Investing Ideas

Here is a quote from Warren Buffett at the bottom of the Stock Market in October 1974.

Forbes : “How do you feel?”
Warren Buffett : “Like an oversexed guy in a whorehouse. Now is the time to invest and get rich.”

The US stock market has dropped 35% from its peak last year and the consumer recession is about to start and will last well into 09. Now is the time to start making your shopping list of stocks and to come up with prices that you dream you could buy those stocks at. You may very well get the chance to buy the investment of your dreams at a once in a lifetime price.

In Part 1 of my shopping list I want to list 25 companies I admire and would like to have in my portfolio. In subsequent posts I will detail what I like about the company and what I think its Intrinsic value is and what my dream price would be. I already hold some of these stocks (in bold) but i would like to buy more at the right price.

1. Berkshire Hathaway
2. Leucadia National
3. Brookfield Asset Management
4. Markel
5. Canadian Natural Resources
6. Chesapeake energy
7. General Electric
8. Johnson and Johnson
9. Pfizer
10. American Express
11. Coca Cola
12. Conoco Phillips
13. Proctor and Gamble
14. US Bancorp
15. Wells Fargo
16. J. P. Morgan
17. Goldman Sachs
18. Sears Holdings
19. Microsoft
20. Fastenal
21. CostCoI will edit this and add 4 more companies later

Bookmark It

The more i think about Microsoft’s new business model the more I like it.

• Customers win because they buy items cheaper. A 2-3% saving is as good as what you get from a cashback rewards card.
• Advertisers win because they are guaranteed to make money. No more click fraud. No more paying for clicks without converting to sales.
• Microsoft wins because they could increase search market share. Im not sure how successful this will be but it will have at least some impact on Microsoft’s share of the search market.

 Disclosure: I own shares of Microsoft

Bookmark It

An excellent article by Bill Gross about how the FED is underreporting inflation. If you are a regular reader here you probably read this in my Article “Here’s a TIP buy TIPS” Bill Gross has an interesting chart in his article showing CPI composite for 24 countries. The article is a must read.
My simplified version of Bill Gross’ article is

Housing
The housing component of CPI is based on how much the house would rent for. The large increases in the cost of buying a home these last few years are not in the CPI since home prices went up but rent has not risen as much. Who cares that the majority of people own homes or want to buy homes, lets look at rent to reduce inflation numbers.

Geometric weighing and Substitution
Using geometric weighing, Goods and Services which increase in price are given lower weight because people would consume less of those goods and services.  So if milk and bread increases in price the government assumes we will eat less milk and bread. Substitution outright replaces what you consume, it says if people cant afford Steak they will buy burgers so lets look at burger prices instead. CPI is supposed to calculate how much the costs increase to live the same quality of life. The current CPI calculates inflation for a deteriorating stand of living.

Core Inflation
So how do you top the brilliant ways to reduce inflation pointed out above? Use Core CPI. The fed and government use core CPI which ignores Food and Energy.  Like i’ve said before I would like to see these people who do not eat, do not drink, do not drive or use electricity. The lower a persons income the higher the effect from Food and Energy. Someone on minimum wage or lower will spend 30-40% of his money on Food and Energy which the really wealthy might just spend 5%-10%.

I propose a solution, before becoming a fed governor the person has to live on minimum wage for 1 year. That should sort this out.

Bookmark It

Microsoft today released a brilliant new business model for search. After reading the views and comments of a lot of opinions I find that the business model is misunderstood by many. Here is a link to one such misunderstood article by Henry Blodget

His first reason why this wont work is

“1 million $1 clicks generate $1 million of revenue for Google, but even if Microsoft gives 50% cash back on each click, that’s only 50 cents per user per transaction. If you’re buying a $5 item, 50 cents is a nice refund, but if you’re buying, say, a $25 item, it’s chump change. “

What Microsoft is proposing is competely different. Microsoft is saying to advertisers, dont pay us for clicks, pay us when you SELL something. Microsoft will then share their revenue with the buyer similar to Cashback programs from Credit Card companies. This cashback amount isnt a percentage of click, its a percentage of the price of the item sold. If microsoft offers cashback of 3 to 5% on most of their items they could save consumers hundereds of dollars a year by switching from other search engines to Microsoft. Here is an example of Circuit city is offering 13% cashback or $11.70 on a $90 camera Samsung S860 Digital Camer. You can see an excerpt from the Microsoft press release.

Participating merchants choose to pay Microsoft a CPA fee each time a customer completes a sale through Live Search cashback. The fee is a percentage of the retail price, and when that transaction is complete, Microsoft returns that fee to the consumer in the form of a cash rebate.

Take a look at Microsoft list of stores shows hundereds of stores offering cashback offers on thousands of products and we can simply ignore the second reason which was “The program only covers “participating” retailers and “participating” products, at least initially. Finally whether or not Google or Yahoo fight back with a similar plan is pure speculation. Lets see how they respond. If they do follow Microsoft’s lead and offer cash back it will cut into profits and it will take them some time to come up with the platform to offer this service.

This is a leap (not just a step) in the right direction for Microsoft in the search business.

Full Disclosure : I own shares of Microsoft.

Bookmark It

Markel (MKL) in the business of specialty insurance business. They usually have very little to no competition and can charge high rates because they provide insurance solutions to niche markets. Markel has a history of making an underwriting profit (ie. They take in more money in premiums than they pay out in claims) and is extremely disciplined about underwriting insurance. Markel’s invesment portfolio is run by Tom Gaynor who is a great value investor and has had market beating performance for years. In my opinion Markel is already at a fair value and it might get cheaper. Warren Buffett has mentioned that insurance rates are falling, in the short term this has put downward pressure on all Insurers. Share of Insurance companies also usually drop going into Hurricane season. There may be a chance to buy this great company at a wonderful price.

Valuation
In this October 2000 Businessweek article Bruce Berkowitz of Fairholme mentioned how he valued Markel.

“Look, the key concept for insurance companies is to take a look at the investments per share. And you can find companies where the investments per share are significantly higher than the stock price. Markel has roughly $400 per share of investments. If they can break even on their underwriting and only make a 5% after-tax investment return, that’s $20 per share. Not bad for a company at $140 per share. So the trick is to have that investment leverage and at the same time break even or make an underwriting profit.”

Any underwriting profit that Markel makes is a bonus.

What are the current numbers ?
Markel has $7,122,257,000 in Investments and $612,056,000 in cash. With 9,947,000 shares outstanding that works out to $777.55 per share in Cash and Investments

Per share cash and investments: $775
5% after-tax investment returns: $38.87
Current share price: $406

Berkowitz bought Markel at 7 times what the investment returns would be. To buy Markel now at the same valuation of 7 times that Berkowitz paid in 2000. You would need to buy the shares at $272. Markel’s visibility has increased a great deal in the last few years with a lot of people comparing it to Berkshire Hathaway. See my article of the next Berkshire Hathaway’s which included Markel. A chance to buy Markel at a valuation of 7 looks extremely unlikely but I feel that any valuation under $390 which is 10x estimated after-tax investment return seems a decent price for Markel. The shares have dropped from last years peak of $554 down to $406, I have my fingers crossed for.

Disclosure : I do not own shares of Markel. I do plan to buy at these levels and I hope to buy a lot more if the shares go lower.

Bookmark It

One of the best places to get some great investing ideas is the 3rd Annual Value Investing Congress West which was held on May 6th and 7this in progress as i write this. The Value Investing Congress is a collection of some of the best and brightest value investors in the country. Most of the the speakers at this congress follow the Graham/Fisher/Buffett form of investing and will be sharing their best investment ideas.
This year the Speakers and their investment ideas were

I cannot guarantee the accuracy of the list above since im collecting the information from other articles and blog posts.

Disclosure : I own shares of Berkshire Hathaway. I do not have positions in any of the other companies mentioned above.

Bookmark It

The news
On April 22 CNBC reported that Warren Buffett is going to Europe to look at businesses. Buffett told CNBC

“My goal is to get on the radar screen of large family-owned companies in Europe, that for one reason or another, need an ownership change, but want the business to be run as it was under the family.”

In the US Berkshire Hathaway has a reputation of buying companies to hold for life. Berkshire Hathaway will always retain ownership of its subsidiaries and unless a company is in an industry where they will keep making losses in perpetuity the company will not be shut down. Berkshire lets a company run the way the founder used to run it. For this reason a lot of owners of private companies in the US have entrusted their lifes work to Berkshire. Since the founders are more interested in the welfare of their employees, the happiness of their customers and preserving their legacy they will typically sell only to Berkshire Hathaway and will do so at a fair price or even a discount to what they would get in the market. After the purchase of ISCAR metalworking, a company based in Israel, Buffett has realized there are wonderful companies all over the world that he could buy if Berkshire Hathaway and its culture was better known outside the US.

The search
I went through the Forbes Billionares list and selected these companies based on the following criteria

1. Company is based in Europe - Obvious since Buffett is visiting Europe
2. Company is not listed or is majority owned - Buffett is looking for family owned businesses
3. The current owner is older than 70 - Someone who wants to preserve his life work.
4. Net worth of the owner is greater than 2.5 Billion - This makes the business large enough to be interesting for Berkshire.
5. Excluded companies which only own investments and/or real estate holdings.
6. Excluded industries which Buffett has said he sees no future in or does not understand, eg:Newspapers, Publishing, Biotechnology

The age of 70 and net worth of 3 Billion are somewhat random numbers I pulled out of my hat to narrow the search. There could be smaller companies or companies run by younger individuals who might be on Buffetts radar.

The Candidates
The companies based on my criteria are listed below. The companies in bold are the ones I feel Warren Buffett might be most interested in.

• Ikea a Furniture Retailer owned by Ingvar Kampard (81)
• Aldi a grocery Retailer owned by Karl Albrecht (88) and Theo Albrecht(85)
• L’Oreal the world’s largest Beauty Products company owned by Lilane Bettencourt(85)
• Tetra Laval a packaging business owned by Birgit Rausing & family(84)
• Ferrero SpA a Food business owned by Michele Ferrero & family(81)
• Dassault an Aviation business owned by Serge Dassault & family(82)
• Bertelsmann a Media business owned by Reinhard Mohn & family(86)
• Wurth Group a Fastners business owned by Reinhold Wurth(72)
• Corticeira Amorim the worlds largest cork company owned by Americo Amorim(73)
• Tengelmann Group a retail trade business owned by Erivan Haub & family (76)
• Deichmann-Schuhe GmbH a shoe retailer owned by Heinz-Horst Deichmann
• Helm AG a Chemicals company owned by Hermann Schnabel(86)

Disclosure : I own shares of Berkshire Hathaway

Bookmark It

ETNs involve substantial risks and are not for everyone. Read the prospectus and consult you financial adviser and tax consultant before investing in them.

Last month Morgan Stanley launched two new ETN’s(Exchange Traded Notes) offering exposure to the Chinese Renminbi and Indian Rupee . The notes charge 0.55% in annual fees. ETN’s are Debt securities not Stocks or ETF’s. The site is http://www.marketvectorsetns.com/index_ETN.cfm.

CNY tracks the performance of the S&P Chinese Renminbi Total Return Index (ticker:SPCBCNY). SPCBCNY seeks to track the performance of rolling investments in short-term forward contracts in China’s currency, the Renminbi. Prospectus for Chinese Renminbi CNY.

INR tracks the performance of the S&P Indian Rupee Total Return Index (ticker:SPCBINR). SPCBINR seeks to track the performance of rolling investments in short-term forward contracts in India’s currency, the rupee. Prospectus for Indian Rupee INR.

I have been bearish on the dollar (read my article Kaching in on the dollars decline). The dollar has declined substantially compared to the Yen, Euro, Australian Dollar, Canadian Dollar, Brazilian Real and a host of other currencies. It hasn’t declined as much against the Chinese and Indian currencies. Indian and Chinese governments have restrictions on currency transactions which prevents most individuals from investing directly in these currencies. China and India get a lot of their trade surplus from exporting goods and services to the US. To keep their cost advantage they maintain their currencies at a rate that benefits exports. While exports have been great and have benefited their economies it has also increased inflation.

A lot of commodities are priced in US dollars and as the dollar has been declining in value the last few years and the value of the Renminbi and Rupee has also declined along with the dollar. The Renminbi and Rupee have dropped in relation to non US currencies and commodities. Unless the US dollar increases in value China and India will have to loosen up or completely drop their peg to the dollar and allow their currencies to appreciate. This is the only way they can fight against commodity inflation. A couple of years ago China started linking the Renminbi to a basket of currencies instead of just the US dollar but the currency hasn’t been allowed to appreciated much. The US and other countries which have growing trade deficits with China are pushing for an increase in the value of the Chinese currency. China itself knows that it will need to reprice the Renminbi be it would prefer to do it slowly, this is probably why Jim Rogers has been a Renminbi bull for quite sometime.

Disclosure : I do not own the ETN’s CNY/INR, I am not invested in Morgan stanley.

Bookmark It

Motorola peaked in 2000 at at about $60 per share, recently the shares traded as low as $9 giving it a market cap of just 20 Billion.

Value Trap?
Its easy to look at Motorola’s revenue and earnings and say that the company has performed badly. Motorola’s revenue dropped from 42.8 Billion to 36.6 Billion. Net earnings dropped from 3.6 Billion to a loss of 50 Million. Mobile Devices sales have dropped 33 percent. The company has not had a hit phone like its amazing Razr for quite a while. The handset business has fickle customers, people with no loyalty to a particular brand. Research and Development expenses are high and ongoing because a lot of people want a new, cool and better phone every couple of years (some change phones every year or less). Motorola has competition at the high end from Apple’s iphone and RIMMs Blackberry and at the low end there are more handset manufacturers than ever before.

Value Investment?
While the handset business has issues, thats not all Motorola does. It has two other business segments Home and Mobility networks and Enterprise Mobility Solutions. Click here to see the wide range of Motorola products and services. Since the company reports as a single entity most people miss how well the other segments are performing. This is why activist investor Carl Icahn has been pushing for Motorola to split the company. He wants them to either sell or spin-off the under performing handset division and Motorola has agreed. So lets value the company as two separate businesses? the handset business aka Mobile devices and everything else. While Motorola has been losing market share in the handset business but at the same time it Enterprise Mobility Solutions business is growing very rapidly.

Motorola’s business segments data from Motorola Q4 2007 Earnings Press Release and Financial Tables
1. Mobile devices. - For the full year 2007, sales were $19.0 billion, a 33 percent decrease compared to 2006, and the segment incurred an operating loss of $1.2 billion, compared to operating earnings of $2.7 billion in 2006.

2. Home and Mobility networks. -For the full year 2007, sales were $10.0 billion, a 9 percent increase compared to 2006, and the segment generated operating earnings of $709 million, compared to $787 million in 2006.

3. Enterprise Mobility Solutions. - For the full year 2007, sales were $7.7 billion, a 43 percent increase compared to 2006, and the segment generated operating earnings of $1.2 billion, compared to $958 million in 2006.

The Home and Mobility networks and Enterprise Mobility Solutions segments combined had operating earnings of 1.9 Billion, this gives Motorola an earnings yield of 9.5%. In my opinion at an earnings yield of 9.5% just these two segments of Motorola’s business are worth as much as the whole company. In addition Motorola has more Cash and Short Term Investments than debt and it has $3.8 Billion remaining under its current share repurchase authorization. Any value that can be extracted from the handset division is gravy. With Icahn winning seats on Motorola’s board I expect a lot of investor friendly changes in the coming months.

Full Disclosure: I own shares of Motorola which I bought at a higher price. I may buy some more.

Bookmark It

Within the last few months the US Federal reserve has cut interest rates from 5.25% to 2.25%.

How the dollar decline helps.
A decrease in the value of the dollar will make US exports cheaper and imports into the US more expensive. This should significantly reduce the trade deficit. US Multinationals which make a lot of their money overseas will do great. Financial companies will have access to cheaper money which will increase liquidity and profits for financial companies. Interest rates on housing loans should decline and Adjustable rate mortgages which reset will have a smaller increase for the time being. Here is an article on how to make money off the dollar decline.

The big question. Whats next?
Based on the reasons i stated above the market seems to think this is positive but I disagree. The reason the fed is reducing interest rates is because they see a major recession looming. The fed cites that “core inflation is under 3%”. Core inflation is also known as CPI excluding food and energy. If you can find people that do not eat, do not drink, do not drive or use electricity then by all means core inflation can be used. Personally I eat, drink, drive and use electricity so for me the Consumer Price Index is the real measure of inflation. Interest rates are supposed to be higher than inflation. The Inflation rate is currently over 4%. With interest rates at 2.25% people that hold Cash in savings accounts, CDs or money market accounts are losing money.

Here is a chart from the Cleveland Fed. Click the chart for a better image.

As you can see at the end of the chart, while Core CPI remains low the actual CPI has shot above 4%. So what protects your investment when there is high inflation? Treasury Inflation protected securities. If inflation remains at this level for a significant period the fed will be forced to increase interest rates dramatically to combat inflation. If the fed delays controlling inflation we may have a bigger problem. Lets just hope we don’t need to bring back Paul Volcker who had to boost interest rates to 20% and put the economy into a recession to combat inflation and end the stagflation of the 70s.

The easiest way to invest in TIPS is to buy the exchange traded fund TIP
Another new exchange traded fund WIP has recently started trading. WIP is a global TIPS fund with exposure to 18 Countries and 15 Currencies.

Disclosure: I do not own TIPS, WIP.

Bookmark It