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"The underlying principles of sound investment should not alter from
decade to decade, but the application of these principles must be
adapted to significant changes in the financial mechanisms and
climate." (Benjamin Graham)
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Should Axel and Porc adapt to a change in the financial climate?
Something I forgot to note in my last posting - not only is the current differential between implied equity return and implied long bond return above average for the period since the start of 1970 - it is higher than it has been since the second quarter of 96. That differential reached a low in the second quarter of `97, getting down into the 1.15% range.
On to new material. Porc has posed the idea that for the patient enterprising investor, the pickings should be somehow better now. For the most part, I don't see it. Looking at the free cash earnings of individual companies I follow, I do not see a higher (better than normal) percentage of them with attractive "coupons." Which leads us to an issue of portfolio management that merits some consideration at this point, IMO.
Graham used to purchase a large number of companies. I have been more influenced by the methods of Phillip Fisher, and tend towards a more concentrated portfolio. Porc also prefers a concentrated portfolio, and we have done some lightweight probability analysis which supported our perspective. But my (and Porc's) portfolio preference is based upon the premise of only purchasing great companies. To put it succinctly, we seek non-market risk while simultaneously seeking to minimize business risk. But as Porc has also noted, the low hanging fruit seems to have mostly been picked. So how about some input (insights? questions?) on this: should we enterprising investors now purchase great companies when available at good prices, or should we purchase merely good companies (and more of them) at great prices? I personally couldn't go to what Buffett calls "cigar butt investing" but there are good companies, which perhaps don't have a place in a very concentrated portfolio, which might work well in a semi-concentrated (Berney-sized) portfolio.
To illustrate this conundrum, I will offer as examples some companies which I have recently noted as seeming to be cheap. My intent is not to analyze the individual companies (though if anybody wants to really dig into any of them and share their findings with the thread, it would be great) but to offer enough background that the "dilemna" is more apparent.
One company which I feel comfortable holding in a fairly concentrated portfolio, which currently seems inexpensive, is Deere (DE). Extremely strong financially, leader in their market, buying back shares. I also follow Case (CSE) which is a smaller, weaker competitor. I might not feel comfortable holding Case in an Axel-sized portfolio, but I would certainly feel comfortable holding Case in a Berney-sized portfolio. Case is, by my estimates, a decent amount cheaper than Deere.
[As an aside, I took a look at the other makers of agricultural equipment. AGCO (AG) is not as financially strong as the others, but wow, talk about a high free cash coupon - and they have been buying shares back recently. New Holland (NH) seems to be cheap as well - Wayne? buddy pal friend colleague associate? Since you like to look at ADRs, wanna give a perspective on NH?]
Some other companies that might be OK in a Berney-sized portfolio, and seem cheap:
Paccar (PCAR) - they make trucks. Sorry, don't know much more.
The following two show up in Value Line's list of stocks trading at a low multiples of working capital - sounds suspiciously like a starting point for followers of Mr. Graham.
Avnet (AVT) - electronics distributor. My understanding is that the electronics distributors are fairly shielded from price fluctuations, and that business activity affects their profits most.
Stratus Computer (SRA) - nearly $9 a share in cash, insider have bought recently at about $6 a share over the current price, and the company did pledge to repurchase shares. Even with their pre-announced loss, the revised estimates leave them with a high cash coupon.
So returning to the topic, now that it can be seen in context, but still keeping it hypothetical: does it make more sense to purchase Deere, though it isn't as cheap, and maintain a more concentrated portfolio, which in itself abets differentiation from market returns, or to buy a basket composed of say Paccar, Avnet, Stratus, and either Case or AGCO, all of which are cheaper, as part of a Berney-sized portfolio?
Axel |
