Saturday, August 20, 2011
It's hedge-fund filing season (every quarter, funds must disclose their positions via SEC filings). Today, we'll cover what some of the better-known managers are doing. David Einhorn, who runs Greenlight Capital, bought 5.75 million shares of Microsoft, bringing his position to 14.8 million shares. It's an interesting move, as Einhorn recently called for Microsoft CEO Steve Ballmer to step down.
Einhorn also increased his Apple position by 246,000 shares, bringing his total position to more than 1 million shares.
Microsoft is the world's most dominant software company. It's trading for around nine times earnings, and it yields 2.5%. It has more than $50 billion in cash and short-term investments. Apple has more than $76 billion in cash and securities. It's trading around 11 times earnings.
Seth Klarman's Baupost Group made two new purchases during the quarter. His fund added 12 million shares of Microsoft and 5.5 million shares of BP.
It seems Einhorn and Klarman have arrived at the same conclusion I arrived at almost five years ago. When you can buy big, safe blue-chip companies at dirt-cheap valuations, you "back up the truck" and fill it with shares.
For once, I can say without even a touch of absurdity that Einhorn and Klarman have nothing to tell me about this particular investment idea. I've been singing this song since I first recommended Wal-Mart in October 2006...
You hear a lot about how Wal-Mart is having trouble competing with Amazon (even though e-commerce is less than 1% of Wal-Mart's sales). You also hear a lot about how it's mistreating its workers (even though it provides low-cost health insurance to more than 1 million people, pays full-timers more than H&R Block, McDonald's, and RadioShack, and attracts thousands of job applicants at new store openings).
You hear fewer mentions that Wal-Mart is doing record sales and now has more than 7,000 stores, over half of which are outside the United States. During a time of high unemployment and ill-conceived economic stimuli and jobs programs, Wal-Mart employs more than 1.4 million people in the U.S. and more than 2 million worldwide.
This week, Wal-Mart reported a 12% increase in net income in the second quarter. Overall sales for the quarter grew 5.5%, with international sales growing more than 16%. The company raised its dividend 20.7% earlier this year. It spent almost $3 billion in dividends and share repurchases last quarter. Wal-Mart trades today for the absurdly low valuation of less than 11 times next year's estimated earnings.
If Wal-Mart is so bad, why does it keep growing relentlessly, raising its dividends, and buying back more shares year after year? When will all this bad news show up in the financials? Ever? Don't hold your breath.
And this is just one example. I listed five other stocks of World Dominating businesses, all of them as safe, cheap, and relentlessly growing as Wal-Mart, in my last Extreme Value weekly update.
To be fair, Einhorn did discover Microsoft a couple months before me, back in the summer of 2006. I sent an internal memo around to my colleagues at Stansberry & Associates, showing how Microsoft was cheap enough and generated enough free cash flow to take on enough debt to buy back all its outstanding shares and still pay out billions in dividends.
Porter Stansberry recommended it to his subscribers a month later, and I put it in Extreme Value the month after that. I've never seen anyone anywhere else do the "buy itself" analysis of Microsoft. Extreme Value readers have known about it for almost five years now.
The stock market in general has been too expensive over the past several years, with one brief interlude of cheapness from March 2009 to April 2009. But during the entire period, I've been recommending one "World Dominator" after another. These companies are by far the best, safest, cheapest deals in the world today.
Which would you rather own? U.S. Treasurys rated double-A-plus and probably deserving a triple-C rating? (I downgraded U.S. Treasurys to triple-C more than a year ago in Extreme Value.)
Or would you rather own Microsoft, with its zero-net-debt balance sheet, gushing free cash flow, and growing dividends at double-digit rates? Microsoft yields 2.5%. The 10-year Treasury note yields about 2.3% today. The note's yield will be eaten alive by inflation. Microsoft's payout will grow at double digits.
This is a no-brainer decision. That's why two of the greatest investors of our generation, Einhorn and Klarman, aren't just buying... They're loading up. Klarman has 13% of his equity portfolio in Microsoft. Einhorn's Greenlight has 8% of it reported equity holdings in Microsoft, a stake worth about $380 million. They'd much rather own Microsoft than U.S. dollars. I don't blame them.
I recently discovered a new World Dominator. Like the other ones, it's the No. 1 company in its market. But unlike most of them, it's small enough that its sales could conceivably grow at double-digit rates over the next several years. It sells a product people buy in good times and bad. Management is paying down debt, growing the core franchise.
Mr. Market stupidly made the stock cheaper last week, even though it's generating record free cash flows and will likely top $600 million in free cash flow this year... putting the company at less than seven times free cash flow. It could easily double over the next year, and it'll be much safer than just about any other stock you're going to learn about during that time. To find out about this company and the other World Dominators, click here to get access to Extreme Value.
Date Range:8/11/2011 to 8/18/2011
Date Range:8/11/2011 to 8/18/2011