The Stock Screen August 26, 2008
The purpose of The Stock Screen is to provide a list of stocks that may warrant further investigation. A stock screen, so to speak. It is not to provide recommendations and any stocks that you see mentioned are not recommendations for purchase, merely a potential starting place for readers to begin their own research. Before getting to The Stock Screen, let’s explore how a little advice from Warren Buffett may help one navigate the market. Using Advice from Warren Buffett to Help Navigate a Volatile Market Warren Buffett, the world’s most famous investor, has often stated that one of the keys to making money in the stock market is to “be fearful when others are greedy and greedy when others are fearful.” This is often easier said than done, as human nature often finds it emotionally difficult to go against the crowd. When it comes to the stock market, however, ignoring the crowd can help avoid a lot of long-term pain even if the there is a little uneasiness in the short run. Some of the most prominent examples where this mindset would have been useful might be the Nifty Fifty of the early 1970’s or the Internet craze of the late 1990’s. Those who refused to throw their money at the popular stocks in those times may have temporarily looked like the patsies at the poker table, but they were the ones left holding the chips at the end. So how does one gain confidence being a contrarian in the stock market? First, it’s important to remember that the market is there to serve you, not guide you. The market gives you prices at which you may buy or sell thousands of stocks. If you think the price is much too low, you may buy. If you think the price is much too high, you may sell. If you think the price is approximately right or aren’t sure what the right price might be, you don’t have to do anything. That last option is one that should probably get more use, since the consequences of being wrong on an investment can be greater than the benefit of being right. Afterall, a 50% loss on an investment would then require a 100% gain on the capital that is left just to get back to even. This is the kind of math that gives credence to another of Mr. Buffett’s quotes, “Rule #1: Never Lose Money; Rule #2: Never Forget Rule #1.”
The Stock Screen August 26, 2008
Let’s expand a little on the definition of a “loss.” It’s tough, if not impossible, to time the bottom of a stock market or a stock price. So once you buy a stock, it usually trades down shortly thereafter. Is this a loss? We don’t think so, as long as nothing has changed about the business, you have bought your share of the business at a discount to what it is truly worth, and there is nothing that would force you to sell in the near term. Mr. Buffett makes a clear distinction between short-term price fluctuations and permanent losses of capital, and we think you should too if you want to navigate the stock market waters successfully. We believe there are three things that lead to real, permanent losses of capital when you invest in a business through stock purchases: 1) The business dies or deteriorates 2) You pay too much 3) You sell on a temporary market fluctuation We think those three situations are the true risk you take when investing in the stock market. Most advisors will define risk as volatility in stock prices, but it is that volatility that creates opportunities to buy low and sell high. So volatility is good, not bad – a truly contrarian point of view! Now that we know how one may permanently lose money, let’s use one more checklist from Mr. Buffett and his partner, Charlie Munger, to help us avoid those losses and find attractive investment opportunities. If you go through Mr. Buffett’s annual letters to shareholders, he uses the same checklist today that he used 30 or 40 years ago to find investment opportunities. He and Charlie look for: a) a business they understand; b) with favorable long-term economics; c) an able and trustworthy management; and d) a sensible price tag. If you stick to these guidelines and take the contrarian view of risk we described above, you are well on your way to being a stock market winner. But remember, to be a top finisher in the end, you must first finish – so always invest with a margin of safety! There’s no need trying to leap 7-foot hurdles when you can wait for 1-foot hurdles to come your way. -- The Stock Screen Team
Quote: “Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.” -Ben Graham
The Stock Screen August 26, 2008
The Stock Screen – 2nd Quarter 2008
*prices indicate the stock price per share as of market close on August 25, 2008.
Small and Micro-Cap ($2 billion market or less cap) Harvest Natural Resources (HNR) – $10.99 Tandy Leather Factory (TLF) – 2.95 Redwood Trust (RWT) – 18.44 Steak n Shake (SNS) – 7.64 Borders Group (BGP) – 5.29 Consolidated Tomoka Land Co. (CTO) – 39.42 K-Swiss (KSWS) – 16.93 Hurco (HURC) – 32.98 Winmill (WNMLA) – 4.79 Bexil (BXLC) – 26.55 Fremont (FMMH) – 18.52 Contango (MCF) – 76.88 Premier Exhibitions (PRXI) – 3.90 SM&A (WINS) – 3.41 Mid-Cap ($2 billion to $10 billion market cap) Wesco Financial (WSC) - $361.00 American Eagle (AEO) – 13.74 Moody's (MCO) – 38.03 White Mountain Insurance (WTM) – 451.35 Legg Mason (LM) – 40.14 CarMax (KMX) – 14.60 Markel (MKL) – 351.05 Alleghany (Y) – 314.60 Fairfax Financial (FFH) – 224.00 Odyssey Re (ORH) – 37.34 Eastman Kodak (EK) – 15.92 USG Corp. (USG) – 25.85 Whole Foods (WFMI) – 17.84 WellCare (WCG) – 41.07
Vulcan (VMC) – 71.10 Washington Post (WPO) – 601.60 Wynn Resorts (WYNN) – 91.80 Coach (COH) – 26.40 International Game Technology (IGT) – 20.98 Jefferies (JEF) – 17.61 Dun & Bradstreet (DNB) – 91.52 Large-Cap (greater than $10 billion market cap) Berkshire Hathaway (BRK-B) - $3,866.50 Pfizer (PFE) – 19.51 Starbucks (SBUX) – 15.52 Target (TGT) – 51.87 Paychex (PAYX) - 34.05 Wells Fargo (WFC) – 28.67 Lowe's (LOW) – 24.14 Loews Corp. (L) – 41.35 McGraw-Hill (MHP) – 41.89 Sears Holdings (SHLD) – 87.08 American Express (AXP) – 37.81 eBay (EBAY) – 24.77 Yahoo! (YHOO) – 19.09 Cemex (CX) – 20.27 3M (MMM) – 70.73 Diageo (DEO) – 73.76 Pepsico (PEP) - 69.05 Coca-Cola (KO) – 53.57 Microsoft (MSFT) – 27.66 Toyota (TM) – 88.18 UnitedHealth (UNH) – 29.31 WellPoint (WLP) – 52.56 Hartford (HIG) – 60.04 Johnson & Johnson (JNJ) – 70.80 General Electric (GE) – 28.32
Quote: "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." -Charlie Munger
The Stock Screen August 26, 2008
Manager Commentary of Interest
1. In an interview with Forbes, Bruce Berkowitz (Fairhome Fund – FAIRX) talked a little bit about Pfizer, along with some other names also included in The Stock Screen: Forbes: One of your top picks is drug giant Pfizer. How come? Berkowitz: $17 billion of free cash, which turns out to be over $2 per share of free cash for a triple-A quality company. This is the largest pharmaceutical company in the world trading under $20 per share. Let me make sure we all understand what I mean by free cash: It's the amount of money that is possible to pull out of the business without hurting the franchise. Ten years ago, everybody loved Pfizer. It was trading between 40 and 50 times earnings. Today, it's under 10 times earnings and nobody wants it. For the complete interview, go here: http://www.forbes.com/personalfinance/2008/08/14/ berkowitz-fairx-pfe-pf-ii-in_jl_0814adviserqa_inl.html (title of article: Bruce Berkowitz Stays in the Sunshine) 2. In their Second Quarter Letter, Oak Value commented on their position in Diageo: Diageo – Diageo is the world’s leading premium drinks business with an outstanding collection of international brands across the spirits, wine and beer categories. We initiated a position during the quarter and took advantage of the market weakness to increase position size. This uncharacteristic move to build a full position in a relatively brief period of time is a reflection of our knowledge of the business and the industry, our understanding of its economics and the manner in which the company management views those economics, and the increasingly attractive opportunity represented by recent share price declines. The Fund has owned Diageo in prior periods and we have maintained our dialogue with the company in the interim. Our view is that while the company’s profile is defensive in nature, it demonstrates an attractive opportunity for growth and earnings leverage at a time when excess cash flows are driving higher returns to company shareholders in the forms of share repurchases and increasing dividends. More importantly, we believe the trend toward premium brands in the spirits category will persist and that Diageo is well positioned to take advantage of this secular trend. For Oak Value’s complete Q2 Letter, go here: http://www.oakvaluefund.com/pdf/ov-iar2q08.pdf Quote: “The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces.” -Warren Buffett