My Portfolio
Typically, I try to post something on this board at least once per week, whether it is related to healthcare, investing, or something else of interest. Last week, there were two postings having to do with health care, based on recent work accomplished during the summer. This week it was my hope to post something stock specific. I am, however, hard at work repairing for the coming semester at UNC, so I’ve had less time to focus on market economics, generally, and the stock market, more specifically. I have, however, run my a weekly stock screener (or, more accurately, the set of screens), but nothing jumped out at me is meritorious — whether long, short, or agnostic. Allow me, therefore, to live up to an earlier promise to post my current portfolio.
Several weeks ago, I asked the members of the Yahoo Finance Board for American Eagle to post their best ideas, which I then ran through my own stock analyzer. To provide an overview of my portfolio, I’ve done the same, and here are the results:
Along with the DuPont breakdown of return on assets:
These are, of course, in reverse alphabetical order. The description of the column entries can be found in the AEO Board posting at http://rcrawford.wordpress.com/2008/07/13/aeo-board-screening-test-results/.
I should mention that the “Div/0″ results in both tables often as not indicate stocks that are pending update by my data source (MorningStar) just prior to or immediately following the quarterly earnings report
With few exceptions, each of the stocks possesses a healthy discount to its identified intrinsic value based on discounted cash flow analysis (the first column). At this point, time prevents providing a detailed explanation for the purchase decisions leading to their inclusion in my portfolio. Instead, I’d like to focus on the comparatively small number of stocks that fall outside of that investment criteria.
Sears Holdings (SHLD). I am not a fan of Jim Cramer, the former hedge fund manager and, more recently, equities pundit for CNBC, nor am I a major critic. The key to understanding Jim Cramer (and profiting from him) is to understand that his penchant is for trading (as opposed to investing), and to understand the logic behind his various recommendations. It is also important to understand that he confronts the same challenges associated with any form of equities publication (Barron’s, Money Magazine, etc.), in that he faces a daily deadline, as well as the necessity of filling an hour of air time (nightly) with his recommendations. This is significantly different than my blog postings, where, if there is nothing to report, I can change subjects or, alternatively, simply post nothing that week. In the case of Sears, I purchased the stock following Cramer’s recommendation — based on the abundant free cash flows, the underreported landholdings of the company, and the proven success of its CEO, Eddie Lambert. At the time I purchased it, it was not undervalued, and that was a mistake. At this point, however, the stock is undervalued — selling at below its book value or hovering just above it. I should mention, as well, that this has been the worst performing stock in my portfolio. It remains in the portfolio because of mathematics. Short shares as a percent of the float come in at just under 30 percent, with over 10 days to cover, while the company is repurchasing shares at an impressive rate. Subtract the number of shares held by institutional value investors and shares held by Lambert and insiders, and it would cost the company roughly $1.9 billion to cover the shorts — an amount adequately reflected in the company’s cash and short-term assets account. Recently, several would-be shorts on the Yahoo message board for the stock have lamented their inability to find short shares, and this prompted me to double down on my position in the mid-$70’s.
Procter & Gamble (PG) and General Electric (GE) are currently undervalued (by discounted cash flows) 39% and 46%, respectively. They were originally purchased when I first began the portfolio last year (18 months ago). Both were purchased as core holdings, and neither has done much since then. Both were undervalued in comparison to the other stocks in the Dow 30, but that is no excuse for buying stocks selling at an insufficient discount to intrinsic value. Instead, the only excuse I can offer is that they were purchased to provide assurance to my wife that I was not about to lose the farm and was, instead, investing in large and respectable firms. Today, I would recommend neither. General Electric, especially, has a worrisome debt posture. I have not sold either stock, because I’m comfortable having both as long-term core assets in a portfolio that tends to favor non-Dow 30 stocks.
Overseas Shipholding Group (OSG) shows a discount to intrinsic value 13.52%. It was purchased prior to the increase in oil prices, which I anticipated. I bought the stock at the same time I purchased OXY (which has since been sold at a significant profit). In the case of this stock, I anticipated a 15% growth rate in free cash flows, which is significantly above the median for the last decade (0%). At that level of growth, the stock would be more significantly undervalued — just under my 50% threshold. Since purchase, the stock has treaded water. It remains in my portfolio because of my conviction that management is abundantly competent, the company’s future prospects are improving, and it is frequent mention as an aquisition candidate for FRO.
Nike (NKE) was purchased some time ago, prior to the 2008 earnings report and before the current economic problems. While the 2008 results have been disappointing, it is a retail stock suffering the expected problems associated with being a retail stock. It remains undervalued at a level, both, Benjamin Graham and Warren Buffett would find attractive (i.e., in excess of 25%), even if Buffett tends to avoid retail stocks. At the time of its purchase, it was undervalued by over 40%. While the market has declined by something approaching 20%, Nike is down just 1% since my purchase of the stock last year. In other words, the market recognizes the quality of the company, and, because it was purchased at a significant discount to intrinsic value, it’s downside was limited. I’ve every confidence that it will return to prior cash return on invested capital rates in the mid teens and it median free cash flow growth rate of around 16%. This is the great merit of having a significant margin of safety, and I’m comfortable owning the stock during this recession.
Methanex (MEOH) is similar to Nike and OSG, combined. It was originally purchased in anticipation of increases in petroleum prices and was significantly discounted based on last year’s figures. More recent results have reduced that discount rate significantly, but the stock remains undervalued by 11.72%. The company, however, is growing book value and shareholders equity at a respectable pace, despite the current economic issues. Consequently, I am happy to hold the stock and, again, enjoy the the benefits of a significant margin of safety during initial purchase. I have not, however, been adding to my position, and I have not recommended the stock on this blog.
Johnson & Johnson (JNJ), along with Barr Laboratories and United Health, was purchased as a long-term play based on the aging of the boomer generation and their expected and growing need for quality pharmaceuticals. For a Dow 30 stock, it was selling at a respectable discount to intrinsic value — even if not rising to the level of my normal purchase threshold of 50%. Johnson & Johnson is, as well, a conservative holding designed to anchor my portfolio, given the abundance of less conservative investments.
Eni SpA (E) is a major petroleum producer, primarily in Europe. It was purchased as a replacement for OXY, and as an effort to diversify internationally. When originally purchased, it was prominently undervalued (by discounted cash flows), and I have ridden the stock up and down as petroleum prospects have improved and, more recently, declined. As a value investor, however, I’m more interested in the long-term value of the company — which continues to grow book value and shareholders equity at truly impressive rates. This is a stock that I plan to hold long term… or until some suitable alternative to the byproducts of deceased dinosaurs (i.e., oil) displaces petroleum products is an energy necessity.
Ceradyne (CRDN) has a listed free cash flow growth rate of 0% based on the prior decade. Cash from operations, however, have been deployed toward future growth; which has the effect of depressing free cash flow. The company is primarily known as the makers of body armor for the US military, but investment has been toward other economic sectors, such as solar energy. This should not suggest that the stock is other than a value play. The case supporting that conclusion can be found in my earlier blog entry at http://rcrawford.wordpress.com/ceradyne-inc-crdn/. Since purchasing the stock, share prices have increased in value by more than 20%.
Barr Laboratories (BRL) was originally purchased along with Forest Laboratories as a generics pharmaceutical play. Barr, however, would not ordinarily show up in my screen, due to the small number of years for which we have reported data. Indeed, I originally researched the company as part of my due diligence in analyzing Forest and Teva. I purchased it, however, on the strength of its financial position, its growth rate, and its prospects for the future (i.e., the aging of the boomer generation, the institutional payors preference for generics over patent protected medications, and it’s footprint in Europe). More recently, Teva made a buyout offer at roughly $70 per share, and the stock has appreciated in value by nearly 30% since my original purchase (net of subsequent purchases).
BHP Billington (BHP) is the ultimate metals and petroleum conglomerate, headquartered out of Australia. Its free cash flow growth rate over the past decade comes in at 11.3%, which is well below the 33.6% and 48.8% growth rates between 2001 and 2006, on the one hand, and 2002 and 2007, or the other hand. I believe, therefore, that a 20% growth rate is in order — taking it to a 50% discount from intrinsic value. Even if estimating a 15% growth rate, the stock is undervalued by 33%. Since purchasing it, however, I have become increasingly concerned about the acquisitiveness of management — seeking to grow through acquisition rather than internal expansion. Some of this may be explained by the scarcity of commodity resources, and it is this scarcity that explains why I have held the stock despite my concerns.
I should mention two stocks that post suspect results when looking at the DuPont breakdown of return on assets — specifically, BPT and PVX. Both are petroleum trusts, which are management companies related to oilfields located in Canada and the US (lands held in trust by the state). Their balance sheet structures, to say nothing of their income statements, represent significant departures from the norm. Consequently, the DuPont breakdown is an inappropriate consideration. Both generate dividend payments in excess of 10%. Consequently, the stocks should be viewed as more closely mirroring the behavior of high performance bonds, with the additional caveat that the stock price tends to move with petroleum prices (but with less volatility).
I will not provide the same level of detail explaining those stocks which remain significantly undervalued (by greater than 50%), because they represent likely candidates for future postings, and, as indicated earlier, time is short at the moment. Instead, this posting is designed to review purchases that represent interesting decisions — focusing primarily on the mistakes and those which appear to be mistakes but are not. For example, a common theme among several of the holdings is the importance of a margin of safety. With Procter & Gamble and General Electric the margin was inadequate, and I now view those purchases as mistakes. In the case of Sears, the margin of safety was not in the free cash flows but in the assets and, with the assets less visible to the market, the market has been slow to recognize the intrinsic value of the company — focusing, instead, on its prospects under the current economy and the decline in operational value of, both, Sears and Kmart. With BHP, BRL, and NKE, the margin of safety is provided by an economy in recession — where recent results appear depressed in comparison to proven growth rates, and, in the case of Barr Laboratories, future prospects.
This focus on value has proven beneficial, even at a time when value investing has underperformed the market. The stock market is down nearly 20% during the same time as these holdings have declined by just under 7%. This is not to suggest that significant declines have not visited many of the stocks in the portfolio. They most assuredly have. This is why diversification is so important.
