Disclaimer: John owns AAPL, BIDU, GOOG, BOOM, MDT, ATW, and DWSN in his Covestor Mid-Cap Fundamentals model.
August 30, 2010: The S&P 500 index is down 4.94% for the month of August through August 26, 2010. I see a lot of good values among the top ten stocks in the S&P 500 by market cap. Exxon Mobil (XOM), Apple (AAPL), Microsoft (MSFT), and Proctor & Gamble (PG) are the top four and trade at comparatively low forward earnings estimates. Apple is the only one on the list with significant growth prospects over the next ten years or so and it trades less than twenty times trailing earnings as of August 30, 2010. These valuations for some of the country’s — and the world’s for that matter — best companies is extremely compelling compared to long term U.S. Treasuries. As of August 27, 2010, The 30 year bond yields less than 4%, the equivalent to a 25-plus PE multiple. In my view, owning solid franchises with sustainable competitive advantages and attractive earnings yields compared to fixed income is the best place to park money you don’t need for at least ten years.
August 2010
I made several transactions in the last three weeks that did one of three things: lowered risk, raised cash for other opportunities, or simply took profit on a stock that was overvalued. The third reason only applied to one holding that I first purchased a few weeks ago. Wesco Financial (WSC) was trading for 1.03 times book value with 50% of the market cap in cash As of August 30, 2010. Wesco is run by Charlie Munger, Warren Buffett’s longtime partner at Berkshire Hathaway (BRK.A). Buffett and Munger have expressed interest in the past in purchasing the remaining 20% of Wesco stock they don’t already own, as long as Wesco was selling below book value, which Munger has said he views as a good proxy for Wesco’s intrinsic value. So, I decided an investment in Wesco at a discount to book value, run by a manager I trust and admire, would be a good place to park a few percent of my assets. As luck would have it, on August 26th, Berkshire announced the intent to acquire all of Wesco Financial at book value in a part cash part stock deal. With Wesco stock selling at a small premium to book value after the announcement, I decided to go ahead and take the market’s offer, netting about a 10% return in two weeks. I wish they were all that easy.
I sold Terra Nova Royalty (TTT) due to spin offs the company is doing in foreign exchanged traded shares. It would have likely yielded a profit in time but that holding was not suitable given it was in Euros.
I also sold off half of my stake in Baidu (BIDU) because of the higher risk of Baidu’s business in China compared to Google’s (GOOG) outside of China. It simply came down to me being more comfortable having more money in Google at this point than Baidu, and since Baidu was growing to a larger percentage of assets, I had to trim it down to a more comfortable position. Most winners I like to leave alone, though.
With the proceeds from these sales I invested in some attractive medium sized companies within the energy and mining space. These include Atwood Oceanics (ATW), Dawson Geophysical (DWSN), and Dynamic Materials (BOOM). I also established a new position in Medtronic (MDT) after the stock got hammered after missing earnings guidance giving me the opportunity to buy shares at a significant discount to intrinsic value.
September 2010
Going into the new month, we have about 9% of the model sitting in cash. Large caps are very attractive right now. I try to focus on the best opportunities among small to medium sized businesses, but if the values get attractive enough, I am not hesitant to trade up for quality. Right now, my favorite idea among large caps is Wal-Mart Stores (WMT). The stock is selling at a relatively cheap price to earnings, almost as cheap as Medtronic.
Until next month…
