Right now we are in the midst of earnings season and investors are reacting to news from individual companies, and in general it has not been good. This reflects the fact that we are in a very weak economic period. But it also reflects the lack of visibility by company managements and so they are keeping expectations low. I think it is the appropriate strategy. Expectations need to be lowered. It may make investors nervous, but eventually we will see positive surprises. That may not happen next quarter, but it could be sooner than most think. Recessions (and let us agree that we are in one now) tend to last on average 11 months, but stocks bottom about half way through and then begin to move up. We may not be in an “average” recession, but the point is stocks begin moving up before we see an improvement in GDP.
Of course, this morning all the talk was about how the overseas markets were down big and the futures in the US were at their limit lows. It looked like today could be really bad, and for awhile it was. But as the day progressed, investors began to buy. The market seemed to be acting more rationally. Still we ended up down over 300 points, but it appeared like it could have been much worse.
I am certain we are still seeing some panic selling. I also know that we are still feeling the effects of hedge funds liquidating their positions. This will all take some time to work through, but we will. And when it does, we will once again return our focus to company fundamentals. I said to many people during the tech bubble of the late 90s that valuation matters and it still does today. There are some incredibly cheap stocks available for purchase. Do your homework during earnings season and be prepared to buy.
Friday, October 24, 2008
Monday, October 20, 2008
Old Friends
I spent this past weekend with some old friends. We played some golf, caught up and reminisced about the past. As we get older, the weekends become more sedate but the stories about our past exploits become more impressive. It is always a good time and something I look forward to every year.
There is a lot going on in the markets, some of it is important, but much of it is noise. That made this weekend especially refreshing as it was a great way to clear my head. I still feel very comfortable with our approach to dealing with this crisis. Look for good businesses, with good balance sheets operated by excellent managers and buy them at the right price. I am confident if we stick with this discipline our clients will come through this a great shape. It is not really complicated, but executing it requires patience. After a nice weekend, I feel rejuvenated and ready to go.
There is a lot going on in the markets, some of it is important, but much of it is noise. That made this weekend especially refreshing as it was a great way to clear my head. I still feel very comfortable with our approach to dealing with this crisis. Look for good businesses, with good balance sheets operated by excellent managers and buy them at the right price. I am confident if we stick with this discipline our clients will come through this a great shape. It is not really complicated, but executing it requires patience. After a nice weekend, I feel rejuvenated and ready to go.
Great Minds...
We are glad to see our thinking about the attractiveness of US stocks is shared by another successful investor.
http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&ref=opinion&oref=slogin
http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&ref=opinion&oref=slogin
Wednesday, October 15, 2008
Panic Is Not An Investment Strategy
The title of this piece came from a quote I heard while listening to NPR last week. I cannot think of a more apt name given the state of affairs in the markets recently. The carnage has been terrible and equity investors have seen portfolio values decline markedly over the past few weeks. It is really scary!
But, it is not the time to panic. The Treasury and the Federal Reserve have been doing everything possible to help alleviate the problems in the market today. There is some question whether they were late to act, but the point now is they are acting and they are acting in unison with many other countries. We are witnessing a global intervention on a scale rarely seen. We believe that it will ultimately prove effective, but we are unable to say when. We just know we want to be there when stocks turn.
Now we are not just sitting idly by watching the markets. We are taking action. First, we are looking to upgrade the quality of our portfolios. Stocks have sold off dramatically, good and bad companies. We are using this time to sell the weaker names and buy the companies we expect to be the long term winners. We are also focused primarily (but not exclusively) on buying those companies that are self financing. By that, we mean that we want to own companies who are not at the whim of the banks or the bond market to finance growth. These companies can use their financial strength to prosper in these tougher times. Some examples would include Johnson & Johnson and Paychex.
We also continue to focus on dividends. We have always been a big fan of dividends, but today they provide some downside protection and a stream of cash flow that can be used to buy additional stock. We like to see companies with the confidence to increase its dividend during these times. It sends a message that management has comfort in the future. United Technologies just raised its dividend 20% last week. It may not have caught the eye of many investors given what was taking place in the stock market, but it caught our eye.
There are tremendous opportunities today. There are many great companies with solid balance sheets available at attractive valuations. Our shopping list is very long and we are buying. That said, we are moving money in at a deliberate pace. This turmoil may not be over, but we do believe that we are close to a bottom. We are also confident that the companies that we are buying today will serve us and our clients well into the future.
(Disclosure: We own Johnson & Johnson, Paychex and United Technologies in our clients’ portfolios as well as our portfolios. Please write our offices for a complete list of securities transactions.)
But, it is not the time to panic. The Treasury and the Federal Reserve have been doing everything possible to help alleviate the problems in the market today. There is some question whether they were late to act, but the point now is they are acting and they are acting in unison with many other countries. We are witnessing a global intervention on a scale rarely seen. We believe that it will ultimately prove effective, but we are unable to say when. We just know we want to be there when stocks turn.
Now we are not just sitting idly by watching the markets. We are taking action. First, we are looking to upgrade the quality of our portfolios. Stocks have sold off dramatically, good and bad companies. We are using this time to sell the weaker names and buy the companies we expect to be the long term winners. We are also focused primarily (but not exclusively) on buying those companies that are self financing. By that, we mean that we want to own companies who are not at the whim of the banks or the bond market to finance growth. These companies can use their financial strength to prosper in these tougher times. Some examples would include Johnson & Johnson and Paychex.
We also continue to focus on dividends. We have always been a big fan of dividends, but today they provide some downside protection and a stream of cash flow that can be used to buy additional stock. We like to see companies with the confidence to increase its dividend during these times. It sends a message that management has comfort in the future. United Technologies just raised its dividend 20% last week. It may not have caught the eye of many investors given what was taking place in the stock market, but it caught our eye.
There are tremendous opportunities today. There are many great companies with solid balance sheets available at attractive valuations. Our shopping list is very long and we are buying. That said, we are moving money in at a deliberate pace. This turmoil may not be over, but we do believe that we are close to a bottom. We are also confident that the companies that we are buying today will serve us and our clients well into the future.
(Disclosure: We own Johnson & Johnson, Paychex and United Technologies in our clients’ portfolios as well as our portfolios. Please write our offices for a complete list of securities transactions.)
Thursday, October 9, 2008
Client Letter
The following is a letter we recently sent to our clients:
This has certainly been a volatile time in our markets! We have seen enormous price swings throughout the quarter, and some huge swings intraday. These market moves have been the result of some historic changes on Wall Street. Starting with the collapse and sale of Bear Stearns to JP Morgan Chase, we have seen Lehman Brothers go bankrupt, Fannie Mae and Freddie Mac bought by the government, and AIG effectively get taken over by the government. We have also seen the largest bank failure in history (Washington Mutual) while other smaller banks have faced a similar fate. Finally, as the 4th quarter begins, we have the White House and congress agreeing to a $700 billion bank rescue plan. There is much angst whether bailing out the banks and Wall Street is a good idea, but ultimately the biggest beneficiary may be those on Main Street who could benefit from looser credit and stronger bank balance sheets.
This is the economic and financial backdrop that we have faced as we focus on the management of your, and our, portfolios. While these events are tremendously important, we have tried not to lose sight of our objective: to manage your money for the long term growth of income and principal. Note the emphasis on long term. While we would like to buy something and see it go up in price immediately, we recognize that is not realistic. Rather, we expect the stocks and mutual funds we purchase to go up in price significantly over a time frame we measure in years, not in days or in hours. To accomplish this, we look for companies that we want to own well into the future. The prices of these good businesses have been subject to a great deal of fluctuation in the short term (for the reasons we described above) but we view that as an advantage for long term investors. It occasionally provides the opportunity to buy very good businesses at very fair to downright cheap prices. Since inaction carries no penalty, we can afford to wait for the stocks that we want to own to reach the prices we want to pay. If not, we will find something else.
We do not have a crystal ball to tell us when the economy will perk up and stocks will rise again. But we will continue to build our portfolios with high quality, well managed companies that we will be pleased to own for many years.
We want you to know that we have been working on updating our website. In the next few days, you should see the results. While the look of the site similar, we have added a section called the Harvest Newsroom. Here you can find a link to our blog that will provide you some of our thoughts on stocks and the markets. Also, in the Newsroom you will find a section highlighting some of our favorite websites and a list of books that may help to provide some perspective on what is taking place in the markets today. We plan to regularly update all of these sections. We also hope to include some articles and maybe even videos on important financial topics. Suggested improvements and topics are always welcome.
We also want to take a moment to thank you all for choosing to work with us. We both love what we do and are hesitant to call it work. We are fortunate to work with you and are always available. Please feel free to call us (610-240-4740) or email us (jim@harvestfp.com or john@harvestfp.com).
Best wishes!
Jim Wright
John Fattibene
This has certainly been a volatile time in our markets! We have seen enormous price swings throughout the quarter, and some huge swings intraday. These market moves have been the result of some historic changes on Wall Street. Starting with the collapse and sale of Bear Stearns to JP Morgan Chase, we have seen Lehman Brothers go bankrupt, Fannie Mae and Freddie Mac bought by the government, and AIG effectively get taken over by the government. We have also seen the largest bank failure in history (Washington Mutual) while other smaller banks have faced a similar fate. Finally, as the 4th quarter begins, we have the White House and congress agreeing to a $700 billion bank rescue plan. There is much angst whether bailing out the banks and Wall Street is a good idea, but ultimately the biggest beneficiary may be those on Main Street who could benefit from looser credit and stronger bank balance sheets.
This is the economic and financial backdrop that we have faced as we focus on the management of your, and our, portfolios. While these events are tremendously important, we have tried not to lose sight of our objective: to manage your money for the long term growth of income and principal. Note the emphasis on long term. While we would like to buy something and see it go up in price immediately, we recognize that is not realistic. Rather, we expect the stocks and mutual funds we purchase to go up in price significantly over a time frame we measure in years, not in days or in hours. To accomplish this, we look for companies that we want to own well into the future. The prices of these good businesses have been subject to a great deal of fluctuation in the short term (for the reasons we described above) but we view that as an advantage for long term investors. It occasionally provides the opportunity to buy very good businesses at very fair to downright cheap prices. Since inaction carries no penalty, we can afford to wait for the stocks that we want to own to reach the prices we want to pay. If not, we will find something else.
We do not have a crystal ball to tell us when the economy will perk up and stocks will rise again. But we will continue to build our portfolios with high quality, well managed companies that we will be pleased to own for many years.
We want you to know that we have been working on updating our website. In the next few days, you should see the results. While the look of the site similar, we have added a section called the Harvest Newsroom. Here you can find a link to our blog that will provide you some of our thoughts on stocks and the markets. Also, in the Newsroom you will find a section highlighting some of our favorite websites and a list of books that may help to provide some perspective on what is taking place in the markets today. We plan to regularly update all of these sections. We also hope to include some articles and maybe even videos on important financial topics. Suggested improvements and topics are always welcome.
We also want to take a moment to thank you all for choosing to work with us. We both love what we do and are hesitant to call it work. We are fortunate to work with you and are always available. Please feel free to call us (610-240-4740) or email us (jim@harvestfp.com or john@harvestfp.com).
Best wishes!
Jim Wright
John Fattibene
Monday, September 15, 2008
Our Principles in Action
Lot of news this weekend: big banks meeting with Treasury and the Fed, Lehman Brothers having to file for bankruptcy, Merrill Lynch agreeing to sell itself to Bank of America, AIG looking for cash.
Fortunately major media outlets were calming influences:
“Street of Fear” – Fox News website
“Crisis on Wall Street…” – Wall Street Journal
“A Hellacious Hurricane Hits Lehman Brothers” - Barron’s
Okay, a little sarcasm.
So what do Jim and I think? Well first we remember two of our principles (we actually remember them all, but two of them are particularly appropriate):
· Strive to be patient investors in an impatient world.
· Never look for validation in conventional wisdom.
We thought of these two principles because today will be a tumultuous day in financial markets; it has started out that way as I type this. And in tumult we believe we can find opportunity. We will be looking for companies that have little or nothing to do with some of the financial assets causing the current problems – subprime mortgages, CDOs, etc – where selling has caused the price to decline well below our estimate of the company’s business value. Or, as I like to say, we will be looking for really easy decisions. Here is hoping that we will find some.
-John
Fortunately major media outlets were calming influences:
“Street of Fear” – Fox News website
“Crisis on Wall Street…” – Wall Street Journal
“A Hellacious Hurricane Hits Lehman Brothers” - Barron’s
Okay, a little sarcasm.
So what do Jim and I think? Well first we remember two of our principles (we actually remember them all, but two of them are particularly appropriate):
· Strive to be patient investors in an impatient world.
· Never look for validation in conventional wisdom.
We thought of these two principles because today will be a tumultuous day in financial markets; it has started out that way as I type this. And in tumult we believe we can find opportunity. We will be looking for companies that have little or nothing to do with some of the financial assets causing the current problems – subprime mortgages, CDOs, etc – where selling has caused the price to decline well below our estimate of the company’s business value. Or, as I like to say, we will be looking for really easy decisions. Here is hoping that we will find some.
-John
Friday, September 5, 2008
Volatility may create opportunity
Goldman Sachs released a report recently called “potential 2-3 year doubles” The report discusses how the market volatility over the past year has created tremendous opportunities in the equity markets. It goes on the discuss 10 stocks the firm believes could double in value over the next 2-3 years.
This report got us thinking about the stocks that we own. Typically, when we purchase a stock, we are not expecting to see the stock double over a 2-3 year period. Instead, we are seeking an attractive and growing level of dividend income coupled with some stock price appreciation. This combination should lead an attractive total return. That said, we believe there are some names in our portfolio that appear so cheap, we would not be surprised if the stock doubled in price over the next 2-3 years. Keep in mind, this is more of a thought exercise than a prediction or recommendation, but it helps to illustrate the attractiveness of the stocks that we own:
Corning ($16.50): With businesses that are involved in fiber optics, LCD screens, diesel fuel and solar power, we think this company is well positioned in some very attractive areas. Of course, recently, Corning has seen some weakness in its LCD business due to slower consumer demand for televisions. We believe this will be short lived and expect demand to pick up again next year. Expectations are that the company will earn $1.80 this year. We think that with this mix of businesses, it is not impossible to see 10% average earnings growth over the next 3-5 years. So, if one looks out to 2011, this company could be earning around $2.40. If you apply a multiple of 15 to those earnings, you get a stock price of $36.
Legg Mason ($42): This investment management firm has seen its share price crushed over the last couple of years. Certainly, the company has caused its share of problems, but investors have punished the stock mercilessly. We think a company with $900 billion in assets under management (AUM) should be valued at least at 1% of its AUM. If we use that amount, the stock is worth over $60 today. But, if you assume some growth in the AUM over the coming years, it is not hard to see a stock worth $80 in 3 years.
We own many stocks with very attractive upside, but it might be hard to expect a double in a short period of time. Still, we are very excited about the names we own today, and fully expect to be purchasing some additional stocks with great potential upside in the coming days.
This report got us thinking about the stocks that we own. Typically, when we purchase a stock, we are not expecting to see the stock double over a 2-3 year period. Instead, we are seeking an attractive and growing level of dividend income coupled with some stock price appreciation. This combination should lead an attractive total return. That said, we believe there are some names in our portfolio that appear so cheap, we would not be surprised if the stock doubled in price over the next 2-3 years. Keep in mind, this is more of a thought exercise than a prediction or recommendation, but it helps to illustrate the attractiveness of the stocks that we own:
Corning ($16.50): With businesses that are involved in fiber optics, LCD screens, diesel fuel and solar power, we think this company is well positioned in some very attractive areas. Of course, recently, Corning has seen some weakness in its LCD business due to slower consumer demand for televisions. We believe this will be short lived and expect demand to pick up again next year. Expectations are that the company will earn $1.80 this year. We think that with this mix of businesses, it is not impossible to see 10% average earnings growth over the next 3-5 years. So, if one looks out to 2011, this company could be earning around $2.40. If you apply a multiple of 15 to those earnings, you get a stock price of $36.
Legg Mason ($42): This investment management firm has seen its share price crushed over the last couple of years. Certainly, the company has caused its share of problems, but investors have punished the stock mercilessly. We think a company with $900 billion in assets under management (AUM) should be valued at least at 1% of its AUM. If we use that amount, the stock is worth over $60 today. But, if you assume some growth in the AUM over the coming years, it is not hard to see a stock worth $80 in 3 years.
We own many stocks with very attractive upside, but it might be hard to expect a double in a short period of time. Still, we are very excited about the names we own today, and fully expect to be purchasing some additional stocks with great potential upside in the coming days.
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