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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: Michael Burry who wrote (194)	5/18/1998 10:26:00 PM
From: James Clarke	Read Replies (1) \| Respond to of 4691

UST. Nice work, Mike. Here's my analysis of the tobacco industry. UST - I looked at the business closely a year ago and really questioned the barriers to entry. You know the competitor Swisher or something like that. I thought they were dangerous. But since then the competitive advantage seems to have reasserted itself. And I did not realize they were buying back shares like that. As for overcapitalized, you missed my point. I said they were OVERcapitalized, not overleveraged. Look at the cash flow. These guys could leverage the company and kick out a dividend of $20-30 a share. Or at least they could have before tobacco became a political pariah. Too late. There may be great value here, especially because even the worst tobacco legislation may not damage smokeless tobacco much. But make no mistake, they're next. I made a lot of money on Philip Morris before this Washington stuff started, and have been out of the stock since the day it ran up on rumors of a settlement. I don't trust Washington, and I was dead right. I sold about 20% of my portfolio in Philip Morris at 45 last February and have never gone back. There are several ways to play the tobacco industry, all of which are very contrarian, and each of which look like "value" in their own way. 1. RJR - bankruptcy risk is very real. Yield of 7.4%. Plus you've got the non-tobacco value of Nabisco worth four dollars more than RN's stock price. If it sounds too good to be true, it very well may be. I would not touch RJR. You've got much more risk than Philip Morris because of the balance sheet, but since Camel's business gets killed by Marlboro, especially internationally, you get none of the long term reward. 2. MO - one of the greatest money machines in the world - the key is they have the foreign tobacco business which RJR lacks. We're talking Coke vs. Pepsi. 4.4% yield? Very tempting. The stock would go to 50 if things in Washington calm down. But what about bankruptcy? It is a risk, and I would not call it remote. I cannot quantify the liability as long as politicians and lawyers are running the show, so I am going to be conservative on this. But at 30-33 I would almost have to bite. 3. UST - a different segment of the industry (smokeless) and one which is not being directly targeted by the politicians...yet. Lousy management, but the kind of business that my dog could make money out of. 6% yield with a balance sheet and a unique Washington risk profile that make bankruptcy unlikely. 4. LTR - Loews. Say their tobacco business were worth zero. The stock is worth about $110-120. It trades at $89. Same story as RN, without the leverage. This puppy's not going bankrupt anytime soon, but I would not invest in this industry for an upside of 20% (whatever the settlement, LTR is still going to trade at a big tobacco discount). Plus, I want the tobacco economics if I am going to take this kind of risk. LTR's tobacco business is a small part of an investment in the company (except when you're talking risk). Hope this analysis is helpful.

To: Michael Burry who wrote (194)	6/19/1998 9:44:00 PM
From: James Clarke	Read Replies (3) \| Respond to of 4691

Buffett Announces BRK is Overvalued Hey guys, did you read between the lines of the acquisition announcement today? The biggest acquisition Buffett has ever done. This position is now significantly bigger than Coke, and correct me if I'm wrong, probably bigger than GEICO. Buffett passed on General RE last year when it was trading much lower, and now he buys it at double that price. Why? Because he's paying in stock. If you read Buffett, you understand the difference between paying in stock and paying in cash. If you believe your stock is overvalued, you can buy a fairly valued business at a discount. I think that's what happened today. To state it a bit more strongly, Buffett just went short $22 billion worth of Berkshire Hathaway. That's not how other companies would look at a stock transaction, but that's how he has written about it in the past. We may have just seen the top of the market.