Monthly Archives: December 2010

A Tribute to Jack McDonald

Regaled Stanford Business School in California long has been seen as a bastion of “efficient markets” thinking. Indeed, two finance professors, Bill Sharpe and Myron Scholes, have won Nobel prizes—a record for business schools—advocating that markets are efficient, that stock prices accurately reflect all information. But another Stanford faculty member, Professor Jack McDonald teaches that markets are not always efficient, that discrepancies can occur, allowing a serious student of fundamental investing to buy a dollar for 50 cents.

“Jack is lonely at Stanford,” both Buffett and Charles Munger have said of McDonald. He is the only professor at Stanford teaching fundamental investing, value investing, offering a bottom-up, company-oriented approach.

Using such texts as Benjamin Graham’s The Intelligent Investor, Phil Fisher’s Common Stocks and Uncommon Profits and Charles MacKay’s Extraordinary Popular Delusions, McDonald believes that gaps of value can be ferreted out. Those willing to do the homework of examining the intrinsic value, the real worth, of an enterprise and comparing it to its market price, may be able to capture the gap in value.

For the past 36 years—sort of like the Cal Ripken of baseball—McDonald has taught investment and finance classes, with a little help from his friends.

Buffett, Munger and Phil Fisher, who have all spoken to McDonald’s class over the years, say that while the market may be largely efficient, it is not always efficient. Buffett teaches one class every two years, Munger has spoken occasionally and Fisher gave his last talk to McDonald’s class in 2000.

(continue reading)

Links of Interest – December 17, 2010

The case against gold – The Globe and Mail

Largest U.S. Stocks Poised to Gain, Hagstrom Says: Tom Keene – Bloomberg

Becton Dickinson: My Kind of Stock – Seeking Alpha

For Some Smoking Dividend Yields, Look to Tobacco – Seeking Alpha

Special Report: Is America the sick man of the globe? – Yahoo! News

David Yacktman on hunting for value in the current market.

My Watchlist – December 15, 2010

I have reviewed issue 3 of Value Line looking for companies that have exceptional returns on equity, strong book value growth or strong “guru investor” sponsorship.

I have added Tim Hortons Inc. (THI)

The idea here is to have a dashboard of substantially all the larger-cap high quality businesses in the U.S. in one place that you can review at least weekly to see what Mr. Market is making available to you.

Because of a limit on the number of functions that Google allows in a single spreadsheet, I had to split the spreadsheet into two parts.

This week’s update is in part 1.

Watchlist – Part 1

Watchlist – Part 2

Stocks from issue 3 (see Watchlist – Part 1)

Ecolab Inc.

ConocoPhillips

Exxon Mobil Corporation

NewMarket Corporation

Praxair, Inc.

Sigma-Aldrich Corporation

One of my favorite pieces of investing from Michael Price

Michael Price is a legendary investor and someone I try to learn from whenever I get the chance. I mean, this is one the guys that taught Seth Klarman how to invest capital. A few years ago, Michael Price gave a speech to Bruce Greenwald’s Value Investing course at Columbia Business School. While I do not have the transcript directly in front of me, his words can be summarized as follows: “Read proxies and bankruptcy disclosure statements because they tell you what rational buyers are paying for businesses.”

Now this is not theoretical data – i.e. this stock should trade at 6x or 9x – this is a real buyer, with real capital at risk, deploying that capital to buy a certain asset or company. And that information holds value and is very rarely discussed or even analyzed by the sell side.

For those that are interested on Bloomberg, you can make a macro to type in NSE “PREM14 A”, and assign that macro to a button and have all the proxies filed at the tip on your hand. For disclosure statements, the process gets a little trickier – you have to monitor the docket to determine when the disclosure statement actually gets filed.

http://www.distressed-debt-investing.com

My Watchlist – December 8, 2010

I have reviewed issue 2 of Value Line looking for companies that have exceptional returns on equity, strong book value growth or strong “guru investor” sponsorship.

I have added Tim Hortons Inc. (THI)

The idea here is to have a dashboard of substantially all the larger-cap high quality businesses in the U.S. in one place that you can review at least weekly to see what Mr. Market is making available to you.

Because of a limit on the number of functions that Google allows in a single spreadsheet, I had to split the spreadsheet into two parts.

This week’s update is in part 1.

Watchlist – Part 1

Watchlist – Part 2

Stocks from issue 2 (see Watchlist – Part 1)

C.H. Robinson Worldwide, Inc.

Expeditors International of Washington

United Parcel Service, Inc.

Rollins, Inc.

FactSet Research Systems Inc.

CEC Entertainment, Inc.

McDonald’s Corporation

Papa John’s Int’l, Inc.

Yum! Brands, Inc.

Tim Hortons Inc. (USA) – ADDED

Nothing in this group looks cheap. All but one of the stocks is within 5% of its 52-week high. Some caution is in order.

Buffett’s Personal Account

In his October 16, 2008 New York Times op-ed piece, Warren Buffett wrote the following:

I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.

In a recent CNBC interview, which I posted on November 19, 2010, Buffett said that his total tax rate would be around 16-17% of his income. He then went on to say that he would have “tens of millions” of capital gains.

From this we can surmise a few interesting things about how Buffett runs his personal portfolio.

1. Buffett is happy to be 100% in cash if he cannot find obvious bargains in the market as he was before the market turned down in 2008.

2. Buffett will scale into stocks and continue buying as they go lower. He is willing to go 100% long if the opportunity is compelling. “If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.”

3. He sells some or all of his stocks when they are no longer undervalued and have appreciated, rather than holding them indefinitely. If he had tens of millions of capital gains tax at a rate of 16 to 17%, he appears to have had capital gains in the neighborhood of $200 to $500 million. Buffett does not sell shares of Berkshire Hathaway to the best of my knowledge, so these gains appear to be from his personal account.

This is by no means an indictment of buy and hold which works well if you buy high quality franchises and do not overpay. In this case, your gains are primarily governed by the growth in intrinsic value of the business. Highly skilled investors may be able to do better – even after taxes – if they have the discipline to actively purchase obviously mis-priced securitied and sell them when they appreciate to fair value.

Rutabaga Capital Management: Dominant niche & temporary problems = profits

Better Than Small
Sizing Up Small Caps
By Rhonda Brammer
Barron’s – August 13, 2001

When, after two decades at D.L. Babson, where he had managed the highly regarded microcap Enterprise Fund, Peter Schliemann in 1999 decided to strike out on his own, he obviously needed a name for his fledgling firm. Finally, after no little mulling, he came up with — are you ready? — Rutabaga Capital Management. That’s right — as in the humble yellow-rooted vegetable, eaten by people and livestock alike, sometimes called a Swedish or Russian turnip.

“Well, it’s catchier than Schliemann & Associates,” quips the 56-year-old money manager.

Schliemann, whose Enterprise Fund was ranked No. 1 by Lipper in the microcap category for the 10-year stretch just before he left, says he got the idea for the name from a woman at Morningstar who had described his investment strategy at Babson as “unearthing rutabagas.” All along, Schliemann has shown an affinity for unloved, largely unfollowed companies, typically in rather run-of-the-mill businesses and not infrequently going through a rough patch.

“If you asked 10 analysts what they look for in an investment,” he observes, “at least eight of them will say a company with good profit margins. Well, we look for just the opposite.”

A big believer in the regression to the mean, Schliemann searches out small companies whose margins have temporarily deteriorated for reasons he thinks he has a handle on. And while he wants to see a catalyst for improvement, he’s willing to wait two or three years for the full turnaround. He prefers companies with a dominant niche and a good balance sheet — though he will buy leveraged outfits if they have ample cash flow to service and pay down debt.

Schliemann runs $285 million for institutions — $60 million in microcaps (companies with market caps of less than $200 million) and the balance in small-caps (with market caps of less than $1.5 billion). And while the small-cap portfolio has handily outperformed the Russell 2000 — up an annualized 8.9% since June 1999 versus 4.1% for the Russell — it’s the microcap fund that has truly sparkled. Since September 1999, it’s up 26.1% annually, compared with 8.4% for the Russell. So far this year, through July 31, Schliemann’s microcap picks have gained a sizzling 40.4%.

But don’t think for moment Schliemann is a wild and crazy guy. Because of his value bent, the beta of his funds — one measure of volatility — is roughly half that of the overall market, with the microcap portfolio being even less volatile than his small-cap holdings.

Continue reading (includes sketches of three microcaps)

Rutabaga Capital Management holdings as of 9/30/2010