26 Mar 2013Goldman Sachs amends terms of warrants held by Berkshire Hathaway( Portfolio ) The warrant had provided Berkshire Hathaway the right to purchase 43,478,260 shares of Goldman Sachs' common stock, par value $0.01 per share, at an exercise price of $115 at any time until October 1, 2013. Under the amended agreement, Goldman Sachs will deliver to Berkshire Hathaway the number of shares of common stock equal in value to the difference between the average closing price over the 10 trading days preceding October 1, 2013 and the exercise price of $115 multiplied by the number of shares of common stock covered by the warrant (43,478,260).
Dataroma's opinion: Under the new agreement, Berkshire will actually end up with less shares of Goldman than if the warrants were exercised under the original agreement (the news headlines regarding the new agreement are in fact misleading). However, Berkshire won't have to put up any cash to acquire the shares. This would be equivalent to having exercised the warrants under the old agreement and then sold enough GS shares to recoup the $5B cost.
21 Mar 2013Heinz moves closer to cementing buyout funding( Portfolio ) Investors said the B1/BB- rated bond issue, which prices on Friday, has been a blowout, with massive demand that has allowed Heinz to shave more than a full percentage point off of pricing expectations, to official guidance of 4.5% area from initial price thoughts of 5.75%.
20 Mar 2013Fireside Chat With Warren Buffett and Cathy Baron Tamraz, CEO of Business Wire( Portfolio ) A video interview with Warren Buffett on the power of innovation has officially launched the start of the PYMNTS.com's The Innovation Project™ 2013, a two-day program to challenge the way the payments and its broader commerce ecosystem thinks, talks, delivers and ignites innovation. Buffett sat down with Business Wire CEO Cathy Baron Tamraz and offered his view on the current landscape of the payments industry and his optimism for the economic future in his keynote introduction to the program, held at Harvard University.
Assessing how the markets and bank stocks are impacted by Cyprus and the Fed, with David Katz, Matrix Asset Advisors.
15 Mar 2013David Katz on Bloomberg (audio)( Portfolio ) David Katz, chief investment strategist at Matrix Asset Advisors Inc, says even though stocks are near all time highs they are cheaper than they were in 2000 and 2007, according to several metrics, and will continue to rise from current levels.
David Winters discusses the reason to switch from bonds to stocks:
Where in the World to Invest:
05 Mar 2013Wintergreen Fund - 2012 Annual Report( Portfolio ) The Fund’s positive performance during 2011 and its underperformance in 2012 are primarily attributable to certain sectors. Banks, Technology, Telecom, and Healthcare are among the sectors that fell the most in 2011 and then rallied the most in 2012, particularly during the first quarter. Wintergreen continues to believe that the best long-term opportunities lie outside of these sectors. During periods of time when the Fund’s security selections are out of favor, it is to be expected that performance will be lower. Those are the times when the Fund accumulates what it believes are quality holdings that are temporarily out of step with the broader market. We believe these investments should benefit long-term shareholders as the true value of these holdings is realized by the markets.
Our investment analysis always includes the quality of management as a critical factor in determining the attractiveness of an investment. On occasion, the core of the company is the personification of its leader and is evidenced by the vision, courage, hard work, dedication, and common sense of that person, partnership, or family. Within our Wintergreen portfolio, we have many examples of excellent leaders.
If opportunity doesn’t knock, build a door. Milton Berle
An example of an individual leader with great vision was Lim Goh Tong, who in 1965 saw a need for a mountaintop resort where the residents of up-and-coming Kuala Lumpur could escape from Malaysia’s oppressive heat. With a dream for a world class resort in his head, but faced with a 6,000 foot jungle covered mountain in the Malaysian countryside, Lim Goh Tong saw opportunity where others saw only obstacles. Over the course of six years, Lim Goh Tong and his family-owned construction company transformed that mountain from wilderness into the Genting Highlands, which today stands as one of the largest and most profitable resorts in the world. Never one to rest on his laurels, Lim continued to expand the Highlands over the decades, adding more hotels, entertainment, and the only casino in Malaysia. In addition to the Highlands, Genting Group currently has an interest in casinos in Singapore, the United Kingdom, the Philippines, and the United States as well as ownership of power plants in China, and oil and gas operations in Southeast Asia.
Although Lim Goh Tong passed away in 2007, his legacy of hard work and never backing down in the face of adversity remains with the company. Having grown up poor in rural China, Lim instilled Genting with a sense of financial conservatism which exists to this day, as witnessed by the several billion dollars of cash and little debt on its balance sheet. Because of the reputation Lim and other Genting managers have built over the decades as a reliable and diligent partner, Genting is often cited as one of the premier casino resort operators in the world. From nothing more than a densely forested mountain and a dream, Lim Goh Tong and his heirs have built Genting into a global company which continues to expand and thrive to this day. Thanks in part to the hard work and foresight of Lim Goh Tong over 40 years ago, we believe Genting’s future is as bright as its past.
I am a success today because I had a friend who believed in me and I didn’t have the heart to let him down. Abraham Lincoln
Perhaps no company is more closely associated with its CEO than Berkshire Hathaway. When people think of Berkshire Hathaway, they think of Warren Buffett, and vice versa. Less well-known but equally important to Berkshire’s long term success is Buffett’s business partner, Charlie Munger. Since Buffett first bought shares in Berkshire in 1962, he and Munger have left an indelible mark on the company and created fortunes for many of its shareholders. Years of shrewd capital allocation amongst shares of public companies and takeovers of entire enterprises turned Berkshire into a compounding machine which currently generates nearly $1 billion per month in free cash flow. Buffett and Munger have recently stated a willingness to purchase Berkshire shares for up to 120% of book value, and have nearly $50 billion in cash at their disposal to back up their words at year-end. With the shares currently trading for approximately 127% of book value and the underlying businesses growing nicely, we believe Berkshire is an example of an asymmetric trade — an opportunity to own a stock where the upside potential should exceed the downside risk.
Warren Buffett’s leadership is viewed by many as the textbook example of good corporate ethics — often chastising companies for excessive pay for executives, steering clear of regulatory problems, and honing his image as an honest and authentic person. This reputation has led to Berkshire being offered many “sweetheart” deals which are not offered to other large investors. When the owners of private companies such as Iscar Metalworking or Marmon Holdings want to sell their company, they often look to Berkshire first because they know Berkshire will provide a strong and permanent home for the company they have painstakingly built. Buffett and Munger have said repeatedly over the years that when Berkshire buys an entire company they will never sell it, and they have remained true to their word. Sometimes finding a good home for their business is more important to sellers than extracting every last dollar from a buyer, and this has led to Berkshire acquiring many high quality companies for reasonable prices. All Berkshire shareholders, Wintergreen Fund included, benefit economically from the reputations that Buffett and Munger have earned over their long careers.
It had long since come to my attention that people of accomplishment rarely sat back and let things happen to them. They went out and happened to things. Leonardo da Vinci
Schindler is an example of a family whose vision continues to embody the company. When you step into an elevator and see the Schindler name, you have confidence that you will go up or down safely and reliably. Since the founding of the company by Robert Schindler in 1874, the Schindler family has been a leader in elevator and escalator engineering that has kept pace with the soaring human imagination to build higher and higher. Safety, quality, and innovation are the strands of DNA that run through the corporate culture, which has served the company well for close to 140 years. From its humble roots in a workshop in Lucerne, Switzerland, the family has guided Schindler into a global business with over US$9 billion in annual sales.
While many of the developed markets of the world have already urbanized, there lies ahead decades of building construction in China, India, Brazil, and other emerging countries with massive populations. We believe there is no shortage of growth opportunities for Schindler to supply new elevators and escalators in these markets, and in both mature and developing markets the company should always have a significant source of revenues from service and maintenance of its installed base. When we travel the world searching for investments, we are transported through vast airports on Schindler moving walkways, carried up and down modern high-rise office buildings by Schindler elevators, and ported from floor to floor of gleaming shopping centers by Schindler escalators. Seeing that name always makes us smile.
These are just a few examples of companies with strong leadership that comprise the Fund’s portfolio. We continue to believe that this portfolio is the best that we have ever assembled, and we remain optimistic about the opportunities ahead for many of our companies and our long-term shareholders.
04 Mar 2013Sound Shore - 2012 Annual Report( Portfolio ) Last year saw continued sluggish economic activity for many sectors of the world economy. In the US, S&P 500 revenue and EPS are expected to have increased only marginally from 2011. Fiscal deficits stretched across the globe, unrest continued in the Middle East, and political drama dominated various country headlines. Many thought the US cliff would be an appropriate place for its politicians to visit. Stock markets are said to abhor last year’s type of uncertainty, which, if true, makes the double-digit returns of many world stock markets puzzling. To many, the S&P 500 Index’s strong 13.4% price gain may be surprising enough, but few would have guessed it would be trumped by Germany, France, and Japan, not to mention Ireland and Greece (as measured by their respective Dow Jones indices in local currencies). The offsets to the troubling economic and political backdrop, in our opinion, were the lack of competition from fixed income investments (stock yields exceeded the 10 year Treasury for the first time in over 50 years) and the promises from various central banks to keep flooding the market until private demand for funds recovers, implying interest rates might remain low for the foreseeable future. Additionally, US corporations continued to manage their labor costs well and, while earnings were flat year-to-year, returns on equity remain high by historical standards at 16%. Capital expenditures were held in check, thereby freeing up cash to be returned to shareholders in the form of increased dividends and/or share repurchases.
Our “value” investment process at Sound Shore is somewhat analogous to the market’s performance last year in that we don’t dwell on current headlines and don’t try to predict the unpredictable. Instead, we use the market’s uncertainty towards an out-of-favor stock as an opportunity to investigate whether that company is likely to soon see improving fundamentals through internal management decisions if not economic tailwinds. If we are correct, then the stock should see improving earnings versus expectations and a recovering P/E valuation towards “normal.”
In 2012, your portfolio had 10 previously unpopular stocks that returned more than 30%: Bank of America, Charles Schwab, Citigroup, Comcast, Invesco, Lowes, Sanofi, Sunoco, Time Warner, and Thermo Fisher. In particular, diversified financials Bank of America and Citigroup performed well as both companies benefited from efforts to focus on core franchises, reduce costs, and improve capital ratios.
Equally important as the financials, however, were several companies that benefitted from their management’s more optimal balancing of growth and shareholder returns. Cable service provider Comcast, a long held position, provides a great case study. We started our position in Comcast in 2007 when the company was on the threshold of significant free cash improvement derived from lower capital spending. Over the past five plus years, Comcast has been successful in the telecommunications marketplace, enhanced its portfolio through the acquisition of NBC Universal, initiated a competitive dividend, including an increase of 44% in 2012, and retired over 10% of its shares. Comcast has outperformed the market by approximately 40% and yet its shares still boast a 6.9% free cash flow yield.
Oil service provider Weatherford was the year’s biggest detractor, the result of a temporarily higher 2012 book tax rate and sluggish North American energy markets. Similarly, oil and gas producer Devon declined due to wider than normal price discounts in the US and Canada. Low end valuations for both stocks (Weatherford at 11.9 times forward P/E, Devon at $1.40 per reserve unit) leave room for significant upside as the companies execute as we believe they can.
The new year features its usual share of uncertainty and countervailing trends. Based on P/E the S&P 500 is not quite the bargain it was a year ago, but at 13.2 times is still below its long-term average of 16.0. Additionally, barring reentry into recessionary conditions, equity yields and cash generation seems sufficient to provide support for stocks as competition to fixed income investments.
Sound Shore’s research process includes an average of 700 private management meetings per year and our starting point of researching previously underperforming but sound companies puts us, we believe, in a good position to uncover favorable risk/reward investment opportunities despite the headlines.
04 Mar 2013Olstein Value Fund - Q4 2012 Commentary( Portfolio ) Despite growing fears regarding the fiscal cliff and lingering doubts about the sluggish pace of economic recovery, the U. S. equity market proved a rewarding choice for investors in 2012. During the last quarter of the year, surprisingly good news regarding the U.S. employment and housing markets, combined with a greater measure of certainty following the Presidential election and an eleventh-hour deal (avoiding the drastic effects of the fiscal cliff), helped U.S. equity markets end the year on a strong note.
While doom, gloom and uncertainty dominated equity market sentiment for most of 2012, the overall economic picture continued to improve throughout the past year. We believe this deliberate progress should continue in 2013 and that signs of real stability, as evidenced by continued growth in employment, improvement in the housing market, increased corporate capital spending, and favorable consumer sentiment could propel equity markets past prerecession highs in 2013. On the negative side of the equation, we acknowledge ￼ that continued economic stagnation in Europe could cast a shadow over global equity markets in 2013, with scrutiny of debt problems in specific countries likely to cause spikes in downside market volatility during the year. In an environment where negative headlines and individual macro events can still trigger sharp volatility in market prices, we believe volatility is our friend.
OUR STRATEGY IN THE CURRENT ENVIRONMENT
We continue to believe that by taking advantage of market volatility and depressed equity prices to purchase strong companies with stable or growing free cash flow and management teams that have proven to be shrewd allocators of capital, investors have the potential to achieve above-average long- term returns. When downside volatility occurs, we will continue to apply our accounting based (looking behind the numbers) free cash flow value discipline to identify companies in which our calculation of intrinsic value materially deviates from current market prices and we believe the upside potential is far greater than the downside risk. On the other hand, when upside volatility results in market prices approaching or exceeding our calculation of intrinsic value and we believe the risk/reward ratio no longer warrants taking the risk of owning a particular equity, we will take our money off the table and hold cash. Our portfolio’s relative cash position is never a call on our belief as to the future direction of the stock market. Our cash position is determined by our ability or inability to discover undervalued equities and our reluctance to increase overall portfolio risk via an undue concentration in any one security. We have no rules with regard to the amount of cash we will hold if suitable undervalued investments are not identified. The market appreciation of the past 4 years has made our job more difficult to uncover materially undervalued securities, but as always, individual stocks often overreact to short-term events and/or news which can produce opportunities to discover undervalued securities possessing long-term appreciation potential (as long as an investor has patience for the clouds to clear).
Although consensus is still predicting slow economic growth and mid single digit market returns going forward, it is increasingly important for investors to find ways to benefit from equity returns as an asset class especially during this period of low fixed income returns and potential bond price risk should future inflation result in firming interest rates. More than four years after the onset of the Great Recession, company balance sheets are in excellent shape with many companies flush with cash and holding little to no, or rapidly decreasing, debt loads. A material number of companies in our portfolio have cash flow yields that are not only considerably higher than current government bond yields, but also have business models we understand and, in our opinion, have positive growth rates attached to them.
We continue to focus on how individual companies have adapted their expectations, strategic plans and operations to recent economic conditions and how they have managed their assets to deliver future earnings to investors. Our current portfolio consists of companies that we believe have discernible balance sheet strength, a sustainable competitive advantage, a management team that emphasizes decisions based on cost of capital calculations and deploys free cash flow to create shareholder value. We believe companies with these characteristics are poised to eliminate the valuation gaps created by recent negative market sentiment.
At December 31, 2012, the Olstein All Cap Value Fund portfolio consisted of 88 holdings with an average weighted market capitalization of $44.91 billion.
RISK IN 2013: IN THE ‘NOW’ AND OUT OF THE MARKET?
With the onset of the Great Recession, investors fled equity markets seeking safety in cash and fixed income investments. A great many of these investors, in the interest of preserving capital, have remained sidelined even though equity markets have rebounded strongly from the lows of 2008 and 2009. In fact, from its March 9, 2009 low through December 31, 2012, the benchmark S&P 500® Index has posted a total return of more than 100%, with many value funds increasing by an even larger percentage. Yet, despite this strong performance, a significant number of investors remain on the sidelines immobilized by doom-filled headlines and afraid of a repeat of 2008.
From our perspective, the primary driver of equity market growth since the global financial crisis and market lows of 2008 and 2009 has been an aggressive easy monetary policy in order to jump start the economy and reduce unemployment. It has been the government’s stated objective to keep interest rates as low as possible for as long as possible. In our opinion, the current approach to monetary policy holds real risk for investors who are “in the now” and out of the market, that is, those investors who have sharply increased their holdings in bonds and cash and have decreased their holdings of common stocks. At some point, the aggressive monetary policy of the past four years is likely to trigger an increase in inflation that could negatively impact the value of fixed income and cash holdings. In fact, we believe that counter to past market cycles, an increase in interest rates from these abnormally low levels would be indicative of an increase in economic growth and be bullish for equity returns and bearish for bond returns.
At this stage of the economic recovery, we believe investors should prepare for the long-term effects of the current low-interest rate monetary policy and seek ways to improve investment returns in a low-growth environment. The real possibility of increased inflation combined with the realities of investing in a low-growth economic environment should compel investors to find ways to benefit from both productivity growth and capital appreciation in their portfolios. While many investors are nervous about equity markets or remain sidelined waiting for robust improvement in the economy, we believe there is a strong case for investing in the equity securities of companies whose real economic value is unrecognized by the market, obscured by market uncertainty or overshadowed by temporary problems. We believe our free cash flow accounting-based investment discipline of looking behind the numbers of individual companies to identify undervalued securities has a decided advantage in the current market environment.
While we attribute much of the current under-exposure in equities to macro- economic concerns and doom and gloom scenarios by most investors and the press, we prefer to focus on the undervalued securities of good companies with strong balance sheets and unique business models that generate (or have significant potential to generate) sustainable free cash flow. In addition, we prefer management teams that are deploying their cash balances to either grow through value-added capital expenditures or return excess cash to shareholders through dividends or stock buybacks.
We also believe it is important to identify those companies that not only have correctly focused their priorities in the face of a fragile economic recovery but have also identified options that have created a substantial strategic advantage for what we believe is an eventual inevitable acceleration of economic growth. As we have stated many times, the Fund focuses on a company’s ability to generate normalized free cash flow as the primary determinant of value. In particular, companies that continue to thrive in a challenging or stagnant economic environment eventually draw the favorable attention of investors.
Above-average long-term returns are generated by paying attention to the cash return an investor can expect from owning a share of a business and whether or not the potential return has enough of a premium (to the risk free rate) to compensate an investor for the risks of the company’s business model and to correctly predict its ability to produce normalized free cash flow. Assessing the adequacy of the cash flow return is of greater importance during an uneven economic recovery especially during a time when investors are being told, often quite loudly, to avoid equities and seek safer opportunities. We believe such times have the potential to set up significant above-average long-term investment returns.