An excerpt from Part II of Jeremy Grantham's latest quarterly letter with some commentary to follow:
-On a regular time horizon, I would continue to overweight quality stocks, which may well be on a roll. They are not priced to make a fortune, but they are priced to give approximately 4.5% to 5% real return, which I think is acceptable for low-risk assets. They have also delivered dependable downside – risk off – relative performance for several years, which is a characteristic generally in short supply.
Grantham's Quarterly Letter - Danger: Children At Play
Grantham and his team think that the S&P 500 is worth no more than 950.
Whether the S&P 500 is worth 950 or not there seem to be plenty of shares in individual businesses selling at a discount to value.
Most of them are, in fact, large and of the high quality variety.
Things like Berkshire Hathaway (BRKa), Pepsi (PEP), Johnson & Johnson (JNJ) along with large cap tech stocks like Microsoft (MSFT), among many others, are not at all expensive.
It almost seems routine now to see quality businesses selling at low teens or even single digit multiples of earnings. Yet, you only have to look back ten years or so to know the situation is far from routine.
A decade ago many of these businesses were selling anywhere from somewhat to massively overvalued.
The fact is most of these have been cheap for quite a while and most continue to get cheaper. That may seem like a bad thing (dead money or worse) but as a long-term holder of shares it's usually beneficial if the shares remain low or better yet, get cheaper, in the short-to-intermediate run:
1) It allows more shares of a good business to be accumulated by an investor over time at a fair or better price via dividend reinvestment or as new sources of cash become available.
2) Management can use the company's own free cash flow generation to buy more of the shares over time, whenever they are selling below intrinsic value, to the benefit of long-term holders of the stock.
The market weighing machine will in the long run reflect the cumulative effects of the buybacks and each businesses core economics on a per share basis.
So, as long as the favorable economics of these businesses remain in tact, hopefully prices remain low or even decline from here. With long-term returns as the focus that's precisely what investors should want.
Whether those favorable economics remains in tact is something far from certain that must be evaluated on a regular basis (especially for any technology business).
Now, I realize this approach flies in the face of the hyperactive trading ethos that is so popular these days. I'm sure there is one heck of an adrenaline rush for those involved in the trading game.
Those in the business of attempting to make a quick buck on a well timed trade will likely find the above somewhere between useless and uninteresting.
Yet, even if admittedly less exciting, it works when applied with discipline and sound judgment. I'll take the highest possible risk-adjusted forward rate of return in lieu of the adrenaline rush.
Adam
Related posts:
Defensive Stocks Revisited - March 2011
KO and JNJ: Defensive Stocks? - January 2011
Altria Outperforms...Again - October 2010
Grantham on Quality Stocks Revisited - July 2010
Friends & Romans - May 2010
Grantham on Quality Stocks - November 2009
Best Performing Mutual Funds - 20 Years - May 2009
Staples vs Cyclicals - April 2009
Best and Worst Performing DJIA Stock - April 2009
Defensive Stocks? - April 2009
Long BRKb, PEP, JNJ, and MSFT
* From the Grantham letter: The forecast provided above is based on the reasonable beliefs of GMO and is not a guarantee of future performance. Actual results may differ materially.
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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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, August 12, 2011
Thursday, August 11, 2011
Cisco's Results & Outlook
Troubled Cisco (CSCO) reported some pretty solid quarterly results yesterday.
Reuters:
Cisco jumps as revenue outlook calms investors
Bloomberg:
Cisco Gains after Profit, Sales Tops Analysts' Estimates
Below are some financial highlights from the company's press release:
Cisco Reports 4th Quarter and Fiscal Year 2011 Results
-Cash flows from operations were $2.8 billion for the fourth quarter of fiscal 2011, compared with $3.0 billion for the third quarter of fiscal 2011, and compared with $3.2 billion for the fourth quarter of fiscal 2010. Cash flows from operations were $10.1 billion for fiscal 2011, compared with $10.2 billion for fiscal 2010.
-Cash and cash equivalents and investments were $44.6 billion at the end of fiscal 2011, compared with $43.4 billion at the end of the third quarter of fiscal 2011, and compared with $39.9 billion at the end of fiscal 2010.
-During the fourth quarter of fiscal 2011, Cisco repurchased 95 million shares of common stock under the stock repurchase program at an average price of $15.85 per share for an aggregate purchase price of $1.5 billion.
Subtract the $ 1.2 billion of capex from the $ 10.1 billion of cash flows from operations and you have a company that produced free cash flow of $ 8.9 billion in a tough transitional year.
Cisco has clearly made quite a few missteps. Yet, if you step back a bit it's a company selling at an enterprise value of $ 47.4 billion generating $ 8.9 billion of free cash flow. Not exactly expensive.
Reuters:
Cisco jumps as revenue outlook calms investors
Bloomberg:
Cisco Gains after Profit, Sales Tops Analysts' Estimates
Below are some financial highlights from the company's press release:
Cisco Reports 4th Quarter and Fiscal Year 2011 Results
-Cash flows from operations were $2.8 billion for the fourth quarter of fiscal 2011, compared with $3.0 billion for the third quarter of fiscal 2011, and compared with $3.2 billion for the fourth quarter of fiscal 2010. Cash flows from operations were $10.1 billion for fiscal 2011, compared with $10.2 billion for fiscal 2010.
-Cash and cash equivalents and investments were $44.6 billion at the end of fiscal 2011, compared with $43.4 billion at the end of the third quarter of fiscal 2011, and compared with $39.9 billion at the end of fiscal 2010.
-During the fourth quarter of fiscal 2011, Cisco repurchased 95 million shares of common stock under the stock repurchase program at an average price of $15.85 per share for an aggregate purchase price of $1.5 billion.
Subtract the $ 1.2 billion of capex from the $ 10.1 billion of cash flows from operations and you have a company that produced free cash flow of $ 8.9 billion in a tough transitional year.
Cisco has clearly made quite a few missteps. Yet, if you step back a bit it's a company selling at an enterprise value of $ 47.4 billion generating $ 8.9 billion of free cash flow. Not exactly expensive.
Shares Outstanding: 5.5 billion
Stock price at yesterday's close: 13.73/share
Market Cap: 5.5 billion*$13.73: $ 75.5 billion
Net Cash on the Balance Sheet*: $ 27.8 billion
Enterprise Value: $ 47.7 billion
Free Cash Flow: $ 8.9 billion
Free Cash Flow: $ 8.9 billion
Enterprise Value/Free Cash Flow = 5.4x
Now, I happen to subtract stock based compensation when calculating the free cash flow of a company that uses lots of stock options to compensate employees.
Cisco is clearly one of those companies.
This approach is meant to be conservative and add a margin of safety**. Using my more conservative free cash flow numbers Cisco's enterprise value to earnings multiple is still just 6.5x.
Neither number is perfect but I think the 6.5x multiple uses cash flow that, while conservative, better approximates Cisco's economics.
"Proper accounting is like engineering. You need a margin of safety. Thank God we don't design bridges and airplanes the way we do accounting." - Charlie Munger
"...double-entry bookkeeping was a hell of an invention. And it's not that hard to understand. But you have to know enough about it to understand its limitations - because although accounting is the starting place, it's only a crude approximation." - Charlie MungerNow, I happen to subtract stock based compensation when calculating the free cash flow of a company that uses lots of stock options to compensate employees.
Cisco is clearly one of those companies.
This approach is meant to be conservative and add a margin of safety**. Using my more conservative free cash flow numbers Cisco's enterprise value to earnings multiple is still just 6.5x.
Neither number is perfect but I think the 6.5x multiple uses cash flow that, while conservative, better approximates Cisco's economics.
"Proper accounting is like engineering. You need a margin of safety. Thank God we don't design bridges and airplanes the way we do accounting." - Charlie Munger
Munger on Accounting
Cisco's free cash flow would have to be shrinking rather quickly to justify either the 6.5x or 5.4x multiple.
I'm not a big fan of Cisco but at some point the price gets low enough that the risk/reward makes sense.
Now, if Cisco starts to grow consistently again returns for investors will likely be impressive. The good news is at the current multiple Cisco doesn't need to grow much to produce some nice longer term returns for investors.
Here's the only problem. Even if not quite as cheap, there are several fairly inexpensive large cap tech stocks (Microsoft: MSFT comes to mind as an example) with seemingly fewer difficulties than Cisco.
For investors, I would say that these are the kind of problems one wants.
Cisco's free cash flow would have to be shrinking rather quickly to justify either the 6.5x or 5.4x multiple.
I'm not a big fan of Cisco but at some point the price gets low enough that the risk/reward makes sense.
Now, if Cisco starts to grow consistently again returns for investors will likely be impressive. The good news is at the current multiple Cisco doesn't need to grow much to produce some nice longer term returns for investors.
Here's the only problem. Even if not quite as cheap, there are several fairly inexpensive large cap tech stocks (Microsoft: MSFT comes to mind as an example) with seemingly fewer difficulties than Cisco.
For investors, I would say that these are the kind of problems one wants.
Adam
Small long positions in CSCO and MSFT
* Cash and Cash Equivalents of $ 44.6 billion Minus debt of $ 16.8 billion.
** Since there's no easy perfect way to estimate what the real future cost of options to shareholders will be I go with this approach. It is admittedly a bit tough (i.e. conservative) but, not being a fan of companies that use lots of options for compensation in the first place, this is how I build in a bigger margin of safety. As an investor, I think of it as an excessive options use penalty.
---
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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Small long positions in CSCO and MSFT
* Cash and Cash Equivalents of $ 44.6 billion Minus debt of $ 16.8 billion.
** Since there's no easy perfect way to estimate what the real future cost of options to shareholders will be I go with this approach. It is admittedly a bit tough (i.e. conservative) but, not being a fan of companies that use lots of options for compensation in the first place, this is how I build in a bigger margin of safety. As an investor, I think of it as an excessive options use penalty.
---
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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, August 10, 2011
Munger On Investment Banks, Economics, and More
More excerpts from the Charlie Munger interview in the Stanford Lawyer:
On Investment Banks
"The investment banks of yore, chastened by the '30s, were private partnerships, or near equivalents. The partners were dependent for their retirement on the prosperity of the firms they left behind and the customs and culture they left behind, and the places were much more responsible and honorable. That ethos, by the time the year 2006 came along, had pretty well disappeared. Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the 'repo' system—one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome."
On Economic Collapses
"I think it is dangerous to have big disasters in a modern economy. I regard pre-World War I Germany as an advanced, decent civilization. After all, little Albert Einstein got a very good, subsidized primary education in German Catholic schools. But in its economic misery, Germany became dominated by Adolf Hitler. We've seen some god-awful people come to power in various miseries in various countries. Enough misery has huge dangers in a world where we have new pathogens, atomic bombs, and so forth. So we can't afford to have huge economic collapses."
On Economics & Psychology
"They say it's not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we're learning is that when you don't understand these consequences, you don't have an adequately skilled profession. You have big gaps in what you need. You have a profession that's like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg."
"If you totally divorce economics from psychology, you've gone a long way toward divorcing it from reality."
On Eliminating Standard Error
"Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It's not a competency if you don't know the edge of it. And Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error."
On Being Risk-Averse
"I think that many CEOs get carried away into folly. They haven't studied the past models of disaster enough and they’re not risk-averse enough. One of the very interesting things about Berkshire Hathaway is how chicken it is, how cautious, how low is its leverage. But Warren and I would not have been comfortable with more risk, entrusted with other people's net worths. There was no reason for our financial institutions to stretch as much as they did, with the leverage, the shady people and the compromises."
"I think the culture is simply going to have to learn to work more the way Berkshire Hathaway does, instead of the way Citigroup did."
"The culture of Goldman Sachs as a partnership was morally superior and better for the surrounding civilization than the culture that came after it went public."
On Resisting Reform
"...there are powerful forces intrinsic to the system that resist reform. But I have lived in my own life with responsible investment banking. When I was young, First Boston Company was an honorable and constructive firm and very much served the surrounding civilization. Investment banking at the height of this last folly was a disgrace to the surrounding civilization."
On Derivatives Trading
"If there aren't a lot of new jobs in derivative trading, maybe the engineers will have to do more engineering."
It's probably too much to ask but during attempts to fix some of what is broken in the financial system it would be nice if the merits of the above views were given some real consideration.
Adam
Related post:
Munger on Derivatives
---
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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
On Investment Banks
"The investment banks of yore, chastened by the '30s, were private partnerships, or near equivalents. The partners were dependent for their retirement on the prosperity of the firms they left behind and the customs and culture they left behind, and the places were much more responsible and honorable. That ethos, by the time the year 2006 came along, had pretty well disappeared. Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the 'repo' system—one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome."
On Economic Collapses
"I think it is dangerous to have big disasters in a modern economy. I regard pre-World War I Germany as an advanced, decent civilization. After all, little Albert Einstein got a very good, subsidized primary education in German Catholic schools. But in its economic misery, Germany became dominated by Adolf Hitler. We've seen some god-awful people come to power in various miseries in various countries. Enough misery has huge dangers in a world where we have new pathogens, atomic bombs, and so forth. So we can't afford to have huge economic collapses."
On Economics & Psychology
"They say it's not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we're learning is that when you don't understand these consequences, you don't have an adequately skilled profession. You have big gaps in what you need. You have a profession that's like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg."
"If you totally divorce economics from psychology, you've gone a long way toward divorcing it from reality."
On Eliminating Standard Error
"Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It's not a competency if you don't know the edge of it. And Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error."
On Being Risk-Averse
"I think that many CEOs get carried away into folly. They haven't studied the past models of disaster enough and they’re not risk-averse enough. One of the very interesting things about Berkshire Hathaway is how chicken it is, how cautious, how low is its leverage. But Warren and I would not have been comfortable with more risk, entrusted with other people's net worths. There was no reason for our financial institutions to stretch as much as they did, with the leverage, the shady people and the compromises."
"I think the culture is simply going to have to learn to work more the way Berkshire Hathaway does, instead of the way Citigroup did."
"The culture of Goldman Sachs as a partnership was morally superior and better for the surrounding civilization than the culture that came after it went public."
On Resisting Reform
"...there are powerful forces intrinsic to the system that resist reform. But I have lived in my own life with responsible investment banking. When I was young, First Boston Company was an honorable and constructive firm and very much served the surrounding civilization. Investment banking at the height of this last folly was a disgrace to the surrounding civilization."
On Derivatives Trading
"If there aren't a lot of new jobs in derivative trading, maybe the engineers will have to do more engineering."
It's probably too much to ask but during attempts to fix some of what is broken in the financial system it would be nice if the merits of the above views were given some real consideration.
Adam
Related post:
Munger on Derivatives
---
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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tuesday, August 9, 2011
Buffett: S&P Downgrade of the U.S. "Doesn't Make Sense"
From this Fox Business Network article:
Buffett to FBN: S&P Downgrade "Doesn't Make Sense"
...Buffett reaffirmed his belief in the quality of the United States' credit telling FBN, "In Omaha, the U.S. is still triple A. In fact, if there were a quadruple-A rating, I'd give the U.S. that."
Buffett also added the following...
"The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you're talking about inflation, that's a different question."
Now, contrast what Buffett had to say with this:
Jim Rogers on CNBC: "Don't See How U.S. Can Ever Pay Off Its Debts"
The U.S. doesn't deserve a AA-plus credit rating, much less triple-A, commodity bull and noted investor Jim Rogers told CNBC on Monday.
Rogers also said...
"It seems to me it's physically, humanly impossible for the U.S. to ever pay off its debt ," Rogers said. "They can roll it over and continue to play the charade, but the U.S. is bankrupt."
So Buffett says U.S. is quadruple-A and Rogers says U.S. is bankrupt.
Two informed participants with polar opposite views.
I'm guessing both views resonate with individuals who mostly think the other is crazy. No matter who you agree with it's worth knowing how and why others come to completely different conclusions with what seem like the same set of facts.
From this Bloomberg article:
Buffett Says Cutting U.S. Rating Was a Mistake, Sees No Recession
"Financial markets create their own dynamics, but I don't think we're facing a double dip recession," said Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A) "Clearly what stock markets do have is an effect on confidence, and this selloff can create a lack of confidence."
Who knows how this plays out. The nature of financial markets, especially the modern iteration, create tough to predict feedback loops that take on a life of their own.
In many ways, a monster of our own making that I'm not convinced serves its primary purpose all that well.
We could easily make it simpler, smaller in scale, less hyperactive, less expensive, and more stable if we wanted it that way. Yet, considering the interests involved, that's not going to happen anytime soon.
Some relevant quotes:
"...the 3% of GDP that was made up of financial services in 1965 was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century. We should be suspicious, therefore, of the benefits derived from the extra 4.5% of the pie that went to pay for financial services by 2007, as the financial services share of GDP expanded to a remarkable 7.5%. This extra 4.5% would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5% a year its ability to save and invest, both of which did slow down." - Jeremy Grantham in Finance Goes Rogue
"In the '20s, a tiny class of people were financial promoters and a tiny class of people were buying securities. Today, it's deep in the whole culture, and it is way more extreme. If sin and folly get punished appropriately, we're in for a bad time." - Charlie Munger in the Stanford Lawyer
"When they wanted to make the securities market function better as a gambling casino with vast profits for the people who were croupiers—there was a big constituency in favor of dumb change....these changes repealed longtime control of margin credit by the Federal Reserve System." - Charlie Munger in the Stanford Lawyer*
"...just one after another the very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we'd put in the last time we had a big trouble—devices that worked quite well." - Charlie Munger in the Stanford Lawyer
What we have then is a system that is much larger than what it has been historically. An example of where that additional size comes from is the making of fast-paced bets using various options, derivatives, and high-speed trading strategies.**
Now, I've no doubt those activities serve the participants involved quite well. Whether modern financial markets come even close to effectively serving their broader purpose or not an afterthought it seems.
"I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive "earnings" (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham." - Warren Buffett in the 2002 Berkshire Hathaway Shareholder Letter
The current large, overly complex, and often less stable iteration of the financial markets is the one we have to live with for now.
It will continue to impact the remaining real economy from time to time in not easy to foresee ways.
Adam
* Munger's point is that we're not controlling financial leverage if we have option exchanges. He also said: "Unlimited leverage comes automatically with an option exchange. Then, next, derivative trading made the option exchange look like a benign event."
**Here's what Charlie Munger said about high frequency trading at the last Wesco Financial Annual Meeting according to these notes: "Fancy computers are engaging in legalized front-running. The profits are clearly coming from the rest of us -- our college endowments and our pensions. Why is this legal? What the hell is the government thinking? It's like letting rats into a restaurant."
---
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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Buffett to FBN: S&P Downgrade "Doesn't Make Sense"
...Buffett reaffirmed his belief in the quality of the United States' credit telling FBN, "In Omaha, the U.S. is still triple A. In fact, if there were a quadruple-A rating, I'd give the U.S. that."
Buffett also added the following...
"The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you're talking about inflation, that's a different question."
Now, contrast what Buffett had to say with this:
Jim Rogers on CNBC: "Don't See How U.S. Can Ever Pay Off Its Debts"
The U.S. doesn't deserve a AA-plus credit rating, much less triple-A, commodity bull and noted investor Jim Rogers told CNBC on Monday.
Rogers also said...
"It seems to me it's physically, humanly impossible for the U.S. to ever pay off its debt ," Rogers said. "They can roll it over and continue to play the charade, but the U.S. is bankrupt."
So Buffett says U.S. is quadruple-A and Rogers says U.S. is bankrupt.
Two informed participants with polar opposite views.
I'm guessing both views resonate with individuals who mostly think the other is crazy. No matter who you agree with it's worth knowing how and why others come to completely different conclusions with what seem like the same set of facts.
From this Bloomberg article:
Buffett Says Cutting U.S. Rating Was a Mistake, Sees No Recession
"Financial markets create their own dynamics, but I don't think we're facing a double dip recession," said Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A) "Clearly what stock markets do have is an effect on confidence, and this selloff can create a lack of confidence."
Who knows how this plays out. The nature of financial markets, especially the modern iteration, create tough to predict feedback loops that take on a life of their own.
In many ways, a monster of our own making that I'm not convinced serves its primary purpose all that well.
We could easily make it simpler, smaller in scale, less hyperactive, less expensive, and more stable if we wanted it that way. Yet, considering the interests involved, that's not going to happen anytime soon.
Some relevant quotes:
"...the 3% of GDP that was made up of financial services in 1965 was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century. We should be suspicious, therefore, of the benefits derived from the extra 4.5% of the pie that went to pay for financial services by 2007, as the financial services share of GDP expanded to a remarkable 7.5%. This extra 4.5% would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5% a year its ability to save and invest, both of which did slow down." - Jeremy Grantham in Finance Goes Rogue
"In the '20s, a tiny class of people were financial promoters and a tiny class of people were buying securities. Today, it's deep in the whole culture, and it is way more extreme. If sin and folly get punished appropriately, we're in for a bad time." - Charlie Munger in the Stanford Lawyer
"When they wanted to make the securities market function better as a gambling casino with vast profits for the people who were croupiers—there was a big constituency in favor of dumb change....these changes repealed longtime control of margin credit by the Federal Reserve System." - Charlie Munger in the Stanford Lawyer*
"...just one after another the very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we'd put in the last time we had a big trouble—devices that worked quite well." - Charlie Munger in the Stanford Lawyer
What we have then is a system that is much larger than what it has been historically. An example of where that additional size comes from is the making of fast-paced bets using various options, derivatives, and high-speed trading strategies.**
Now, I've no doubt those activities serve the participants involved quite well. Whether modern financial markets come even close to effectively serving their broader purpose or not an afterthought it seems.
"I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive "earnings" (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham." - Warren Buffett in the 2002 Berkshire Hathaway Shareholder Letter
The current large, overly complex, and often less stable iteration of the financial markets is the one we have to live with for now.
It will continue to impact the remaining real economy from time to time in not easy to foresee ways.
Adam
* Munger's point is that we're not controlling financial leverage if we have option exchanges. He also said: "Unlimited leverage comes automatically with an option exchange. Then, next, derivative trading made the option exchange look like a benign event."
**Here's what Charlie Munger said about high frequency trading at the last Wesco Financial Annual Meeting according to these notes: "Fancy computers are engaging in legalized front-running. The profits are clearly coming from the rest of us -- our college endowments and our pensions. Why is this legal? What the hell is the government thinking? It's like letting rats into a restaurant."
---
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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, August 8, 2011
Attention, Shoppers. It's Time to Buy
This Barron's article points out that many tech stocks have strong balance sheets and low P/Es.
The article also calls Berkshire Hathaway (BRKA) a "financial Fort Knox" and says the stock looks inexpensive.
Attention Shoppers, It's Time to Buy
Charlie Munger said the following about Berkshire at the final Wesco Financial annual meeting:
Berkshire's stock is at a point Buffett and I never anticipated it would go to.
Investors owning Berkshire at current prices will do quite all right just sitting on their rear ends.
When Munger said that, the stock was roughly 10% higher than it is now. The Berkshire Hathaway class B shares (BRKb) are currently selling at just over $ 70/share as I write this.
As far as the other stocks go it should continue to be a rough ride. I have no idea whether these stocks will be higher or lower in 3 months or even 3 years for that matter. Anyone who doesn't like looking at paper losses for potentially an extended period probably should not be buying.
On the other hand, the price that some of these businesses are now selling at compared to what they will likely be worth in ten years or so is attractive.
The article also mentions stocks from several other sectors (financials, pharma, defense, and even a gold miner) worth considering that, for the most part, are of little interest to me.
Adam
Long positions in MSFT, INTC, HPQ, AAPL, and BRKb
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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
The article also calls Berkshire Hathaway (BRKA) a "financial Fort Knox" and says the stock looks inexpensive.
Attention Shoppers, It's Time to Buy
Charlie Munger said the following about Berkshire at the final Wesco Financial annual meeting:
Berkshire's stock is at a point Buffett and I never anticipated it would go to.
Investors owning Berkshire at current prices will do quite all right just sitting on their rear ends.
When Munger said that, the stock was roughly 10% higher than it is now. The Berkshire Hathaway class B shares (BRKb) are currently selling at just over $ 70/share as I write this.
As far as the other stocks go it should continue to be a rough ride. I have no idea whether these stocks will be higher or lower in 3 months or even 3 years for that matter. Anyone who doesn't like looking at paper losses for potentially an extended period probably should not be buying.
On the other hand, the price that some of these businesses are now selling at compared to what they will likely be worth in ten years or so is attractive.
The article also mentions stocks from several other sectors (financials, pharma, defense, and even a gold miner) worth considering that, for the most part, are of little interest to me.
Adam
Long positions in MSFT, INTC, HPQ, AAPL, and BRKb
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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, August 5, 2011
Buffett on Kraft: "I Have Oreos for Breakfast"
This Fox Business News article provides some insight into Buffett's reaction to the split of Kraft (KFT):
Buffett to FBN: Kraft is Already Good Business, Now it Will Be Two Good Businesses
Kraft's CEO was heading to Omaha to tell Buffett that she wanted to split Kraft into two businesses. He apparently supports the split.
"I'm fine with it. Irene is a good manager and she does a good job..."
Buffett wasn't a big fan of how much Kraft paid for Cadbury. In fact, he was a very vocal critic. He said this to CNBC about the deal at the time:
Buffett on Kraft-Cadbury Deal
"...I think Irene has done a good job in operations. I like Irene. I mean, she's been straightforward with me. We just disagree. She thinks it's a good deal. I think it's a bad deal."
More from the FBN article:
"I'm sure she would have preferred I was supportive of the Cadbury deal but there's no edge or anything between us."
When asked if he'd hold onto the shares that Berkshire Hathaway (BRKa) owns...
"Listen, I have Oreos for breakfast so I'm in the stock with both feet." He added, "It's a good business and it'll be two good businesses."
Kraft is currently Berkshire Hathaway's 5th largest holding in its equity portfolio behind Coca Cola (KO), Wells Fargo (WFC) American Express (AXP) and Procter & Gamble (PG).
Adam
Long positions in all stocks mentioned
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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Buffett to FBN: Kraft is Already Good Business, Now it Will Be Two Good Businesses
Kraft's CEO was heading to Omaha to tell Buffett that she wanted to split Kraft into two businesses. He apparently supports the split.
"I'm fine with it. Irene is a good manager and she does a good job..."
Buffett wasn't a big fan of how much Kraft paid for Cadbury. In fact, he was a very vocal critic. He said this to CNBC about the deal at the time:
Buffett on Kraft-Cadbury Deal
"...I think Irene has done a good job in operations. I like Irene. I mean, she's been straightforward with me. We just disagree. She thinks it's a good deal. I think it's a bad deal."
More from the FBN article:
"I'm sure she would have preferred I was supportive of the Cadbury deal but there's no edge or anything between us."
When asked if he'd hold onto the shares that Berkshire Hathaway (BRKa) owns...
"Listen, I have Oreos for breakfast so I'm in the stock with both feet." He added, "It's a good business and it'll be two good businesses."
Kraft is currently Berkshire Hathaway's 5th largest holding in its equity portfolio behind Coca Cola (KO), Wells Fargo (WFC) American Express (AXP) and Procter & Gamble (PG).
Adam
Long positions in all stocks mentioned
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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Thursday, August 4, 2011
Kraft to Split Into Two Companies
News broke this morning that Kraft (KFT) will become two separate companies splitting its global snacks business from the North American grocery business.
Some excerpts from this Wall Street Journal article.
Global Snacks Includes:
...Kraft's European business and developing markets units, as well as snacks and confectionery businesses in North America. With about $32 billion in estimated revenue, it will house the likes of Oreo cookies, Cadbury chocolates and Trident gum, all which have greater prospects for growth in emerging markets and to sell more to consumers on the go.
North America Grocery Business Includes:
...Kraft cheeses, Maxwell House coffee and Jell-O snacks, lacks the growth potential but comes with stronger margins and more reliable sales.
Kraft will separate the two businesses by spinning off its North American grocery business to shareholders. The process is expected to be complete by the end of 2012.
Nelson Peltz, who owns over 12 million Kraft shares, apparently likes the split and said the following to CNBC:
...it is in the "best interest of shareholders to create a unique consumer products business with very high-growth prospects, huge emerging-market exposure and one that separates itself from the slow-growth commodity-related meat and cheese business."
Investors, Peltz said, "now have a choice between investing in this business, which will be a low dividend payer, and the North American food business that will probably be a high dividend payer."
According to CNBC, Warren Buffett also supports the split. Berkshire Hathaway (BRKa) is Kraft's largest shareholder.
Kraft's stock is up more than 3% on the news in what is otherwise a huge stock market sell-off.
Adam
Long position in KFT established at much lower than recent market prices
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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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Some excerpts from this Wall Street Journal article.
Global Snacks Includes:
...Kraft's European business and developing markets units, as well as snacks and confectionery businesses in North America. With about $32 billion in estimated revenue, it will house the likes of Oreo cookies, Cadbury chocolates and Trident gum, all which have greater prospects for growth in emerging markets and to sell more to consumers on the go.
North America Grocery Business Includes:
...Kraft cheeses, Maxwell House coffee and Jell-O snacks, lacks the growth potential but comes with stronger margins and more reliable sales.
Kraft will separate the two businesses by spinning off its North American grocery business to shareholders. The process is expected to be complete by the end of 2012.
Nelson Peltz, who owns over 12 million Kraft shares, apparently likes the split and said the following to CNBC:
...it is in the "best interest of shareholders to create a unique consumer products business with very high-growth prospects, huge emerging-market exposure and one that separates itself from the slow-growth commodity-related meat and cheese business."
Investors, Peltz said, "now have a choice between investing in this business, which will be a low dividend payer, and the North American food business that will probably be a high dividend payer."
According to CNBC, Warren Buffett also supports the split. Berkshire Hathaway (BRKa) is Kraft's largest shareholder.
Kraft's stock is up more than 3% on the news in what is otherwise a huge stock market sell-off.
Adam
Long position in KFT established at much lower than recent market prices
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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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, August 3, 2011
Buffett on Derivatives: The 'Chain Reaction' Threat
"Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system." - Warren Buffett in the 2002 Berkshire Hathaway Shareholder Letter
When Berkshire Hathaway (BRKa) purchased Gen Re, along with it came with General Re Securities, a derivatives dealer that Warren Buffett and Charlie Munger did not want.
They viewed the derivatives operation as dangerous and wanted to be rid of it but couldn't sell.
So they decided to terminate it. Ten months into winding down the operation still had 14,384 contracts outstanding involving 672 counterparties around the world.
That's someone who wanted out of the derivatives business. Imagine the complexity of those institutions who are perfectly happy to engage extensively in this type of activity to this day.
Buffett explained why he thinks derivatives are dangerous in the 2002 Berkshire Hathaway letter.
Back then, Buffett couldn't have guessed the specific events that would trigger the paralyzing systemic instability and resulting economic damage we all witnessed in 2008.
Yet, I think the following pretty well describes what was at the root of the financial meltdown that happened six years later. From the 2002 letter:
"In banking, the recognition of a 'linkage' problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a 'chain reaction' threat exists within an industry, it pays to minimize links of any kind. That's how we conduct our reinsurance business, and it's one reason we are exiting derivatives.
Many people argue that derivatives reduce systemic problems, in that participants who can't bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.
Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others."
Unfortunately, the linkage problem and chain reaction threat still remains a serious risk. We have not done enough post-crisis to reduce it.
The analysis of any financial institution, even if you read every last footnote in a companies annual report, ends up being a giant leap of faith.
There is no practical way to get a clear picture of the risks that an individual institution is running when it comes to their derivatives activities. So it certainly is not possible to gauge the risks to the system as a whole at any point in time.
We'd be wise to change this. Somehow neither Long-Term Capital Management in 1998 or the financial crisis of 2008 was enough of a lesson.
It brings to mind a scene from the movie Citizen Kane. In the scene, a stubborn self-obsessed Charles Foster Kane facing a scandal forsakes good sense and reason. Seeing this lack of good sense, Kane's political opponent Boss Jim Gettys says the following:
Adam
Long position in BRKb
Related posts:
Munger on Derivatives
Buffett on Derivatives
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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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
When Berkshire Hathaway (BRKa) purchased Gen Re, along with it came with General Re Securities, a derivatives dealer that Warren Buffett and Charlie Munger did not want.
They viewed the derivatives operation as dangerous and wanted to be rid of it but couldn't sell.
So they decided to terminate it. Ten months into winding down the operation still had 14,384 contracts outstanding involving 672 counterparties around the world.
That's someone who wanted out of the derivatives business. Imagine the complexity of those institutions who are perfectly happy to engage extensively in this type of activity to this day.
Buffett explained why he thinks derivatives are dangerous in the 2002 Berkshire Hathaway letter.
Back then, Buffett couldn't have guessed the specific events that would trigger the paralyzing systemic instability and resulting economic damage we all witnessed in 2008.
Yet, I think the following pretty well describes what was at the root of the financial meltdown that happened six years later. From the 2002 letter:
"In banking, the recognition of a 'linkage' problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a 'chain reaction' threat exists within an industry, it pays to minimize links of any kind. That's how we conduct our reinsurance business, and it's one reason we are exiting derivatives.
Many people argue that derivatives reduce systemic problems, in that participants who can't bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.
Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others."
Unfortunately, the linkage problem and chain reaction threat still remains a serious risk. We have not done enough post-crisis to reduce it.
The analysis of any financial institution, even if you read every last footnote in a companies annual report, ends up being a giant leap of faith.
There is no practical way to get a clear picture of the risks that an individual institution is running when it comes to their derivatives activities. So it certainly is not possible to gauge the risks to the system as a whole at any point in time.
We'd be wise to change this. Somehow neither Long-Term Capital Management in 1998 or the financial crisis of 2008 was enough of a lesson.
It brings to mind a scene from the movie Citizen Kane. In the scene, a stubborn self-obsessed Charles Foster Kane facing a scandal forsakes good sense and reason. Seeing this lack of good sense, Kane's political opponent Boss Jim Gettys says the following:
"You're the greatest fool I've ever known, Kane. If it was anybody else, I'd say what's going to happen to you would be a lesson to you. Only you're going to need more than one lesson. And you're going to get more than one lesson."
So Kane strikes Boss Gettys as a fellow who'll NOT learn a lot of hard lessons and, of course, he goes on to do just that.
Either we reduce the risks to the system caused by this garbage or future events will force us to in more painful ways.
"When the regulators put in the option exchanges, there was just one letter in opposition saying 'you shouldn't do this,' and Warren Buffett wrote it.
Then, next, derivative trading made the option exchange look like a benign event. So just one after another the very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we'd put in the last time we had a big trouble—devices that worked quite well." - Charlie Munger in the Stanford Lawyer
I'd rather us not wait for the next "lesson" to do what makes sense.
"When the regulators put in the option exchanges, there was just one letter in opposition saying 'you shouldn't do this,' and Warren Buffett wrote it.
Then, next, derivative trading made the option exchange look like a benign event. So just one after another the very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we'd put in the last time we had a big trouble—devices that worked quite well." - Charlie Munger in the Stanford Lawyer
I'd rather us not wait for the next "lesson" to do what makes sense.
Adam
Long position in BRKb
Related posts:
Munger on Derivatives
Buffett on Derivatives
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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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tuesday, August 2, 2011
Yacktman Funds 2Q 2011 Portfolio Update
Donald Yacktman and his team have a very solid long-term track record.
Over the past ten years the cumulative return of the S&P 500 is a bit over 30%.
By comparison, both the Yacktman Funds, YAFFX and YACKX, are up more than 242% and 212% over the same time frame respectively.*
A summary of the additions to the portfolio:
Additions that had greater than 1 percent impact on the portfolio
Cisco (CSCO)
News Corp (NWSA)
Procter & Gamble (PG)
Microsoft (MSFT)
Additions that had between .2 percent and 1 percent impact on the porfolio
Research in Motion (RIMM, new position)
Hewlett-Packard (HPQ)
U.S. Bancorp (USB)
Exxon Mobil (XOM)
Wal-Mart (WMT)
Johnson & Johnson (JNJ)
Sysco (SYY),
C.R. Bard (BCR)
Apollo (APOL)
Pepsi (PEP)
Coca-Cola (KO)
Bank of New York Mellon (BK)
Additions that had less than .2 percent impact on the portfolio
Viacom (VIA-B)
ConocoPhillips (COP)
Pfizer (PFE)
Becton Dickinson (BDX)
Comcast (CMCSK)
Berkshire Hathaway (BRKb)
The biggest addition in terms of percentage impact on the portfolio was Cisco at just over 3%.
Yacktman also reduced exposure to Leucadia (LUK) and sold all shares in Dell (DELL) and SLM Corporation Preferred (SLM-PA).
As a major holding and with News Corp experiencing some rather high profile difficulties they had this to say in their 2nd Quarter 2011 Letter:
After the end of the second quarter, News Corp became a major news story as new information about an old phone hacking scandal at its newspaper, News of The World, was released. Management has taken swift action to deal with the issues, including closing the News of The World, withdrawing a bid for BSkyB, authorizing an increase to the share repurchase, and changing management. We continue to monitor the situation closely and think News Corp is taking the right steps to address the issues and move forward.
Some other comments from the letter:
Consumer Staples
PepsiCo, Procter & Gamble, Coca-Cola, and Sysco are four of our top ten positions in each fund, and all appreciated during the second quarter, with PepsiCo and Sysco rising more than 10% each. We like the steady nature of these consumer staples businesses and think that the valuations are compelling.
"Old Tech"
Cisco Systems declined nearly 10% during the quarter and we increased our exposure, making it the 5 th largest holding in each fund. The company has a stellar balance sheet with significant excess cash, and we think management is objectively facing the challenges in the business.
Microsoft appreciated during the quarter but disappointed us by offering $8.5 billion to acquire Skype. We think Microsoft is paying a high price for this business, and the company has had a poor record of integrating and managing acquisitions. Fortunately, the amount of money on the proposed deal is not especially significant to Microsoft and represents only about 5 months of free cash flow. While companies disappoint us from time to time, we think it is important to objectively evaluate information in context of the entire investment thesis. In Microsoft’s case, we think the valuation is so compelling that we are able to look beyond a deal of this modest size that we do not especially like.
Hewlett-Packard declined a bit more than 10% during the quarter as business results continued to be challenging. The weak share price is due in part to business issues and in larger part to the general disfavor of "old tech" shares. We think Hewlett-Packard's stock could perform well from current levels even if its businesses continue to struggle.
I've said before that it's worth noting value-oriented managers like Yacktman, who wouldn't touch a tech stock a decade ago due to extreme overvaluation, are moving into stocks like Microsoft, Cisco, and Hewlett-Packard in a meaningful way.
Large media companies like News Corp and Viacom, even though they seem reasonably valued, are businesses that I've never become comfortable with as investments.
Adam
Long positions in PEP, KO, PG, MSFT, CSCO, HPQ, JNJ and COP. Technology stocks are generally smaller positions.
* From the letter: 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. The current performance may be higher or lower than the performance data quoted.
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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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Over the past ten years the cumulative return of the S&P 500 is a bit over 30%.
By comparison, both the Yacktman Funds, YAFFX and YACKX, are up more than 242% and 212% over the same time frame respectively.*
At the end of the most recent quarter, Yacktman continued to hold and build positions in large capitalization stocks that are household names. These are relatively concentrated portfolios with roughly 40% in the top 5 stocks.
Top 5 Holdings
1 News Corp (NWSA)
4 Microsoft (MSFT)
5 Cisco (CSCO)
Interestingly, Coca-Cola (KO) was displaced from the top 5. This came from Yacktman adding more Cisco not reducing Coca-Cola which is now the 6th largest holding (more shares on the soft drink maker were actually added during the quarter).
Yacktman Funds continue to have minimal exposure to financials with only 1 bank in the top 25 (U.S. Bancorp: USB).
Yacktman Funds continue to have minimal exposure to financials with only 1 bank in the top 25 (U.S. Bancorp: USB).
A summary of the additions to the portfolio:
Additions that had greater than 1 percent impact on the portfolio
Cisco (CSCO)
News Corp (NWSA)
Procter & Gamble (PG)
Microsoft (MSFT)
Additions that had between .2 percent and 1 percent impact on the porfolio
Research in Motion (RIMM, new position)
Hewlett-Packard (HPQ)
U.S. Bancorp (USB)
Exxon Mobil (XOM)
Wal-Mart (WMT)
Johnson & Johnson (JNJ)
Sysco (SYY),
C.R. Bard (BCR)
Apollo (APOL)
Pepsi (PEP)
Coca-Cola (KO)
Bank of New York Mellon (BK)
Additions that had less than .2 percent impact on the portfolio
Viacom (VIA-B)
ConocoPhillips (COP)
Pfizer (PFE)
Becton Dickinson (BDX)
Comcast (CMCSK)
Berkshire Hathaway (BRKb)
The biggest addition in terms of percentage impact on the portfolio was Cisco at just over 3%.
Yacktman also reduced exposure to Leucadia (LUK) and sold all shares in Dell (DELL) and SLM Corporation Preferred (SLM-PA).
As a major holding and with News Corp experiencing some rather high profile difficulties they had this to say in their 2nd Quarter 2011 Letter:
After the end of the second quarter, News Corp became a major news story as new information about an old phone hacking scandal at its newspaper, News of The World, was released. Management has taken swift action to deal with the issues, including closing the News of The World, withdrawing a bid for BSkyB, authorizing an increase to the share repurchase, and changing management. We continue to monitor the situation closely and think News Corp is taking the right steps to address the issues and move forward.
Some other comments from the letter:
Consumer Staples
PepsiCo, Procter & Gamble, Coca-Cola, and Sysco are four of our top ten positions in each fund, and all appreciated during the second quarter, with PepsiCo and Sysco rising more than 10% each. We like the steady nature of these consumer staples businesses and think that the valuations are compelling.
"Old Tech"
Cisco Systems declined nearly 10% during the quarter and we increased our exposure, making it the 5 th largest holding in each fund. The company has a stellar balance sheet with significant excess cash, and we think management is objectively facing the challenges in the business.
Microsoft appreciated during the quarter but disappointed us by offering $8.5 billion to acquire Skype. We think Microsoft is paying a high price for this business, and the company has had a poor record of integrating and managing acquisitions. Fortunately, the amount of money on the proposed deal is not especially significant to Microsoft and represents only about 5 months of free cash flow. While companies disappoint us from time to time, we think it is important to objectively evaluate information in context of the entire investment thesis. In Microsoft’s case, we think the valuation is so compelling that we are able to look beyond a deal of this modest size that we do not especially like.
Hewlett-Packard declined a bit more than 10% during the quarter as business results continued to be challenging. The weak share price is due in part to business issues and in larger part to the general disfavor of "old tech" shares. We think Hewlett-Packard's stock could perform well from current levels even if its businesses continue to struggle.
I've said before that it's worth noting value-oriented managers like Yacktman, who wouldn't touch a tech stock a decade ago due to extreme overvaluation, are moving into stocks like Microsoft, Cisco, and Hewlett-Packard in a meaningful way.
Large media companies like News Corp and Viacom, even though they seem reasonably valued, are businesses that I've never become comfortable with as investments.
Adam
Long positions in PEP, KO, PG, MSFT, CSCO, HPQ, JNJ and COP. Technology stocks are generally smaller positions.
* From the letter: 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. The current performance may be higher or lower than the performance data quoted.
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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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, August 1, 2011
Lowe's and Home Depot
This Michael Santoli article in Barron's compares Home Depot (HD) to Lowe's (LOW) and points out the former has a premium valuation that doesn't seem justified.
As the two leading home improvement retailers, both companies have and are likely to at least maintain a respectable economic moat. The article points out that Lowe's should generate enough cash to be able to repurchase roughly half of its market capitalization in five years or so.
Very shareholder-friendly.
Something that I highlighted in this previous post:
Lowe's Shareholder-Friendly Buyback Plan
This article points out Lowe's plans to buy back $ 18 billion of its shares. That would more than half its shares outstanding near current prices.
At current prices and with a longer-term investing time horizon I'd expect solid returns from owning Lowe's shares. The buyback plan makes that even more likely. Their business has performed just fine in a very weak economic environment for U.S. housing. They are almost certain to do an awful lot better once the housing situation improves.
Yet, the current environment may persist for quite a while yet. How long is difficult to judge. With a U.S. housing market that is likely to be weak for an extended period, I wouldn't necessarily expect much from Lowe's stock in the short-to-intermediate run.
I'm not in the business of trying to time the turn in economic conditions. If the price of an asset seems right compared to likely future long-term prospects I don't wait to accumulate shares. That's a recipe for owning too few shares of something. Waiting makes little sense if you understand the business and you've judged long-term prospects reasonably well.
Of course, if the judgment on future prospects is off returns will suffer. So the focus, as always, is not on whether the shares will be "dead money" for one or even three years. It's on whether the competitive advantages of Lowe's allow the company to at least maintain or, even better, widen the economic moat that it has.
During the difficult times the leaders within an industry are often able to do just that.
Otherwise, the so-called dead money that some investors seem to fear so much is just a chance to accumulate more shares in a good business while it is cheap.
It's also an opportunity for the company to use its cash flow to do the same potentially enhancing returns for long-term holders.
Adam
Long position in Lowe's
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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 should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
As the two leading home improvement retailers, both companies have and are likely to at least maintain a respectable economic moat. The article points out that Lowe's should generate enough cash to be able to repurchase roughly half of its market capitalization in five years or so.
Very shareholder-friendly.
Something that I highlighted in this previous post:
Lowe's Shareholder-Friendly Buyback Plan
This article points out Lowe's plans to buy back $ 18 billion of its shares. That would more than half its shares outstanding near current prices.
At current prices and with a longer-term investing time horizon I'd expect solid returns from owning Lowe's shares. The buyback plan makes that even more likely. Their business has performed just fine in a very weak economic environment for U.S. housing. They are almost certain to do an awful lot better once the housing situation improves.
Yet, the current environment may persist for quite a while yet. How long is difficult to judge. With a U.S. housing market that is likely to be weak for an extended period, I wouldn't necessarily expect much from Lowe's stock in the short-to-intermediate run.
I'm not in the business of trying to time the turn in economic conditions. If the price of an asset seems right compared to likely future long-term prospects I don't wait to accumulate shares. That's a recipe for owning too few shares of something. Waiting makes little sense if you understand the business and you've judged long-term prospects reasonably well.
Of course, if the judgment on future prospects is off returns will suffer. So the focus, as always, is not on whether the shares will be "dead money" for one or even three years. It's on whether the competitive advantages of Lowe's allow the company to at least maintain or, even better, widen the economic moat that it has.
During the difficult times the leaders within an industry are often able to do just that.
Otherwise, the so-called dead money that some investors seem to fear so much is just a chance to accumulate more shares in a good business while it is cheap.
It's also an opportunity for the company to use its cash flow to do the same potentially enhancing returns for long-term holders.
Adam
Long position in Lowe's
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