Brian Yacktman and YCG's investment team periodically write up-to-date investment thoughts right here on this blog page.
During the third quarter of 2016, despite a uniquely dysfunctional election season, the S&P 500 generated a solid 3.85% gain. While the randomness of short-term market movements clearly could have yielded a different result, we are nevertheless amused by the apt metaphor that this turn of events offers up. In the face of considerable uncertainty and numerous problems in both the world and the United States, the collective efforts of humanity to better their circumstances moved society’s wealth f… read more
Since most investors are impatient with greedy aspirations, market inefficiencies are often found among businesses with predictably favorable long-term economics but soured short-run prospects. Let’s see how Nike fits into these two concepts.
We believe athleisure is in a secular uptrend. All species are wired to survive, and so, as a society, we value fitness as it leads to longevity. This basic need, combined with both population growth and the increasing discretionary time and income available a… read more
Only a few short months ago, we were writing about the markets plunging 10% over anxiety of a Chinese devaluation, only to then rebound shortly thereafter. In even quicker fashion, markets apparently discounted the odds of Britain leaving the European Union (EU) as they heavily sold-off on the news and briefly fled to safety, fearing “Brexit” would have global repercussions. But in what seems to have been the blink of an eye, the S&P 500 index has already rebounded and is posting fresh records as … read more
Over the first twelve trading days of the year, the S&P 500 experienced a 10% decline, the second worst start in the history of the index. At the time, many commentators were arguing that this dubious distinction portended more pain for the remainder of the year. Subsequently, much to their chagrin, the S&P 500 rallied all the way back to end the first quarter with a 1.35% gain, supporting our long-held belief that markets are unpredictable in the short to medium term. We also believe the fear-driven… read more
Richemont is the owner of brands such as Cartier, Van Cleef & Arpels, Vacheron Constantin, and a number of other ultra-high end Swiss watchmakers. Richemont generates about 54% of its revenue from its jewelry maisons, about 30% from its specialist watchmakers, and about 16% from other businesses such as Montblanc and Peter Millar. Roughly 70% of profits come from the jewelry maisons, with the remaining 30% coming almost entirely from the specialist watchmaker business. Geographically, the company… read more
We spend a great deal of time here and elsewhere explaining the merits of our strategy of primarily owning what we believe to be some of the best businesses in the world, with characteristics such as high returns on capital, conservative leverage, steady growth, pricing power, and geographic diversification. One of the advantages we most emphasize is our companies’ resilience. In stark contrast to many other stock market constituents, we believe that the vast majority of the companies we own will… read more
Recently, we acquired a position in Discovery Communications (DISCK). Discovery Communications is a market-leading Pay-TV programming company that produces non-fiction media content for a variety of channels. These channels include the flagship Discovery Channel, Animal Planet, and TLC. Each of these channels currently has over 90 million subscribers domestically and over 300 million internationally. In addition, Discovery also has joint venture channels such as the Oprah Winfrey Network (OWN, a… read more
Recently, we accumulated shares of Charles Schwab, one of the largest brokerage, banking, and asset management firms in the United States, with over $2.4 trillion in client assets, almost 9.4 million active brokerage accounts, and nearly $96 billion in interest-bearing banking deposits. Other large firms in the industry include Fidelity with over $4.9 trillion in customer assets, Blackrock with over $4.3 trillion, Merrill Lynch with over $2.2 trillion, Morgan Stanley with over $2 trillion, Wells… read more
Over the last month, we’ve built a position in Verizon Communications (VZ), the largest wireless provider with over $80 billion in wireless revenues, 105 million retail customers, and coverage of more than 95% of the U.S. population. At about 34% market share each, they and AT&T have a commanding lead over their only other significant competitors, Sprint (16% share) and T-Mobile (15% share). We believe we’ve been able to acquire this business at an attractive price as result of two primary factors.
The fir… read more
Recently, we took a position in Express Scripts (ESRX), the largest Pharmacy Benefit Manager (PBM) in the U.S. PBMs help insurance companies bargain with drug manufacturers and/or retailers to get better pricing. Since payers for drugs are fairly fragmented, a PBM can leverage its scale to negotiate better prices on branded and generic drugs. The PBM then takes a cut of the cost savings it generates for its clients. Interestingly, each additional claim the PBM generates is more profitable than the… read more
Western Union (ticker: WU) leads the money transfer industry with locations in more than 200 countries and 16,000 corridors, creating a network effect, brand awareness, and scale advantages. They boast over 500,000 agent locations, over 100,000 ATM locations, and settlement capabilities in over 120 currencies. The majority of WU’s revenue is from cross-border transfers generated outside of the U.S. Their network is 50% bigger than the size of their next largest competitor, MoneyGram (ticker: MGI), a… read more
Health related concerns about soda being linked to obesity, heart disease, and diabetes have led to a corresponding decline in sales of carbonated soft drinks (CSD) in North America, particularly in diet soda (near a 7% decline last year), putting pressure on Coca-Cola’s stock price.
Despite the North American CSD weakness, Coke continues to expand with volume growth in emerging markets such as Latin America, India, China and Africa. In fact, 80% of their profit stems from international markets i… read more
Recently, we’ve been getting some questions asking us to explain why Procter & Gamble (PG) is our largest holding. In answering these questions, we realized that our reasoning for owning P&G in such size could prove instructive and thus decided to post a detailed write-up of the investment. Hopefully, by the end of this write-up, you’ll understand not only a little more about why we like Procter & Gamble, but also a bit more about how we think through investments and portfolio construction in gen… read more
On the heels of two disappointing earnings reports, we’ve built a position in Oracle (ORCL), the dominant provider of enterprise database software (74% of revenues and 87% of profits), hardware (14% of revenues and 9% of profits), and services (12% of revenues and 4% of profits). Investors have bid the stock down as a result of weak sales to new software clients, which they worry is a sign of competitive encroachment by cloud-based providers such as Workday and Salesforce.
We think investors o… read more
In our client letters, we often mention our concerns so that you are aware that we are not blinded by the “animal spirits” in this upward trending market. We voice these concerns so that you know we are indeed watching, observing, and being vigilant as we construct and manage your portfolio. However, you likely have noticed we are always quick to mention that we are long-term optimists about our portfolio holdings. This contrast may seem counterintuitive, and so, rather than discussing our concerns as … read more
Over the past three months, we’ve built a position in DirecTV (DTV), the largest satellite cable television provider with 20 million subscribers in the U.S. and 15 million in Latin America. While most of the cable and media companies have rocketed upward over the past couple of years, DirecTV has put in a relatively quotidian performance, leaving it valued at a very significant discount to its cable peers, which trade at about 16x 2013 EPS estimates versus DirecTV at a mere 12×. There are a couple o… read more
The YCG separate account strategies significantly lagged the S&P 500 in 2012. While we view the January through December calendar year as relatively arbitrary and too short a time period to judge the long term performance of an investment strategy, we thought it would be helpful to current and prospective clients to explain the major reasons for this underperformance and to reemphasize the key tenets of our investment philosophy.
Our total return lagged the market for four primary reasons:
*1) We… read more
We’ve had some clients ask our views on the Presidential race and the effect it will have on stock prices. In the short-run, some pundits have suggested it’s a win-win outcome. In other words, if Obama wins, then the economy is perceived to be recovering and good for stocks; and if Romney wins, he could put policies in place that will be favorable to business enterprise, job creation, and growth. They add that a Republican president could resolve the “fiscal cliff,” which refers to the end of this… read more
Recently, shares of MSCI dropped 30 percent on news that Vanguard, one of its largest clients, would be switching benchmark providers to FTSE to cut costs. By our estimation, this $24 million loss in revenue and operating income translates into a 10% haircut to MSCI’s trailing earnings. However, the reason the stock is down much more is due to the fear that this change will force MSCI to cut its prices in order to retain the remaining customers in its asset-based fee business. We believe these c… read more
We recently took a position in Aon (AON), the world’s largest insurance broker and human resource consultant/outsourcer. As a broker, Aon analyzes the insurance needs of corporations like Pepsi and Procter & Gamble and, using its virtually unrivaled global network of providers and database of transactions, matches these clients with the insurance companies that provide the best risk solutions at the lowest price.
Aon’s insurance brokerage business is excellent because, as a result of significant con… read more
Jason Zweig provided an interesting parallel between Facebook and the St. Petersburg Paradox. (“Facebook and the St. Petersburg Paradox”, Zweig, Feb 4, 2012, WSJ) The paradox is as follows:
In the 18th century, the Bernoulli cousins, Nicolas and Daniel, proposed to play a game of tossing a coin. Every time you toss tails, you double your prize and can toss again. You will keep tossing until you come up heads. At that point, you are paid whatever prize you have earned and the game ends. The pri… read more
Shares of Vivendi, a large media and telecom conglomerate in France, took a dive recently due to reduced profit expectations at their largest division, a subsequent dividend cut that resulted from this negative future outlook, and renewed concerns about a recession in Europe as sovereign debt issues continue to plague the region. In our experience, complexity, which Vivendi’s byzantine corporate structure provides in spades, plus a rapidly falling stock price, equals a great place to search for v… read more
The stock market put on quite the show, with the S&P 500 climbing a staggering 12.6% – the best first quarter showing since 1998. Many forecasters’ year-end targets have already been surpassed or are very close to being met, yet the rise in equity prices was not nearly as broad as one might think. Approximately one-third of the index’s gains could be explained by a mere 10 of the 500 stocks, with Apple alone accounting for nearly 13% of the gains. This seems appropriate, since the S&P 500’s first q… read more
Tesco is a multinational grocery and merchandise retailer based in the UK. Based on revenues, Tesco ranks number three among the world’s largest grocers just behind Carrefour in France and Wal-Mart in the U.S. Tesco is also located in over a dozen other countries around Europe, Asia, and North America.
The company’s shares took a dive in January after management issued a profit warning due to their struggling UK business. Management admitted to running a little too lean, which suggests margins may… read more
Ever since strong Black Friday sales were reported at the end of November, combined with the news of the ECB’s (European Central Bank) move to flood more dollars into Europe, the market has been on a forward march. True, holiday shopping did look solid, but the problem is personal incomes are not growing as fast as spending – an unsustainable course. We will not delve into our thoughts on Europe, except to say the closing act looks bleak.
At the end of Q1 2011, we wrote in our quarterly letter to … read more
Each day the market is open, we have software that beautifully displays a list of ticker symbols and provides their real-time price quotes and percentage changes from the prior day – if a stock is down, the numbers are shown in red (my brother Steve refers to these as “Tomorrow’s Heroes”), if a stock is up, the numbers are shown in green (he refers to these as “Yesterday’s Losers”). For much of the year, it seemed on any given day we would either see everything on our list in green, or a sea of r… read more
Earlier this year, we decided to take a position in Abbott (ABT). Recently, we have decided to move out of our investment in Abbott and rotate into something we are currently finding more attractive – CR Bard (BCR).
The company’s name may not be a common household term, but it certainly produces products that are used every day. Bard is most known for producing catheters. They also produce a variety of other disposable medical products through their four core divisions: Urology, Oncology, Vas… read more
It’s almost hard to believe that shares of Corning (GLW) have fallen to almost one-tenth of the price they fetched a decade ago, especially considering that since that time the glass company has almost doubled their earnings. Corning is one of the former darlings from the tech bubble that has suffered severe multiple compression over the past decade. Yet, as the pricing pendulum had swung too high in the past, it may have now dipped too low to ignore.
Corning’s revenues suggest a company wit… read more
While our focus is picking individual stocks, we occasionally like to take a step back to see if the broad market is over or undervalued to help paint a backdrop to our current environment. Last quarter, we wrote a blog explaining why the market appeared to have hit new all-time highs, even though the S&P 500 was trading far below its previous all-time high. The market has since dropped 17 percent from the May high, and we are frequently hearing the media state that… read more
Yesterday, the Fed announced their intent to repeat a strategy implemented in 1961 called “Operation Twist.” Under the new program, the Fed is going to sell $400 billion in shorter term Treasuries (3 years or less) and use the proceeds to purchase long-term securities, as well as take the payments from their current mortgage portfolio and reinvest them back into mortgages (whereas before, they were reinvesting proceeds into Treasuries). The object is to lower long-term rates to aid the ailing hou… read more
During this latest downturn we scooped up shares of Bank of New York Mellon’s (BNY Mellon) stock, which has taken a beating as of late as it continues to be clumped in with other banks and broader market fears regarding mortgage losses, industry regulation, and spread net interest income. Additionally, recent news has drawn a negative focus on BNY Mellon’s lawsuits regarding improper foreign exchange fees (which is less than half of 1% of the company’s revenue), and its decision to begin charging fees … read more
Consumers often think of Hewlett Packard (HP) as a computer business, but it is much more than that. Like Dell, its competitor, HP has recognized that the tablet and smartphone revolution will slow traditional pc sales, so they have started to focus in other areas.
We are attracted to the breadth and diversity of the company because it’s more than PCs, but IT & BPO (Business Processing Outsourcing) services, printers & ink cartridges, storage & servers, software, other handheld devices, and n… read more
If you’re a frequent reader to our blog, then you’re probably already aware that we took a position in News Corp. last January (see There’s No News Like News Corp.). With all the phone-hacking scandal news surrounding News Corp., we felt we should briefly address our viewpoint over the matter.
While this is not something Rupert Murdoch would want in his media empire’s history, we believe it will prove to be simply a bump in the road, nonetheless…. read more
During the quarter, the S&P 500 reached an intraday high of $1370.58 on May 2, 2011. Despite the fact that this price remains 13% below its previous intraday high of $1576.09 reached on October 11, 2007, we would argue that the general market is back to pushing new all-time highs. This becomes particularly apparent when you look at another index such as the Russell 2000 (primarily a small-cap index) where last quarter the price level surpassed prior highs from 2007 by 1.4%. But this phenomenon is… read more
Lately, Research In Motion (RIMM) just can’t get any love. Analysts all over the place are already pronouncing the company dead. To be sure, the mobile phone graveyard is filled with cases of Original Equipment Manufacturers (OEMs) that had a significant product but failed to follow structural market shifts (ex: Motorola, Nokia, Sony-Ericsson, LG, and Palm). Yet RIMM isn’t iced on the coroner’s table just yet.
There’s no doubt that RIMM and its Blackberry mobile phone are in trouble. In fact, d… read more
Cisco certainly isn’t a Wall Street darling. In fact, investors of Cisco since July of 1998 have had a loss in the stock. But Cisco isn’t completely to blame. Through no fault of its own, Cisco was at one time one of the tech stock kings, trading higher than 100 times earnings only to find its price falling back to earth with the rest of the tech bubble (gravity does that to objects high in the sky with no apparent force keeping them up…) Now, at a single digit P/E, nobody wants anything to do … read more
Aeropostale (ARO) certainly doesn’t seem quite aerodynamic in facing current short-term headwinds. Perhaps that’s why many investors are valuing the company like it is set to crash and burn in the foreseeable future. While Aeropostale faces some challenges to be sure, there are definitely some things to get excited about.
Aeropostale can be seen more or less as a discount version of other teen specialty retail shops such as Abercrombie and Fitch or American Eagle. As such, Aeropostale’s growt… read more
Corporate profits have been great. Through the downturn, a lot of excess fat was cut, and companies have come back leaner and meaner than ever before. In fact, operating margins are back to pushing up against all time highs. But when the Fed turns off the spigot, is all this sustainable? The definition of capitalism alone would tell you operating margins are mean reverting, with or without the Fed’s help. And even without the logic of competition gnawing at fat margins, we are of the mindset… read more
Silver fever seems to be in season. Over the last couple of days, the number of shares traded in the iShares Silver Trust, the biggest silver ETF, topped the SPDR S&P 500 ETF, which is usually one the most actively traded ETFs around the world. Silver prices shot past 31-year highs on its way towards $50, up over 169% since last August.
The inflation scare, plus the idea of buying silver as “the poor man’s gold,” continues to attract more and more bubbly speculation. Interestingly, we have recen… read more
Hungry? Chances are that if you’re eating out, Sysco helped put your food on the plate. The Houston-based company is the single largest player in the $215 billion North American food-service business, distributing a variety of foods and dining supplies to a broad range of customers, including restaurants, hospitals, schools, and hotels. The company commands a dominant 17% of market share in the industry, so despite being in a low-margin business, Sysco has proved it can make high returns on invested c… read more
“Debt is like any other trap, easy enough to get into, but hard enough to get out of.” Those words, once penned by Mark Twain’s contemporary, Henry Shaw, could not resound any louder than it does today. With the national debt exceeding $14 trillion, we are trapped in uncharted waters in the largest monetary experiment in history.
Keynesian economics rules in Washington, where the prescribed drug for our economy’s problems is another dose of stimulus. Like Pavlonian dogs, the markets seem to reac… read more
With the end of the first month in 2011, we frequently hear the coined phrase “As goes January, so goes the year.” If this is the case (and we do not subscribe to such superstition by the way) then with the S&P 500 index up approximately 1.6% for the month, we should be in for a pretty good year right? Shares of Salesforce.com trading at around $131 a share, up over 100% in the last year is evidence of the bullishness we’re seeing in the market. How much further can this market go? Where are the b… read more
Recently, pharmaceutical companies have been left behind in a roaring market amidst fears of expiring patents and changing regulation. So far this year, the S&P 500 total return has been 4.38% whereas pharmaceuticals have had a return of only 1%. However, the general discounting of an entire group, such as pharmaceuticals, can lead to a few gems hidden in the rough. One such case is Abbott Laboratories (ABT), a company that we believe deserves to trade at a premium amongst the group.
Abbott’s s… read more
It’s morning. You wake up, get ready, and go to get some breakfast. Then you read your morning newspaper. Wait, maybe it’s your morning news on an iPad, laptop, or even an iPhone. Later in the evening, you may choose to watch a movie. Will it be a DVD you own or from Red Box? Or how about some TV streaming digitally through Netflix or Hulu?
You get the point. The entertainment industry has definitely been seeing a lot of technological disruption in the past few years. In fact, the most predictable asp… read more
The market is enjoying incredible momentum, buoyed by the Federal Reserve’s $600 billion quantitative easing program (“QE2” is the popular Wall Street name), the hopes of less anti-business rhetoric with the Republican victory in the house, and the Bush tax cuts extension. All of these reasons have created expectations for a solid recovery and the belief that the prospects of a double-dip recession are obsolete. The only fear that seems to prevail is fear of missing the bandwagon as the market surge… read more
Recently, one of our clients sent us an email about an app he was excited to have found to monitor his portfolio on his iPhone. We thought his research could be valuable for other YCG clients, so we posted his email here on our blog. Here’s what he wrote:
I recently did some research on the best smart phone app to monitor my YCG portfolio, and think I determined the best of the bunch — Wikinvest. Once you install the free Wikinvest app on your smart phone, you’ll be asked to link the app to… read more
What began as a timber company, has now become the largest real estate development company in Florida. Incorporated in 1936, St. Joe (JOE) owns 577,000 acres of low cost basis land which is primarily located in Northwest Florida. Of that amount, 70% is within 15 miles of the coast of the Gulf of Mexico.
In order to extract value from their real estate holdings, they donated 4,000 acres of land to the Airport Authority to relocate the Panama City Airport and build the Northwest Florida Beaches… read more
Academia focuses much on modern portfolio theory. One of the major assumptions upon which this theory is built is comparing things to the so-called “risk-free rate,” which in practice Treasuries are used as proxy. But are Treasuries really risk-free? We want to dispel the thought that just because something is labeled as a “bond”, it is somehow less risky than an equity. Labels aside, whether it be called a bond, equity, or real estate, when discussing expected returns and risk levels of any … read more
H&R Block’s stock (ticker: HRB) reached a 52-week intraday low of $12.51 last Thursday in anticipation for expected losses in their quarterly report. It appears that investors were fearing the worst about HRB’s ability to deal with its mortgage loan repurchase obligations and mortgage loan portfolio, regulatory changes that would affect its refund anticipation loans, and also changes in the tax preparation industry in general. How much should a potential investor worry about the company’s ability to … read more
Yesterday, the National Association of Realtors said existing home sales fell 27% in July month over month to a seasonally adjusted annual rate of 3.83 million – the lowest level in at least 11 years. Granted, much of this can be attributed to sales being pushed from July into June because homebuyers were scurrying to take advantage of the $8,000 homebuyer tax credits that were going to expire (they ended up being extended to Sept. 30th). But still, this statistic should raise some eyebrows.
Seems… read more
In the last few months, for-profit education stocks have flunked, in many cases dropping 50% or more from their highs. The negative headlines have been focusing on increased scrutiny over two main issues: recruitment procedures and gainful employment.
A couple weeks ago, the Government Accountability Office (GAO) released a very disturbing report detailing several deceptive recruiting practices. For example, undercover applicants were encouraged to falsify information on their financial government… read more
Only two months ago, the Fed said a recovery was proceeding and there was much talk of an exit strategy. Today, the Fed surprised many and shook the markets when it changed its tune seemingly overnight announcing the “pace of economic recovery is likely to be more modest in the near term than had been anticipated.” With interest rates already near zero, the Fed has already used up its most traditional ammo of stimulating the economy by lowering rates. As a result, it has decided to take an unc… read more
I opened up the “Money & Investing” section of the WSJ today and read in big, bold letters “Big Investors Fear Deflation.” The risk of deflation seems to be the hot topic recently, so I thought I’d throw in our two cents.
We believe deflation is certainly a possibility in the short run, particularly when it is believed to be coming. Deflation can be a self-fulfilling prophecy when purchases are delayed in anticipation of lower prices, exacerbating the problem. In spite of this, should it… read more
This past week Goldman Sachs ended up paying a big “fine” while admitting no guilt for being involved in the sub-prime meltdown. My read is that basically it is a rebate to the government for bailing out AIG and thus allowing AIG to pay Goldman for the terrible underpricing of insurance contracts (subprime mortage puts) AIG wrote and Goldman sold at a big markup to smart investors who figured out a way to profit from the meltdown in the housing industry.
An analogy: Someone comes to Goldman… read more
In the first quarter of the year, we sold out of our position in Covidien, a healthcare company known for their surgical instruments, as we believed it had reached our fair value estimate. This past quarter, we have essentially reinvested the proceeds from that sale into Becton, Dickinson & Co (ticker: BDX). Headquartered in New Jersey, BDX, like Covidien, is a medical company engaged in the manufacture and sale of a broad range of medical supplies, devices, laboratory equipment and diagnostic… read more
Investing in emerging markets for growth seems to be quite alluring. Exchange Traded Funds (ETFs), mutual funds, and other investment vehicles have sprung up in recent years making investing in emerging countries extremely accessible. However, here at YCG, we often find we are best able to invest and take advantage of the growth in emerging markets by investing in the United States. How so?
Pat Dorsey, Director of Equity Research for Morningstar, conducted a study to see how much revenue… read more
This morning, in a WSJ article titled “Consumer Mojo Lifts Profits,” we read:
“The broadest measure of U.S. consumer spending, the Commerce Department’s personal consumption expenditures, rose at a 1.6% inflation-adjusted annual rate in the fourth quarter. Based on all the latest data on retail sales and the like, forecasters at Macroeconomic Advisers, St. Louis, estimated personal consumption expenditures increased at a 3.6% rate in the first calendar quarter.”
We must admit we have been shocked… read more
Happy Tax Day! A few days ago, the WSJ referenced a study by the Tax Policy Center that "found that to reduce the federal budget deficit to a sustainable 3% of GDP, the government would have to find an average of about half a trillion dollars each year in new revenue (or spending cuts). To cover that amount through tax increases on the top two brackets—roughly, families with more than $209,000 in taxable income—top rates would have to go from the current 33% and 35% to 72.4% and 76.8%, the stu… read more
The stock market has run ahead of underlying fundamentals and we believe this rally has very little upside remaining. When the S&P 500 reached its all time high in October 2007, it was an unusual time. The market was at peak profit margins and lofty P/E multiples – a scenario that is unlikely we will see anytime soon. Furthermore, with the exception of the financial sector, most stocks are beginning to trade near the same prices they were during that peak. This may not seem correct because t… read more
Today’s front page of the WSJ has an article titled, “Mortgage Increases Blunted.” As you know, another oncoming wave of resets on adjustable rate mortgages (ARMs) has been a concern of ours. This article did bring up a good point, though:
“Lower-than-expected interest rates, coupled with efforts to aggressively modify loans, are likely to mute payment shocks for some borrowers.”
While this is very true, we’d also like to point out that mortgage resets will continue into the future, and there… read more
In Barron’s this week, Alan Abelson writes about a discussion with Stephanie Pomboy, the Founder and President of MacroMavens, a company which provides macroeconomic research to the institutional investment community: “[There was approximately] a $10 billion reduction in the banks’ loss provisioning last year [which] was a major contributor to their gain in fourth-quarter earnings…There’s the possibility that banks are forced to mark to market all the toxic securities they carry at cost. If the… read more
Even though the broad market has rebounded sharply, it does not mean every stock has moved in concert. One such example is with Western Union, the world’s largest global money transfer business. Much of their business stems from immigrants who come from poorer nations to wealthier nations and send money back home to their family members. With a high proportion of their revenues coming from the Hispanic population, a major concern is the slowdown in manual labor (such as home construction) as w… read more
After I wrote the last blog, I realized I may have left you wondering, “If the federal stimulus is helping GDP growth, if we do start to retrench, why not just do another one on the government’s tab?”
The problem can be seen on the cover of the WSJ this morning, “Deficit to Hit All-Time High.” The government is not planting seedlings that will grow and continually yield fruit, but instead simply handing out fruit, and eventually the stockpile (being supported by debt) is going to run out. … read more
According to preliminary numbers (these numbers frequently are adjusted months after the fact), the government reported fourth quarter gross domestic product (GDP) jumped 5.7%. Since real GDP increased 2.2% in the third quarter, I suppose that means with two quarters of growth we are considered to be officially out of the recession – time to celebrate?
From the March lows, the S&P 500 has gained 68%, although it remains 25% below its all time high. It might seem reasonable and even stimulating to envision the S&P 500 returning to $1,565 where it sat in October 2007. However, some words of caution – keep three things in mind. First, operating margins were at an all time high, about 40 percent above average. Second, the price to earnings multiple on the overall market was above historic norms, which again, were being multiplied on inflated e… read more
Over the weekend, the WSJ published a detailed article about all the investment opportunities that were brought to Warren Buffett during the debacle. The article begins with some sage advice:
“Warren Buffett believes his best deals during the economy’s biggest belly flop since the Crash of 1929 may well turn out to be the ones he didn’t do.” -Scott Patterson
Ever since I began investing, my father has repeatedly told me "The #1 rule in investing is don’t lose your client’s money. The second… read more
As many of you know we manage separate accounts and implement a multi-strategy when it comes to managing our client portfolios. We have few constraints, allowing us to go long, short, or hedge our positions using options (you’ll find that we often sell cash secured or “naked” puts and/or covered calls). We recently took advantage of this flexible mandate by shorting Amazon (AMZN), with its’ lofty valuation we see tremendous downside in this stock and are happy to take the short side of this trade…. read more
Last week, I visited a good friend of mine in Chicago. As we were driving back from the airport, he mentioned he had some friends in the area who were behind on a couple mortgage payments. He told me that they called their banker and were actually advised to NOT pay their mortgage so that they could qualify for government aid and get their loan balance reduced and thereby their monthly payments lowered. You know things are getting messy when there is the perverse, unintended consequence to purposely… read more
Do you recall the Fed forecasting positive growth for 2008? When it comes to inaccurate forecasts, it looks like the Fed has some company. Earlier this year, the Obama administration had predicted the unemployment rate would peak at 8 percent before beginning to fall toward the end of 2009. The numbers are in. Drum roll please…the nation’s unemployment rate hit 10.2% for the first time since 1983, and only the second time since official recordkeeping began in 1948. Well, when it comes to forecasting, w… read more
Kraft is the second largest food maker in the world behind Nestle, with #1 market share in over two-thirds of its categories. They have a long list of popular brands that you would recognize – Kraft Macaroni & Cheese, Velveeta cheese, Oscar Mayer lunch meats, Oreo & Chips Ahoy cookies, Ritz crackers, Planters nuts, Kool-Aid, Cheez Wiz, A1 Sauce, DiGiorno pizza, Philadelphia Cream Cheese, Miracle Whip, and many other well known brands. However, their growth prospects are admittedly low.
By n… read more
Successfully run by the Roberts family, Comcast enjoys great scale – the largest U.S. cable TV operator with about 24 million subscribers in 39 states. Through their cable infrastructure, they also offer high-speed internet and telephone services, with about 15.3 million and 7 million customers, respectively. This triple-play offer is very valuable in not only adding to customer loyalty, but there is little added variable cost to these upgrades. Additionally, they own some cable stations such a… read more
In the early part of the 20th century, the average mutual fund turnover was in the range of 20% to 10%, meaning the average holding period of a stock was 5 to 10 years. This turnover has increased to over 100% (meaning a completely different portfolio every year), and spiked even further last year. There are many reasons for this, but in large part, it’s because over the years, investors have increasingly become short-term oriented. In 2006, USA Today cited a survey conducted by Retirement Corp. o… read more
The cover of today’s WSJ has a statement, “U.S. auto sales hit their highest monthly level in more than a year in August, bolstering hopes that the industry’s recovery will continue.” Hopeful for an auto sales recovery – are you kidding me?!? Can sentences be called an oxymoron? This “logic” makes no sense to me. The cash for clunkers program only increased the probability of a future slump – we have borrowed from future sales and shifted them to the pres… read more
Investors are cheering an increased rate of home sales. Let’s look at the data more closely.
We’ve recently learned that 1 in 8 households with mortgages are in foreclosure and/or behind on payments. In the beginning, it was subprime borrowers with mortgage resets that couldn’t refinance who were defaulting. Now, it’s the prime borrowers who are picking up the pace of foreclosures and delinquencies due to traditional reasons such as rising unemployment.
On the front cover of the “Money & Inves… read more-
As we’ve already discussed in recent blogs (in particular, visit Fed says: Recession Near End), retail sales appear to be up, but when you strip out the boost of auto sales from the cash for clunkers program, spending is actually weaker. The more frugal consumer as of recent hasn’t disappeared after all. During this rally, investors seem to believe that consumers who were trading down are now going to be trading up. However, unemployment is still ris… read more
Since the March lows we’ve watched the S&P 500 index rally over 50%. The rally has been fueled primarily by cyclical, lower quality stocks found in the financial, material, and retail sectors to name a few.
Investors have rushed into economically sensitive stocks as their appetite for risk has increased. One can’t help but think there’s an element of investors putting cash to work in fear of missing out on a further rally. Whether the rally continues to run up or if we’re ready for another… read more
Yesterday, I was eating at Which-Wich, a sandwich shop around the corner. As I walked in, posted against a tack board was the front cover of a local newspaper. In big, bold letters it read, “Fed says: Recession Near End.” I don’t mean to be cynical, but I had to chuckle a little. Wasn’t it this same Fed that, in November 2007, forecasted positive growth for 2008? I’m not sure how much weight that statement carries.
Even if stats come out over the next few quarters, or even a year, that we’r… read more
The front cover of the WSJ had an article discussing the current sugar shortage (“Food Firms Warn of Sugar Shortage”). It stated that large food companies such as Kraft and General Mills are petitioning the Agriculture Department to ease import restrictions (the government imposes restrictions on how much tariff-free sugar they can import). The food companies warned that the alternative would be consumers paying higher prices. Notice, they didn’t warn that their own profit margins would be cr… read more
I keep hearing so much about the “success” of this “Cash for Clunkers” program and I’m getting more frustrated the more I hear about it. So, I decided to Google it (or Bing it) to learn more about this nonsense. I typed in “Cash for Clunkers Nonsense” and came across a well written article that summed up all my thoughts in a nutshell. Rather than reinvent the wheel, I thought I’d share the article. I don’t know anything about the author, other than the fact that I agree with what he says about… read more
Federal debt is out of control. We’re all well aware that unemployment is rising and capital gains are becoming capital losses as the stock market falls. What’s this translate to? Plunging tax revenue – it dropped 34 % over the past year to $138 billion – the biggest decline in 28 years. At the same time, following Keynesian economics, the government is becoming the spender of last resort through a huge $787 billion stimulus package (and I would bet there will be more stimulus packages on the … read more
We came across a fascinating article this morning written by Andy Xie from the website Caijing.com.cn. The piece is titled Fear the Dark Side of China’s Lending Surge
In short Mr. Xie’s commentary highlights how the Chinese bank’s lax lending practices are giving rise to an increased amount of investment, not into private companies, but rather into asset speculation causing commodity prices to rise. What’s so surprising to us is that… read more
From the market bottom, the S&P 500 is up about 34% whereas MSFT is up over 55%. Why is this blue chip behemoth getting a lot more attention on Wall Street?
Well three things…1. There is much talk about Windows 7, Microsoft has maneuvered this product effectively through the various preparatory stages and appears to be set for distribution in the fall of this year. 2. “Bing” is now the new buzz word and is gaining traction very quickly in the world of search. Instead of friends telling me to… read more
Although a manufacturer of consumer products, hospital products, and animal health products, Pfizer is known for being the largest producer of pharmaceuticals in the world boasting annual sales of over $46 billion, 58% of which comes from overseas. Some of their well-known patented blockbuster drugs include: Lipitor, Viagra, Zoloft, Celebrex, Zyrtec, Zithromax, and Diflucan. Before the end of the year, pending shareholder approval, Pfizer has agreed to purchase rival Wyeth for $68… read more
In a previous blog, we discussed the case for used cars and our small investment in CarMax (KMX). We have additional exposure to the used car market through a much larger investment in AmeriCredit (ACF).
AmeriCredit is a sub-prime auto loan business (primarily used cars) based in Fort Worth, TX. In today’s market, the term “sub-prime” doesn’t draw many fans, but in large part, this is what helped create the opportunity. Missing home payment… read more
Today, Target shareholders shot down Bill Ackman’s proposal to nominate 5 candidates to the board, including himself. We believe they were right on target.
Target has been one of the few to succeed in battling Wal-Mart in the discount retailing space by striving to create a different shopping experience. They target a more affluent, female customer base (an estimated 75% are female) and get about 40% of sales from fashionable home decor and more stylish apparel. This is one reason they have… read more
Yeah, right! Yes, you can. I don’t know anybody in a life or death matter who would say, “Doc, I’m strapped for cash, can’t afford that stent.” The numbers Medtronic reported today support that. In an economy needing a defibrillator, last year Medtronic seemed immune to the downturn. Revenues were very robust, up 8% despite a strong dollar (more than 1/3 of their revenues are overseas in 120+ countries). In fact, all of their 7 businesses grew year over year, with five of them growing in double… read more
The other day I came across a statistic that there are about 250 million vehicles in the US and approximately 5% (or 12.5 million) are junked every year. Current auto sales show we are only producing a little above 9 million a year. Assuming the demand for vehicles remains the same, this 3-3.5 million shortfall means consumers are going to be relying more and more on used cars. Of course, Americans could decide to use more public transportation or rid of their 2nd car, but this gap is so large,… read more
We couldn’t help but laugh when we opened the WSJ this morning. For years, we’ve probably all noticed Cheerios cereal boxes claiming that the cereal has cholesterol-lowering heart benefits. There is evidently a strong clinical study supporting this, but apparently, the FDA says if General Mills states “clinically proven to help lower cholesterol” then that makes the product a drug.
“The FDA…suggested that if General Mills wants to keep the box labeling as is, it should file a new-drug application… read more
What’s wrong this title? This was on the front page of the WSJ today…unbelievable!
Disclaimer: _The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed d… read more
UnitedHealth provides health insurance to more than 70 million individuals. Last Tuesday, as we expected, they posted strong results. One source of concern has been that with unemployment rising, membership from business health insurance plans will shrink. While there has been a reduction here, revenues from Medicare have more than offset this decline by continuing to grow at a healthy pace.
At $23/share, we believe UnitedHealth is significantly undervalued. Thus, we were excited to see they… read more
Today’s cover of the WSJ has an article titled “Companies Spy an End to Declines in Earnings.” This title caused us to reflect upon our last quarterly letter where we stated:
Unfortunately, we believe this hope for recovery is premature. This is not to say we will not see a further advance in stock market prices. Prices are simply a function of supply and demand, and in the short run, all sorts of factors can come into play affecting emotions. We may see little blips of economic indicators showi… read more
In our March 25, 2009 blog, we mentioned Gap Inc. as an example of overpaying and thereby selling away future growth. We discussed the “Greater Fool Theory” where investors (or rather, speculators) adhere to the belief that there will always be someone stupider than them by paying an even higher price. We felt that today, an appropriate “April Fools” discussion would be to revisit this greater fool concept by taking a look at Wal-Mart. Despite high earnings per share… read more
Back in 1997, all my friends were constantly shopping at The Gap. This was during my early days of learning about the basics of investing. It was clear to me that Gap Inc. (GPS) was going to be a fast growing company. As most people do, I assumed this high growth meant it would turn out to be a fabulous stock investment. So, I told my father he should consider buying the stock for The Yacktman Funds. That day, my father wanted to teach me three lessons.
First and foremost, he taught me a… read more
We’ve been keeping our eye on Copart, Inc. (CPRT) as a potential investment for quite some time. It’s a fantastic business – very profitable with high cash flow and low capital needs, no debt, very high margins, great management, the list goes on. Their main business is to be the liaison for insurance companies to sell salvage vehicles to auction buyers (used vehicle dealers, junk yards, rebuilders, etc.).
Last Thursday, the Board decided to consider a proposal to have senior management foreg… read more
A good friend of mine sent me an email today about a very respectable hedge fund manager, David Einhorn of Greenlight Capital, and how he is making bets on gold. In a letter to his investors, Einhorn wrote, "The size of the Fed’s balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed…Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency,… read more
Yesterday, Citigroup broke below a buck! Yep, that same behemoth of a bank that was once trading above $55 dropped below $1/share.
It reminds me of an article I read somewhere about a year ago. It was titled something like “Citigroup: Do as we say, not as we do.” I recall that it pointed out the irony of Citi analysts urging investors to avoid leveraged businesses. They were essentially issuing a very strong sell recommendation on their very own stock!
I’d like to take you back to something… read more-
After American Express shares began to tumble we made a small stake and have added little by little as it’s shares have declined, and we’ve been eyeing it much more lately – especially at $11/share. AmEx is much more transparent than some of the larger banks such as Citigroup, Bank of America, and JPM. It’s a much more straightforward financial company – their financial assets are much easier to analyze.
It’s also very different than the other credit card companies in three major ways. First … read more
Saw this on the U.K.’s Telegraph online newspaper…a little bit of Internet humor. Enjoy!
Heidi is the proprietor of a bar in Berlin. In order to increase sales,
she decides to allow her loyal customers – most of whom are unemployed
alcoholics – to drink now but pay later. She keeps track of the drinks
consumed on a ledger (thereby granting the customers loans). Word gets around and as a result increasing numbers of customers flood into Heidi’s bar.
Taking advantage of her customers’ freedom… read more
In WSJ’s weekend journal, there was a quote from Pepsi’s finance chief “You can’t…turn on the faucet and have chips come out.”
He was referring to how beverage sales are slowing as consumers choose tap water, but that snack sales are actually increasing. They attributed some of this increase to their ability to raise prices (which comes from owning strong brand names, especially among small price-tag items).
The company name “PepsiCo” is certainly misleading, as the company actually makes… read more-
On the front page of the WSJ there is an article about Coke betting on sales in Russia.
Another advantage of owning businesses with strong brand names, strong balance sheets, and ample cash flow beyond their capital needs, is their ability to expand their empire when the going gets tough.
Coke, among many of the other businesses we own, continues to expand across the globe and also acquire other businesses at bargain prices as valuations drop. They continue to steal market share through… read more
With President-elect Obama proposing that our economy is in diar need of a $700+ billion stimulus package. Our thoughts turn back to what we discussed in our year-end client letter. The thought of combatting this deepening recession that came as a result of having too much debt by borrowing even more…in our opinion, to get ourselves out of this slump by doing more of the same seems ludicrous! I once heard the definition of insanity is doing the same thing over and over expecting different results.
Over… read more
The jobs report is in, and unemployment doesn’t look so good coming in at 6.7%. But we need to realize that this is actually about in line with historic norms of an unemployment rate around 7%. The current unemployment rate would need to double to reach the 81-82 recession levels, and is still nothing compared to the 25% levels seen during the Great Depression. We wouldn’t be surprised to see this number continue to hike up. “Experts” see this number reaching 9% by the end of 2009, we wouldn’t… read more
At Yacktman Capital Group, when we buy common stock of a company we are not just buying stock, but more, we view ourselves and our clients as becoming part-owners of the business. You can read more about our investment philosophy on our website, but essentially we are attracted to businesses that are non-cyclical, have low capital requirements, and as such, have a high and consistent return on tangible assets. The complete anithesis of such a business would be the autos.
This morning GM reached… read more
In today’s WSJ, in an article titled “Wal-Mart Flourishes as Economy Turns Sour”, this morning I read the following statement:
“For every $1 spent in the last year on goods other than cars in the U.S., 8.2 cents went to a cashier at a Wal-Mart store or a Sam’s Club.”
Wow! That’s pretty amazing. Is there anybody that doesn’t shop at Wal-Mart?
With all the doom and gloom, especially in the midst of very dismal retail earnings reports, you’d think perhaps we’re purchasing Wal-Mart shares…. read more
Yesterday, the S&P 500 index closed at 911.29. We hear so many people ask the question, will the market keep going down or are we going to see a rally in the stock market? Now we have no crystal ball here at YCG (although we do have a rather large “magic 8 ball” on our desk – perhaps we should give that a shake?), but we shall go ahead an illustrate a few findings we’ve found interesting to note.
In our Q2 2008 client letter (and you can find this by clicking on “Literature —> Client Letters”)… read more
We read in the Wall Street Journal today the fact that Treasury Secretary, Henry Paulson, officially backed away from the original plan to buy up troubled mortgage assets from distressed financial institutions. We are still proponents of some form of this plan and are dissapointed that Secretary Paulson and his team have decided to walk away from such a notion. It’s almost as if the Fed is brewing a completely new recipe for a stew, and they randomly add a little salt here, a little pepper there,… read more
One week ago we wrote a blog titled “Mosquito in a Nudist Colony.” Well, it appears we’re not the only ones getting excited about investment opportunities. Today, Warren Buffett wrote an article that was posted in the NY times. For your reading pleasure, we have pasted it here:
October 17, 2008
Buy American. I Am.
By WARREN E. BUFFETT
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general… read more
Yesterday, as I would have expected, Coke posted strong results despite a feeble U.S. economy. In large part, this was because 80% of their profits come from overseas, and global unit case volume grew 5%, offsetting a slight decline in the U.S. market of 2%. The irony is that during intraday trading, Coke shares were being sold off like everything else, down 4.7% at one point.
Based on the way the market is pricing Coke, you’d think nobody drinks during a recession. This goes to show *the v… read more
Wow – what a rocky week in the markets! Over the course of a week, the S&P 500 dropped from $1,100 to $900!
An investor friend of mine was joking with me today and said, “I feel like a mosquito in a nudist colony!”
We would concur. We’re starting to see valuations us value-starved investors haven’t seen for a LONG time.
Having said that, we need to keep in mind that today the S&P 500 closed at about $900 – which we would say is approximately fair value. Markets do tend to overshoot to … read more
We opened the WSJ this morning and read the “What’s News” section as we always do. We here at YCG found an interesting headline that no one seems to be talking about.
We have heard so much about the $700 billion bailout plan and indeed it is a lot of money, however, we found it very surprising and quite puzzling when we read in the first column more details regarding the bail-out plan and then only to read in the next column over that:
“The House approved a $600 billion spending bill that… read more