Bought STT, VLO, PFG.
I don't consider any of these traditional value investments. I am swinging at balls.
I have wanted State Street (STT) to be a core holding for me for several years, but nobody gives it away (ditto for Coke). I'm stepping up again and paying a high price for STT (mid $50s), i.e. a mid 20s PE with expected earnings growth in low teens. I still don't own Coke. STT has delivered outstanding earnings growth.
Bought Valero Energy at $40.XX. VLO is an S&P400 refiner. Last January I bought Ultramar Diamond Shamrock and Tosco on a low PE/low book/supply-constraint basis. These investments turned out great (64% and 40% annualized respectively). VLO's valuation now might approach these. Trailing earnings are around $8.56, forward earnings are expected around $5.39, book is around $33, sales per share around $254. VLO has $1.3 billion in LTD. Moody's upgraded its senior debt in December to baa2.
Bought Principal Financial (PFG) at $24.XX. I had a 401k through them and admired their moat, service, etc. I looked at the IPO and thought I would wait for a below book price. After reading this from this week's Barron's, I decided to take a starter position:
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Schafer: Principal Financial Group is the ninth largest life insurance company in the U.S. It is based in Des Moines, Iowa, and came public in October 2001 at 18.50 a share. The company has an asset management subsidiary, a mortgage banking subsidiary, and writes life and health insurance. This stock is now at 24. Principal is the largest provider of 401(k)s to small and medium-sized businesses in the U.S. It's a terrific business, with high barriers to entry and attractive returns. Most life insurance stocks sell for only 11 to 14 times earnings since only about half to three-fourths of their GAAP [generally accepted accounting principles] earnings are cash.
Principal's GAAP earnings, on the other hand, are approximately equal to its statutory or cash earnings. When the market begins to appreciate this fact, Principal will be accorded a higher multiple than other life insurance stocks.
The company has been targeting 11%-12% earnings growth over the next few years, but they are being conservative. Once management begins to redeploy the company's $1 billion-$1.5 billion, or $3-$4 a share in excess capital through share repurchases, the growth rate will start to look like 13% to 14%. Since a 10% change in the S&P 500 impacts Principal's earnings per share by 4%, the stock is a low-risk play on any recovery we may have in the stock market. I estimate the company will earn $2.20 in '02 and $2.50 in '03. I can see the stock at 35 to 40 in a year.
Q: Oscar, isn't the growth of 401(k)s a product of the bull market and the general economic development of the 1990s? You act as if nothing has changed.
Schafer: Congress is going to start looking at 401(k)s and the amount of assets put in the shares of any one company. But I don't think 401(k)s are a thing of the past.
Cohen: A lot of the growth in 401(k)s is coming from the fact that companies would rather their employees have defined contribution programs instead of defined benefit programs. That is something that is likely to stay in place because defined contribution programs are to the companies' best interest. They don't have to worry about returns.
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