest 10-Q filing revealed 96% of the portfolio is now in marketable securities (primarily common stocks).
As recently as December of 2008, the portfolio continued to have zero common stock exposure.
Basically, leading up to the financial crisis the portfolio was well-positioned to act when attractive opportunities to invest became available.
Then, in early 2009, at the height of the crisis, the portfolio allocation was completely transformed.
Common stocks were purchased aggressively and have been held or added to since that time.
The company's 10-Q filing this past Friday outlined some of their moves into marketable securities in recent years. The filing also revealed a recent purchase "of common stock of another Fortune 200 company".
From the latest 10-Q of Daily Journal released this past Friday:
In February 2009, the Company purchased shares of common stock of two Fortune 200 companies and certain bonds of a third, and during the second and the third quarters of fiscal 2011, the Company bought shares of common stock of two foreign manufacturing companies. During the first quarter of fiscal 2012, the Company bought shares of common stock of another Fortune 200 company. The investments in marketable securities, which cost approximately $45,166,000 and had a market value of about $76,213,000 at December 31, 2011...
---
The rest of the portfolio is made up of $ 3.1 million in U.S. Treasury bills, cash and cash equivalents. So, in total, the portfolio was valued at $ 79.3 million at the end of the quarter (actually, more than that now considering the recent rally).
The past five years is a great example of building up capital and waiting patiently for attractive investments (something Munger has emphasized on many occasions) to emerge.
Let's compare, in some more detail, the situation now to where the company was just five years ago.
At the end of December 2006, the Daily Journal's cash and investments in total were worth $ 9.6 million.
Debt was $ 4.2 million
Net cash and investments (cash and investments minus debt) = $ 5.4 million
Market Capitalization = ~$ 61 million
Enterprise Value (EV = market capitalization minus cash and investments) = ~$ 56 million
Average earnings over the previous five years (2002-2006) = $ 2.8 million
EV/Avg Earnings = 20x
Back then, investor's were willing to pay slightly more than 20x for the prior five years average earnings. If, for some reason, earnings capacity became compromised, at that time there was little value in the investment portfolio compared to the market capitalization.
Let's look at the business the same way today. At the end of December 2011, the Daily Journal's cash and investments in total were worth $ 79.3 million.
There's no debt now so, of course, net cash and investments also equals $ 79.3 million.
Market Capitalization = ~$ 101 million
Enterprise Value (EV) = ~$ 22 million
Average earnings over the past five years (2007-2011) = $ 7.2 million
EV/Avg Earnings = 3x
Investor's are now willing to pay roughly 3x for what the business itself earned on average over the prior five years.
(The forward multiple is likely to be higher. Earnings were $ 7.9 million in its most recent fiscal year but seems poised to decline from here. Earnings were actually boosted by increases in foreclosures in recent years. Public notice advertising for foreclosures is mandated by law in California and Arizona. This most recent quarter saw earnings drop to just $ 1.70 million down from 2.18 million in the same quarter a year ago.)
The stock is up more than 70% since December of 2006 (share count shrunk somewhat so the per share price is up more than the % gain in market cap). Even with that rise in price, the enterprise value to earnings has dropped from 20x to 3x.
So, even if earnings drops substantially going forward, there's now plenty of value in the portfolio to support much of the market capitalization. We don't know the specific holdings but odds are pretty good that, at least with Charlie Munger involved, the holdings are not exactly speculative. The portfolio is also likely to made up of shares in businesses with the capacity to increase intrinsic value substantially over time.
More from the latest 10-Q of the Daily Journal:
The Company's Chairman of the Board, Charles Munger, is also the vice chairman of Berkshire Hathaway Inc., which maintains a substantial investment portfolio. The Company's Board of Directors has utilized his judgment and suggestions, as well as those of J.P. Guerin, the Company's vice chairman, when selecting investments, and both of them will continue to play an important role in monitoring existing investments and selecting any future investments.
---
In just five years, the portfolio has grown from under $ 9.6 million (actually just $ 5.4 when you include debt at the time) to $ 79.3 million using only the cash generation capacity of the business itself and some wise allocation.
It's a business that may have hard to predict long-term prospects but, since the traditional business needs little incremental capital, with smart allocation of funds value has been created.*
Even if the traditional business is in steady decline, since it doesn't consume much capital, the somewhat reduced earnings levels can continue to be deployed into other attractive investments. This works, of course, only as long as the core business can produce a positive even if somewhat reduced stream of earnings (a sudden sharp decline in earnings would be much more troublesome).
Some questions come to mind:
Will Daily Journal's core business remain profitable, even if somewhat less so than recent levels, for a very long time?
If so, then valuation seems very low. When you combine the value of the new cash earnings that will be coming in each year, potential intrinsic value growth over time of the existing portfolio, and who'll be allocating capital the recent market price seems a nice discount to intrinsic value. In fact, the stock wouldn't be expensive at even half recent profitability levels as long as those lower levels were sustainable long-term.
(Oh, and though it now seems unlikely, if there ended up being any sustained growth whatsoever in earnings then the stock would be truly cheap.)
Are much larger declines in profitability more imminent?
If that's the case then the current market price makes more sense. Under this scenario returns may not be great but the downside still appears somewhat limited by the investment portfolio's value as a percent of market cap.
---
I think knowing how long the core business will maintain favorable economics is a tough call but, as a result of smart allocation, risks seem to have been managed very well.
The question is what level of revenues and profits can be considered normalized. A good answer to that question would make the shares quite a bit more attractive.
In recent years, unusually high levels of foreclosures in California and Arizona have temporarily boosted earnings but clearly aren't sustainable. Foreclosure notices decreased by 26% in the most recent quarter compared to the prior year period. The recent trends for their other key sources of revenues are also not particularly great. The company is expecting revenues to decline in 2012 and that would appear likely to continue.
So it's best to assume earnings in recent years were much stronger than they will be going forward (nothing wrong with expecting lower levels and being pleasantly surprised). The investment portfolio performance and effective allocation of future free cash flow remains the key to value creation at Daily Journal.
(Is an outright acquisition in the cards at some point?)
I still think it is fair to say not much right has to happen at the current valuation. A sudden sharp decline in earnings and possibly a costly wind down of the business down is a risk. Otherwise, considering the balance sheet strength and who's involved in allocating capital, the margin of safety isn't too bad.
Keep in mind that insiders own a bunch of the stock and shares trade in an extremely illiquid fashion. Anyone interested in the shares had better avoid market orders.
Adam
No position in DJCO
* I wouldn't equate the Daily Journal with Blue Chip Stamps but the redeployment of capital from a source with less attractive prospects toward something with more attractive prospects is familiar territory for Charlie Munger. The float from Blue Chip Stamps, a doomed business long ago, was intelligently used to buy See's Candy (among other things), a business that has created lots of value for Berkshire Hathaway over the years. In the case of Daily Journal, instead of float it is free cash flow but still a matter of allocating capital effectively. It would seem that Daily Journal has more favorable business prospects than Blue Chip Stamps but that's a separate question altogether.
--------
I do not make stock recommendations as that comes down to individual circumstances. The site is for informational and educational use and opinions found here should not be treated as investment advice. Visitors should consult their own financial advisor before making any investment decisions.
The investment portfolio value is now nearly 80% of market capitalization (the company has no debt). As I'll cover below, subtract the portfolio's value from market capitalization and the business itself sells for roughly 3x earnings.
Daily Journal Expands Portfolio Eight-Fold in Five Years
As I mentioned in the prior post, the company took what was less than a $ 10 million portfolio back in 2006, combined it with very solid free cash flow from the core business, then wisely reallocated into marketable securities when prices were low.
(Obviously, the marketable securities didn't go up in value eight-fold, it was the combo of capital appreciation and five years of free cash flow invested wisely.)
As far as allocation goes, the portfolio has moved from being 100% in cash, U.S. Treasury notes and bills in December of 2006 to now being almost entirely in marketable securities. The company's latest 10-Q filing revealed 96% of the portfolio is now in marketable securities (primarily common stocks).
As recently as December of 2008, the portfolio continued to have zero common stock exposure.
Basically, leading up to the financial crisis the portfolio was well-positioned to act when attractive opportunities to invest became available.
Then, in early 2009, at the height of the crisis, the portfolio allocation was completely transformed.
Common stocks were purchased aggressively and have been held or added to since that time.
The company's 10-Q filing this past Friday outlined some of their moves into marketable securities in recent years. The filing also revealed a recent purchase "of common stock of another Fortune 200 company".
From the latest 10-Q of Daily Journal released this past Friday:
In February 2009, the Company purchased shares of common stock of two Fortune 200 companies and certain bonds of a third, and during the second and the third quarters of fiscal 2011, the Company bought shares of common stock of two foreign manufacturing companies. During the first quarter of fiscal 2012, the Company bought shares of common stock of another Fortune 200 company. The investments in marketable securities, which cost approximately $45,166,000 and had a market value of about $76,213,000 at December 31, 2011...
---
The rest of the portfolio is made up of $ 3.1 million in U.S. Treasury bills, cash and cash equivalents. So, in total, the portfolio was valued at $ 79.3 million at the end of the quarter (actually, more than that now considering the recent rally).
The past five years is a great example of building up capital and waiting patiently for attractive investments (something Munger has emphasized on many occasions) to emerge.
Let's compare, in some more detail, the situation now to where the company was just five years ago.
At the end of December 2006, the Daily Journal's cash and investments in total were worth $ 9.6 million.
Debt was $ 4.2 million
Net cash and investments (cash and investments minus debt) = $ 5.4 million
Market Capitalization = ~$ 61 million
Enterprise Value (EV = market capitalization minus cash and investments) = ~$ 56 million
Average earnings over the previous five years (2002-2006) = $ 2.8 million
EV/Avg Earnings = 20x
Back then, investor's were willing to pay slightly more than 20x for the prior five years average earnings. If, for some reason, earnings capacity became compromised, at that time there was little value in the investment portfolio compared to the market capitalization.
Let's look at the business the same way today. At the end of December 2011, the Daily Journal's cash and investments in total were worth $ 79.3 million.
There's no debt now so, of course, net cash and investments also equals $ 79.3 million.
Market Capitalization = ~$ 101 million
Enterprise Value (EV) = ~$ 22 million
Average earnings over the past five years (2007-2011) = $ 7.2 million
EV/Avg Earnings = 3x
Investor's are now willing to pay roughly 3x for what the business itself earned on average over the prior five years.
(The forward multiple is likely to be higher. Earnings were $ 7.9 million in its most recent fiscal year but seems poised to decline from here. Earnings were actually boosted by increases in foreclosures in recent years. Public notice advertising for foreclosures is mandated by law in California and Arizona. This most recent quarter saw earnings drop to just $ 1.70 million down from 2.18 million in the same quarter a year ago.)
The stock is up more than 70% since December of 2006 (share count shrunk somewhat so the per share price is up more than the % gain in market cap). Even with that rise in price, the enterprise value to earnings has dropped from 20x to 3x.
So, even if earnings drops substantially going forward, there's now plenty of value in the portfolio to support much of the market capitalization. We don't know the specific holdings but odds are pretty good that, at least with Charlie Munger involved, the holdings are not exactly speculative. The portfolio is also likely to made up of shares in businesses with the capacity to increase intrinsic value substantially over time.
More from the latest 10-Q of the Daily Journal:
The Company's Chairman of the Board, Charles Munger, is also the vice chairman of Berkshire Hathaway Inc., which maintains a substantial investment portfolio. The Company's Board of Directors has utilized his judgment and suggestions, as well as those of J.P. Guerin, the Company's vice chairman, when selecting investments, and both of them will continue to play an important role in monitoring existing investments and selecting any future investments.
---
In just five years, the portfolio has grown from under $ 9.6 million (actually just $ 5.4 when you include debt at the time) to $ 79.3 million using only the cash generation capacity of the business itself and some wise allocation.
It's a business that may have hard to predict long-term prospects but, since the traditional business needs little incremental capital, with smart allocation of funds value has been created.*
Even if the traditional business is in steady decline, since it doesn't consume much capital, the somewhat reduced earnings levels can continue to be deployed into other attractive investments. This works, of course, only as long as the core business can produce a positive even if somewhat reduced stream of earnings (a sudden sharp decline in earnings would be much more troublesome).
Some questions come to mind:
Will Daily Journal's core business remain profitable, even if somewhat less so than recent levels, for a very long time?
If so, then valuation seems very low. When you combine the value of the new cash earnings that will be coming in each year, potential intrinsic value growth over time of the existing portfolio, and who'll be allocating capital the recent market price seems a nice discount to intrinsic value. In fact, the stock wouldn't be expensive at even half recent profitability levels as long as those lower levels were sustainable long-term.
(Oh, and though it now seems unlikely, if there ended up being any sustained growth whatsoever in earnings then the stock would be truly cheap.)
Are much larger declines in profitability more imminent?
If that's the case then the current market price makes more sense. Under this scenario returns may not be great but the downside still appears somewhat limited by the investment portfolio's value as a percent of market cap.
---
I think knowing how long the core business will maintain favorable economics is a tough call but, as a result of smart allocation, risks seem to have been managed very well.
The question is what level of revenues and profits can be considered normalized. A good answer to that question would make the shares quite a bit more attractive.
In recent years, unusually high levels of foreclosures in California and Arizona have temporarily boosted earnings but clearly aren't sustainable. Foreclosure notices decreased by 26% in the most recent quarter compared to the prior year period. The recent trends for their other key sources of revenues are also not particularly great. The company is expecting revenues to decline in 2012 and that would appear likely to continue.
So it's best to assume earnings in recent years were much stronger than they will be going forward (nothing wrong with expecting lower levels and being pleasantly surprised). The investment portfolio performance and effective allocation of future free cash flow remains the key to value creation at Daily Journal.
(Is an outright acquisition in the cards at some point?)
I still think it is fair to say not much right has to happen at the current valuation. A sudden sharp decline in earnings and possibly a costly wind down of the business down is a risk. Otherwise, considering the balance sheet strength and who's involved in allocating capital, the margin of safety isn't too bad.
Keep in mind that insiders own a bunch of the stock and shares trade in an extremely illiquid fashion. Anyone interested in the shares had better avoid market orders.
Adam
No position in DJCO
* I wouldn't equate the Daily Journal with Blue Chip Stamps but the redeployment of capital from a source with less attractive prospects toward something with more attractive prospects is familiar territory for Charlie Munger. The float from Blue Chip Stamps, a doomed business long ago, was intelligently used to buy See's Candy (among other things), a business that has created lots of value for Berkshire Hathaway over the years. In the case of Daily Journal, instead of float it is free cash flow but still a matter of allocating capital effectively. It would seem that Daily Journal has more favorable business prospects than Blue Chip Stamps but that's a separate question altogether.
--------
I do not make stock recommendations as that comes down to individual circumstances. The site is for informational and educational use and opinions found here should not be treated as investment advice. Visitors should consult their own financial advisor before making any investment decisions.
Monday, February 13, 2012
Munger's Daily Journal Corp: Expands Portfolio Eight-Fold Over Five Years
When it comes to deploying the company's funds, The Daily Journal (DJCO) benefits from having Charlie Munger as its Chairman.
What's the long-term business prospects for the The Daily Journal ?
I think that's far from clear, but the investment results from deploying company funds have been impressive in recent years.
The investment portfolio has expanded roughly eight-fold in size over five years.
At the end of December 2006, the portfolio's value was $ 9.5 million and made up mostly of U.S. Treasury notes and bills. According to the 10-Q filing released on Friday, the portfolio was worth $ 79.3 million at the end of December 2011 and made up mostly of common stocks.
Some of that expansion has come from taking the relatively small original portfolio and very solid free cash flow, then wisely allocating it into marketable securities when prices were low (obviously, the marketable securities didn't go up in value eight-fold, it was the combo of capital appreciation and five years of free cash flow).
Most of the portfolio has been going into common stocks in recent years.
The Daily Journal is a good example of a solid, if unexciting, core business with difficult to judge (at least for me) long-term prospects.
Yet, because, at least in the near-term (and may be longer), the core business continues to require little capital, the excess funds it produces can be allocated to other high return use. It's a study in why it often makes sense, when in doubt, to choose owning shares of businesses that require little capital to remain competitive.
Growth prospects for a business can be uninspiring if the excess capital it produces can be allocated productively elsewhere (the worst businesses need every dollar they make and then some to maintain competitiveness). The problems start when those in charge of capital allocation don't make the wisest choices. Some businesses can put lots of capital to good internal use while some otherwise fine businesses cannot.
See's Candy is an example of a fine business that doesn't need much incremental capital (prior post: Buffett on See's). The profits from See's over the years have been used by Berkshire to make other attractive investments.
The Daily Journal operates as two different businesses. The company describes its "traditional business" (where effectively all the operating profits are produced) as follows in the latest 10-Q filing:
The Daily Journal Corporation (the "Company") publishes newspapers and web sites covering California and Arizona, as well as the California Lawyer magazine, and produces several specialized information services. It also serves as a newspaper representative specializing in public notice advertising.
The other business is a wholly-owned subsidiary (Sustain Technologies, Inc.). It's been mostly an unprofitable software business which supplies case management software systems and related products to courts and other justice agencies.
I'll look more specifically at Daily Journal's portfolio growth, capital allocation, and valuation in a follow up.
Adam
What's the long-term business prospects for the The Daily Journal ?
I think that's far from clear, but the investment results from deploying company funds have been impressive in recent years.
The investment portfolio has expanded roughly eight-fold in size over five years.
At the end of December 2006, the portfolio's value was $ 9.5 million and made up mostly of U.S. Treasury notes and bills. According to the 10-Q filing released on Friday, the portfolio was worth $ 79.3 million at the end of December 2011 and made up mostly of common stocks.
Some of that expansion has come from taking the relatively small original portfolio and very solid free cash flow, then wisely allocating it into marketable securities when prices were low (obviously, the marketable securities didn't go up in value eight-fold, it was the combo of capital appreciation and five years of free cash flow).
Most of the portfolio has been going into common stocks in recent years.
The Daily Journal is a good example of a solid, if unexciting, core business with difficult to judge (at least for me) long-term prospects.
Yet, because, at least in the near-term (and may be longer), the core business continues to require little capital, the excess funds it produces can be allocated to other high return use. It's a study in why it often makes sense, when in doubt, to choose owning shares of businesses that require little capital to remain competitive.
Growth prospects for a business can be uninspiring if the excess capital it produces can be allocated productively elsewhere (the worst businesses need every dollar they make and then some to maintain competitiveness). The problems start when those in charge of capital allocation don't make the wisest choices. Some businesses can put lots of capital to good internal use while some otherwise fine businesses cannot.
See's Candy is an example of a fine business that doesn't need much incremental capital (prior post: Buffett on See's). The profits from See's over the years have been used by Berkshire to make other attractive investments.
The Daily Journal operates as two different businesses. The company describes its "traditional business" (where effectively all the operating profits are produced) as follows in the latest 10-Q filing:
The Daily Journal Corporation (the "Company") publishes newspapers and web sites covering California and Arizona, as well as the California Lawyer magazine, and produces several specialized information services. It also serves as a newspaper representative specializing in public notice advertising.
The other business is a wholly-owned subsidiary (Sustain Technologies, Inc.). It's been mostly an unprofitable software business which supplies case management software systems and related products to courts and other justice agencies.
I'll look more specifically at Daily Journal's portfolio growth, capital allocation, and valuation in a follow up.
Adam
Friday, February 10, 2012
Tweedy, Browne: Positions In Globally Diversified, Underleveraged Businesses
Morningstar's 2011 International-Stock Fund Manager of the Year was awarded to the team that manages the Tweedy, Browne Global Value Fund (TBGVX). It's their flagship international fund.
The team of managers at Tweedy, Browne tend to be positioned in "larger, more globally diversified, underleveraged businesses" selling "products that are of growing interest to emerging middle classes around the globe."*
The fund has relatively low turnover which is always good to see.
According to Morningstar, the annual turnover of the fund is just 12% so there's a pretty good chance the shares owned at the end of a quarter will be held longer term. Funds with very low turnover like Tweedy, Brown Global Value are more about investing, less about trading.
In contrast, what's owned by a fund with very high turnover at the end of a quarter doesn't mean much. What was owned at the end of the quarter has a decent chance of having been sold or being sold sooner than later. Unfortunately, there are too many funds with very short time horizons when it comes to stocks. These funds are more about trading, less about investing.
Here's the top five holding of the Tweedy, Browne Global Value Fund as of the end of the 4th Quarter 2011:
Top 5 Holdings
1 Phillip Morris International (PM)
2 Nestle (NSRGY)
3 Diageo (DEO)
4 Roche (RHHBY)
5 Total (TOT)
The team did trim their position in Diageo somewhat during the quarter. Otherwise, there were no changes among the top five holdings.
Some excerpts of note from the most recent Tweedy, Browne Quarterly Commentary:
Our fourth quarter results were led by continued strength in consumer staples stocks such as Philip Morris, Diageo, Walmart and Unilever, and a significant uptick in some of our more cyclical holdings including Axel Springer, Total, Royal Dutch, and Union Pacific.
Later in the letter they added...
We continue to maintain significant positions in consumer staples and healthcare stocks, but also have substantial positions in more cyclical areas such as insurance, industrials, energy and media. While the spread in valuation between the more defensive and the more cyclical parts of the equity market has widened of late, the overall valuation for our portfolios remain quite reasonable to attractive with a forward 2012 weighted average price earnings ratio for our Funds' equities, which range between 11.4X and 12.3X estimated earnings.
It's notable that positions in consumer staples make up over 30% of the portfolio. That high percentage allocation is not unlike the low turnover equity portfolios of Berkshire Hathaway (BRKa) and The Yacktman Funds. Many funds have a smaller allocation because they're considered "defensive" investments even though there's plenty of evidence that suggests otherwise.
Both Berkshire and Yacktman have more than 30% of their equity portfolio in consumer staples stocks.
Readers of my many prior posts on consumer staples stocks will know that I generally favor shares of the better ones as core long-term holdings.
Of course, like anything else, the shares need to be purchased at reasonable valuations. Many of them were very reasonable valued not too long ago.
The discounts on most are much smaller now.
Still, when bought well and held longer term the best consumer staples businesses are capable of producing very attractive risk-adjusted returns.
Adam
* From the Tweedy, Browne 4th Quarter 2011 Commentary
Established long positions in PM, DEO, TOT, WMT, and UNP at much lower than recent prices
The team of managers at Tweedy, Browne tend to be positioned in "larger, more globally diversified, underleveraged businesses" selling "products that are of growing interest to emerging middle classes around the globe."*
The fund has relatively low turnover which is always good to see.
According to Morningstar, the annual turnover of the fund is just 12% so there's a pretty good chance the shares owned at the end of a quarter will be held longer term. Funds with very low turnover like Tweedy, Brown Global Value are more about investing, less about trading.
In contrast, what's owned by a fund with very high turnover at the end of a quarter doesn't mean much. What was owned at the end of the quarter has a decent chance of having been sold or being sold sooner than later. Unfortunately, there are too many funds with very short time horizons when it comes to stocks. These funds are more about trading, less about investing.
Here's the top five holding of the Tweedy, Browne Global Value Fund as of the end of the 4th Quarter 2011:
Top 5 Holdings
1 Phillip Morris International (PM)
2 Nestle (NSRGY)
3 Diageo (DEO)
4 Roche (RHHBY)
5 Total (TOT)
The team did trim their position in Diageo somewhat during the quarter. Otherwise, there were no changes among the top five holdings.
Some excerpts of note from the most recent Tweedy, Browne Quarterly Commentary:
Our fourth quarter results were led by continued strength in consumer staples stocks such as Philip Morris, Diageo, Walmart and Unilever, and a significant uptick in some of our more cyclical holdings including Axel Springer, Total, Royal Dutch, and Union Pacific.
Later in the letter they added...
We continue to maintain significant positions in consumer staples and healthcare stocks, but also have substantial positions in more cyclical areas such as insurance, industrials, energy and media. While the spread in valuation between the more defensive and the more cyclical parts of the equity market has widened of late, the overall valuation for our portfolios remain quite reasonable to attractive with a forward 2012 weighted average price earnings ratio for our Funds' equities, which range between 11.4X and 12.3X estimated earnings.
It's notable that positions in consumer staples make up over 30% of the portfolio. That high percentage allocation is not unlike the low turnover equity portfolios of Berkshire Hathaway (BRKa) and The Yacktman Funds. Many funds have a smaller allocation because they're considered "defensive" investments even though there's plenty of evidence that suggests otherwise.
Both Berkshire and Yacktman have more than 30% of their equity portfolio in consumer staples stocks.
Readers of my many prior posts on consumer staples stocks will know that I generally favor shares of the better ones as core long-term holdings.
Of course, like anything else, the shares need to be purchased at reasonable valuations. Many of them were very reasonable valued not too long ago.
The discounts on most are much smaller now.
Still, when bought well and held longer term the best consumer staples businesses are capable of producing very attractive risk-adjusted returns.
Adam
* From the Tweedy, Browne 4th Quarter 2011 Commentary
Established long positions in PM, DEO, TOT, WMT, and UNP at much lower than recent prices
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