20 May 2011 Thornburg Value - Q1 2011 Commentary ( Portfolio )
Inpex, has a major liquefied natural gas (LNG) project called Ichthys. Prior to our investment in the company, Inpex announced a delay in Ichthys and then issued equity to fund the project. Investors were angry about the mixed signals and the share price was almost cut in half between April and August of 2010. We used the share price weakness to establish a position in Inpex because we believed management’s actions were reasonable and Ichthys was likely to benefit prospectively. The share price has recovered sharply as more investors have become comfortable with Ichthys. Sandridge Energy made an impressive transition from being a nearly pure play on natural gas to becoming a company whose earnings and reserves were primarily oil and whose oil production growth rate was impressive. Investors were skeptical as Sandridge made multiple strategic moves and the hare price has been extraordinarily volatile, but we believe the strategy is showing clear signs of success. Baker Hughes is one of the three leading global oilfield service companies. Investors were discouraged by the lack of activity in the Gulf of Mexico, but the global oilfield service market is experiencing strong growth that appears to be sustainable for a number of years, and we believe Baker Hughes may have more operating leverage than its peers during this up cycle.

Monsanto rebounded strongly after weak performance last year. Corn prices have risen dramatically, and Monsanto’s yield-improving seeds are in high demand. For the time being, Monsanto is not charging as high a price as it could for its current generation of seeds, given the very high corn prices. This should lead to market share gains. Comcast was also a strong performer during the period, reached its price target, and was sold. Comcast has been a Value Fund holding for a long time; in a way, we’re sad to see it go. That said, it appears that video piracy over the Internet is becoming easier all the time, and the sale of Comcast (at a great price, no less) helps to reduce our portfolio risk to this phenomenon. We continue to own satellite provider Dish Network in the Fund.

A few holdings were weak during the period, including China Mobile, Eli Lilly, Exxon Mobil, Tokyo Steel and Best Buy. China Mobile and Eli Lilly have both recently been sold from the portfolio. China Mobile has an impressive balance sheet and market share in what should be a large and rapidly growing market, but we became convinced that the Chinese government was directing China Mobile to lose market share and preventing China Mobile from pursuing profitable opportunities. Eli Lilly’s drug pipeline is interesting, but their patent cliff issues are severe, and we have become concerned about the efficacy of their research and development spending.

Best Buy and Exxon Mobil were both purchased during the quarter. Unlike its peers, Exxon continued investing through the downturn in oil prices and we expect those investments to generate growth and high returns for the company. We became interested in Best Buy through our work on Best Buy Mobile, which is the leading independent seller of Smartphones in the United States. While the company faces some challenges, we are encouraged by growth in their high-margin Best Buy Mobile division and what we believe is an attractive valuation.

For Tokyo Steel, startup delays at its new steel plant in Tahara have impacted near-term output, but we expect plant production to ramp up this year. The company will supply steel to help Japan rebuild after the devastating earthquake and tsunami.

The Fund purchased shares of Yahoo! during the period. Yahoo! owns a collection of Asian assets that we believe justify the entire enterprise value of the company. This creates a “free” call option on the company’s U.S. search-and-display advertising businesses. The Asian assets include stakes in publicly traded Yahoo! Japan and Alibaba.com, but also a holding in the private company Alibaba Group. Alibaba Group has a leading share in China markets that are served by Amazon.com, Ebay.com and Paypal in the United States. These businesses are growing dramatically and have very exciting prospects. Yahoo!’s U.S. operation is not the growth business it once was, but it generates a lot of cash flow ($526 million of free cash flow in 2010) and some of that cash is being returned to shareholders (Yahoo! bought back 7% of outstanding shares in 2010).