In an earlier post I noted my performance for 2010 and how it was calculated. I promised to get to all my buys and sells for the first quarter. I mentioned my gains since inception as 29% from early 08, and 25.85% for 2010. I have ~36 holdings right now. I like diversification but I plan on lowering this number because it is too hard to keep track of all these stocks due to time constraints.
Below I listed my buys for the 4th quarter of 2010. I will get to sells in a post early this week. I do not have exact numbers from my broker but I have a rough estimate of ~13 return in Q410, almost matching the S&P500’s return for the entire year in one quarter!
Dan Loeb’s Third Point Re To Merge After Years Of Losses
Last week, Third Point Re insurance, which is backed by US hedge-fund manager Daniel Loeb, said it would merge with Sirius International Insurance Group in a cash-and-stock deal worth around $788 million. The deal comes at a pivotal time for both companies. Third Point Re To Merge After Years Of Losses Early last year, reports Read More
You can see that three of the names are household blue chip stocks. I have been finding much more value in the large cap stocks now. The Russell 2000 was up ~28% in 2010, and up ~100% from the March 2009 low. Although the large return is due to the growth in earnings, the PE multiple has increased. The current valuation of the Russell is approximately 17x earnings vs. 13% for the Dow Jones. Therefore most of my buying has been in the large cap names. However, I did buy one small cap so far in Q12011, which I will be reporting on at the end of the first quarter. Stay tuned for mid April for other buys and sells.
PFE-I owned Pfizer and sold immediately after the bid for Wyeth. In general I am not a fan of big mergers, and this was a humungous merger that forced PFE to take on lots of debt. I wanted to wait a year or two to see if Pfizer was able to be the cash generating machine that it was before the acquisition. Pfizer two years later has barely moved and besides for more debt has been showing positive results. Most of the fears regarding the stock have to do with the pending expiration of the Lipitor patent. Pfizer has forward earnings of ~ 8X, and a dividend yield of 4.4%. I did a post Lipitor analysis, and even assuming that Pfizer has zero revenue from Lipitor after the patent expires, earnings will only decrease ~20%. The stock would still be trading at a discount even if they lost 100% revenue from Lipitor! The market is over-reacting to the expiration. Although, Pfizer has wasted a lot of money on R&D over the past decade, producing few results, they are still a dominate player in the pharmaceutical market and has shown innovation in the past.
CSCO-I always liked Cisco as a company. They have an extremely strong moat. Just to state it briefly, makes networking equipment. It holds the dominant position in Ethernet switches, controlling ~ 70% of the market share. The moat is so strong because the switching costs would be enormous for companies to switch to a competitor. However, a good company does not equal a good stock to paraphrase Benjamin Graham. The issue was always valuation, Cisco traded at high valuation historically and I tend to shy away from those types of stocks. Cisco traded at absurd valuations during the tech bubble and even over the past five years traded ~20x earnings. Now I do not look at historic valuations to determine intrinsic value as many others do. Just because a stock used to trade at a high multiple for a long period of time does not mean it deserved that multiple. Many value investors will tend to disagree with me, I think it is a fair topic for debate. Regardless, I think the current value is extremely attractive. The company is trading at 11x forward earnings and if you subtract the ~40billion in cash it is trading at an 8x multiple. If I told someone during 2000 that they would one day be able to buy Cisco at 8x earnings that would think I was crazy. Cisco reported mediocre earnings for the Quarter and the stock fell ~16% to $20. That is when I purchased the stock. The bears are scared that cloud computing is eroding the moat, while this may be partially true the valuation is too low to justify the fears.
MSFT- The Microsoft story is very similar to Cisco, strong moat trading at a cheap valuation with the bears fearing erosion due to cloud computing. Buffett was quoted in 1997 as stating ““In effect the company has a royalty on a communication stream that can do nothing but grow. It’s as if you were getting paid for every gallon of water starting in a small stream but with added amounts received as tributaries turned the stream into an Amazon. He also compared MSFT to Bell and Coke. Buffett’s largest equity investment in Berkshire Hathaway’s portfolio is Coke. Valuation is 10x earnings, taking out ~$37billion in cash, the stock is trading at closer to 9x earnings. Again, I think the market is over-reacting to the fear of cloud computing.
CIT-This one is a more complicated thesis and I would be a liar to say I did not get this idea from David Einhorn. CIT is a large lender to medium and small size businesses. Basically CIT is attractive post-bankruptcy reorganization equity. CIT emerged from bankruptcy in and started trading again on December 12th, 2009. Through bankruptcy CIT eliminated ~$11 billion in debt and all existing equity shareholders. In bankruptcy, CIT was able to have a fresh start. CIT marked down all of their assets and liabilities to market. Now CIT is very well capitalized, with assets that are marked quite conservatively.
Disclosure: Long all these stocks. This is not a professional recommendation to buy or sell, every investor must do their own due diligence.
I did not get into a detailed analysis of each company, I merely scratched the surface. If you want to ask for further explanation please feel free to leave comments.