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.


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.