Thursday, December 17, 2009

Stocks to Watch

Here is an update of stocks I like* for my own portfolio at the right price.

Those under the dashed line are businesses I like but prevailing prices have become too expensive. Some are just barely above but the objective should be, of course to buy them well below.

Unfortunately, most of the stocks are now below that line.

Kraft (KFT) continues to be held back by it's bid for Cadbury (CBY) so it's price has remained reasonable.

I've added NSC and MCD to the list. Neither are great bargains right now but NSC is a good alternative to BNI and MCD is one of the great global franchises. I've removed BNI from the list due to Berkshire Hathaway's pending acquisition.

As always, the stocks in bold have two things in common. They are:

1) currently owned by Berkshire Hathaway (as of 9/30/09) and,
2) selling below the price that Warren Buffett paid in the past few years.

There are several other Berkshire Hathaway holdings on this list but they don't have the 2nd thing going for them.

These are all intended to be long-term investments. A ten year horizon or longer. No trades here.

Stock/Max Price I'd Pay/Recent Price (12-16-09)
JNJ/65.00/64.80 - Buffett paid ~$ 62
KFT/30.00/27.15 - Buffett paid ~$ 33
USB/24.00/22.09 - Buffett paid ~$ 31
WFC/28.00/25.84 - Buffett paid ~$ 32
COP/50.00/50.86 - Buffett paid ~$ 82...sold some shares at a loss
(Splits, spinoffs, and similar actions inevitably will occur going forward. Will adjust as necessary to make meaningful comparisons.)

Stocks removed from list:
  • BNI - I liked purchasing BNI up to $ 80/share. It was bought out by Berkshire Hathaway for $ 100/share in late 2009. Deal should close early 2010.
The max price I'd pay takes into account an acceptable margin of safety**. That margin of safety differs for each company.

In other words, I believe these are intrinsically worth quite a bit more than the max price I've indicated in this post and in prior Stocks to Watch posts. I also believe most of these companies generally have favorable long-term economics (i.e. the best of them have high and durable ROC) and, as a result, intrinsic values will increase over time. Of course, I may be wrong about the core economics and that margin of safety could provide insufficient protection against a loss. Still, a year from now I would expect to be willing to pay more for many of these based upon each company's intrinsic value growth over that time frame.

Some of these stocks have rallied quite a bit compared to not too long ago. So they're more difficult to buy with a sufficient margin of safety. Still, that doesn't mean the risk of missing something you like when a fair price is available (error of omission) won't ultimately be more costly than suffering a short-term paper loss.

Here are some thoughts on errors of omission by Warren Buffett from an article in The Motley Fool.

And also...

"During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt... Furthermore, I made some errors of omission, sucking my thumb when new facts came in." - Warren Buffett's 2008 Annual Letter to Shareholders

In other words, not buying what's still attractively valued to avoid short-term paper losses is far from a perfect solution with your best long-term investment ideas.

To me, if an investment was initially bought at a fair price, and is likely to increase substantially in intrinsic value over 20 years, it makes no sense to be bothered by a temporary paper loss. Of course, make a misjudgment on the quality of a business and that paper loss becomes a real one (error of commission).

There is no perfect answer to this problem. When highly confident that a great business is available at a fair price it's important to accumulate enough while the window of opportunity exists.

Sometimes ignoring the risk of short-term losses is necessary to make sure a meaningful stake is acquired.


* This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here are never a recommendation to buy or sell anything and should never be considered specific individualized investment advice. In general, intend to remain long the above stocks (at least those that at some point became cheap enough to buy) unless market prices become significantly higher than intrinsic value, core business economics become materially impaired, prospects turn out to have been misjudged, or opportunity costs become high.
** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and misjudge a company's economics in a major way, the margin of safety may still not be sufficient. Judging the durability of the economics correctly matters most. If the economics remain intact but the stock goes down that is a very good thing in the long run.