Jump to content

Cheap large caps!?


bargainman
 Share

Recommended Posts

Ok so Bill Miller, our favorite value investor (ahem), just penned an article claiming Blue Chip large caps are as cheap as they've ever been!  Who agrees, and what are some names!?  Here's a quick list I came up with, would love to hear other opinions (and any opinions on this list too!) :-)

 

XOM

KFT

PAYX (just took a dive, not necessarily cheap, but for the strength of it's business, historically cheap)

MDT

JNJ

MO

WMT

EXC

INTC

GSK

AMGN

BR

 

MKL (trading around book value vs 2x historically)

LUK (also trading around book value vs about 2x historically)

 

Thanks!

Link to comment
Share on other sites

I don't know about as cheap as they've ever been, since almost all of them were cheaper when the S&P hit 670 in February of 2009...but they are relatively cheap in relation to other asset classes. 

 

Other than KFT, we've never owned any of those stocks in our personal/corporate portfolios or our funds...but we own a fair amount of four of them today!  And none of those four are Kraft.  Also, as I mentioned previously in another post, our largest position is a company never mentioned on this board or its predecessor...it is significantly cheaper than any of the stocks listed.  Cheers! 

Link to comment
Share on other sites

Ok so Bill Miller, our favorite value investor (ahem),

 

haha,

 

ok, for me, I have a hard time saying what is currently cheap if the future is currently so uncertain 8).

 

Having said that, I would state that the "recession proof" holdings you are listed are the cheapest or safest - not necessarily cheap.

Link to comment
Share on other sites

Other than KFT, we've never owned any of those stocks in our personal/corporate portfolios or our funds...but we own a fair amount of four of them today!  And none of those four are Kraft.  Also, as I mentioned previously in another post, our largest position is a company never mentioned on this board or its predecessor...it is significantly cheaper than any of the stocks listed.  Cheers!  

 

Wait a minute!  Am I hearing this right?  the several stocks I just 'picked out of thin air'.. you own 4 of them!?  I'm a bit confused by your statement.. you say you've never owned them, but that you own them today?  Presumably you mean you have never owned them until recently, and today?  

 

So..  is your largest position a company you'll be forced to disclose soon due to a large ownership stake?  or is it large enough where that won't be a problem?  come one Sanjeev, drop some hints!!! :-)  I assume you're not talking about _TEX or CCLR since those have been talked about...

Link to comment
Share on other sites

Wait a minute!  Am I hearing this right?  the several stocks I just 'picked out of thin air'.. you own 4 of them!?

 

I guess I should have made that clearer.  Have not owned them until this year...more precisely, bought in the last three months...all four of them.  Cheers!

Link to comment
Share on other sites

Now your just teasing us!! :P  But you can't go wrong - IMHO - with JNJ or LUK.....

 

cheers

Zorro

 

Wait a minute!  Am I hearing this right?  the several stocks I just 'picked out of thin air'.. you own 4 of them!?

 

I guess I should have made that clearer.  Have not owned them until this year...more precisely, bought in the last three months...all four of them.  Cheers!

Link to comment
Share on other sites

Banks and oil companies look cheap to me. I've bought WFC, added to my position of USB, bought RIG and added to my position of XOM recently. Deflation is a risk for banks, but many of the best run banks in the country are selling for at or less than BV.

 

 

Link to comment
Share on other sites

To quote the great Buffett in Snowball -- "Interest rates are to finance as gravity is to physics"

 

Translation -- anyone investing in a long duration asset (e.g., stocks, real estate) at record low interest rates better have a high margin of safety.  At some point over the next 30 years interest rates will rise sharply, creating a tremendous headwind for returns on long duration assets. 

 

Large cap stocks may indeed prove a great trade if the greater fool theory plays out -- personally I have no clue.  But from a true Buffett/Graham perspective, no way -- modest returns at best from a long term investment.

 

The same holds for real estate -- anyone buying real estate at record low interest rates with the hope of meaningful capital appreciation over the long term is severely misguided.

 

Best.

Link to comment
Share on other sites

To quote the great Buffett in Snowball -- "Interest rates are to finance as gravity is to physics"

 

Translation -- anyone investing in a long duration asset (e.g., stocks, real estate) at record low interest rates better have a high margin of safety.  At some point over the next 30 years interest rates will rise sharply, creating a tremendous headwind for returns on long duration assets. 

 

Large cap stocks may indeed prove a great trade if the greater fool theory plays out -- personally I have no clue.  But from a true Buffett/Graham perspective, no way -- modest returns at best from a long term investment.

 

The same holds for real estate -- anyone buying real estate at record low interest rates with the hope of meaningful capital appreciation over the long term is severely misguided.

 

Best.

 

Expecting National Association of Realtors report tommorrow to show a 12-13% decline in July sales of existing homes.

 

Those "cheap" co's will probably get a bit cheaper

Link to comment
Share on other sites

I agree with Munger's point that low interest rates mean that the asset prices are high so returns will be low. I also think that Prem is correct that interest rates will stay low for an extended period. Considering the demographic problem after we get through the current debt new problems will arise so the current extended period already seems likely to be further extended. Further, those who disagree with Prem and enjoy power are unlikely to admit they are wrong and are more likely to continue the same policies except to try harder. Accordingly the likely outcome is higher debts and that we get more deeply trapped into low interest rates.

 

Nonetheless as more people agree with Prem relative prices will adjust. As in the Great Depression there has been a rush into bonds for good reason. Bond prices will rise as interest rates drop further. The danger is that bonds will default like in the Great Depression. Failure to adjust brings defaults and there are alot of failures. Accordingly the current challenge is not to seek return but to preserve capital. Cash is safe short term but for how long? Unlike the Great Depression we have a much bigger world with huge populations with better demographics and sensible policies. Any monetary easing in the west will flood those countries with capital and cause inflation. We already see this now. Many of these large caps look safer than government bonds and will rise accordingly in the coming flight to safety. Later, I hope the rotate out into the new Walmart's etc. which will arise elsewhere. I haven't identified any so I hope we attract more board members from India.

 

 

Link to comment
Share on other sites

As in the Great Depression there has been a rush into bonds for good reason. Bond prices will rise as interest rates drop further.

 

Just how much further can interest rates drop?

 

I haven't done much looking into bonds but it seems to me that aside from going with specific bonds and picking winners when people are going with bond funds that they have an upside in the 5% range with a whole lot of downside possibility. That doesn't set well with me and my thinking. Maybe I am wrong about the upside maybe there is more potential upside then I am seeing.

 

The way I am looking at it I would prefer a 1/2% yield in a MM that is safe from decline then a potential max of around 5% return with a significant downside possibility. For me to step out and take a risk there needs to be a more significant upside potential.

 

SmallCap

Link to comment
Share on other sites

 

Expecting National Association of Realtors report tommorrow to show a 12-13% decline in July sales of existing homes.

 

Those "cheap" co's will probably get a bit cheaper

 

The drop was much greater than expected.

 

http://online.wsj.com/article/BT-CO-20100824-708958.html

 

Existing home sales plunged to their lowest level in 15 years in July as inventories soared, painting a grim picture for the housing market absent government support in a stubbornly sluggish economy.

 

Home resales dropped a record 27.2%--nearly twice as much as analysts had expected--to an annual rate of 3.83 million in July, the National Association of Realtors said Tuesday. Meanwhile, inventories rose to 12.5 months from 8.9 months in June, pressuring already depressed home prices. Inventories are at their highest level in more than a decade.

 

"Historically July is the peak inventory month in any given year," NAR Chief Economist Lawrence Yun said.

 

Economists surveyed by Dow Jones Newswires had expected existing home sales to fall by 14.3% to an annual rate of 4.6 million.

 

Tuesday's data drove the Dow Jones Industrial Average down more than 100 points and pulled down yields on 10-year Treasury notes.

 

Link to comment
Share on other sites

In the Great Depression, I'm guessing that investors were buying bonds directly rather than through mutual funds.  How will under-educated investors react when prices in longer bonds fluctuate?  Bonds held directly were likely redeemed at the end of their term with little mental upset.  In the current age, we're likely to have yet more panicking and redemptions when bond mutual fund quoted prices drop in response to short-term events.  It will be a sad destruction of capital for the average citizen.

 

You may recall Fairfax sitting on unrealized losses well in excess of $1B several years ago, but Watsa indicated that the bonds would be held to maturity if necessary (since bonds are loosely linked to insurance liabilities).

 

-O

As in the Great Depression there has been a rush into bonds for good reason. Bond prices will rise as interest rates drop further.

 

Just how much further can interest rates drop?

 

I haven't done much looking into bonds but it seems to me that aside from going with specific bonds and picking winners when people are going with bond funds that they have an upside in the 5% range with a whole lot of downside possibility. That doesn't set well with me and my thinking. Maybe I am wrong about the upside maybe there is more potential upside then I am seeing.

 

The way I am looking at it I would prefer a 1/2% yield in a MM that is safe from decline then a potential max of around 5% return with a significant downside possibility. For me to step out and take a risk there needs to be a more significant upside potential.

 

SmallCap

Link to comment
Share on other sites

And this is a surprise?  The US government distorted the supply/demand of the market by pulling sales forward earlier in the year.  Same government action occurred in Canada.  Now there is an excess of supply which means that pricing will decline further.  Additionally, July is the typical highest month of housing inventory, so beware figures that are not seasonally adjusted.

 

At what point does it become cheaper to buy a house than build a house?  Some light investigation should prove out that a significant decline from current pricing will put housing stock on sale below replacement value.  As Buffett has pointed out, a combination of new household creation, destruction of housing stock, or pricing declines will soak up the excess.  It ain't pretty and it will take time...but, it'll be a darned good time to buy a house at below replacement cost if you're forming a new household.

 

-O

 

Expecting National Association of Realtors report tommorrow to show a 12-13% decline in July sales of existing homes.

 

Those "cheap" co's will probably get a bit cheaper

 

The drop was much greater than expected.

 

http://online.wsj.com/article/BT-CO-20100824-708958.html

 

Existing home sales plunged to their lowest level in 15 years in July as inventories soared, painting a grim picture for the housing market absent government support in a stubbornly sluggish economy.

 

Home resales dropped a record 27.2%--nearly twice as much as analysts had expected--to an annual rate of 3.83 million in July, the National Association of Realtors said Tuesday. Meanwhile, inventories rose to 12.5 months from 8.9 months in June, pressuring already depressed home prices. Inventories are at their highest level in more than a decade.

 

"Historically July is the peak inventory month in any given year," NAR Chief Economist Lawrence Yun said.

 

Economists surveyed by Dow Jones Newswires had expected existing home sales to fall by 14.3% to an annual rate of 4.6 million.

 

Tuesday's data drove the Dow Jones Industrial Average down more than 100 points and pulled down yields on 10-year Treasury notes.

 

Link to comment
Share on other sites

 

Expecting National Association of Realtors report tommorrow to show a 12-13% decline in July sales of existing homes.

 

Those "cheap" co's will probably get a bit cheaper

 

The drop was much greater than expected.

 

http://online.wsj.com/article/BT-CO-20100824-708958.html

 

Existing home sales plunged to their lowest level in 15 years in July as inventories soared, painting a grim picture for the housing market absent government support in a stubbornly sluggish economy.

 

Home resales dropped a record 27.2%--nearly twice as much as analysts had expected

Add to the fact there are so many homes in an "inventory" of foreclosure - there is so much supply out there its going to take a long while.

Seeing that Construction is one of the last sectors that hasnt been "outsourced" it prob makes up a larger % of GDP than we are used to.

Huge unemployment + Huge house supply = ugly.

Link to comment
Share on other sites

Huge unemployment + Huge house supply = ugly

 

Didn't WEB have some interesting calculations about the housing supply and comparing it to population growth both organic and immigration. I seem to remember about 2 years ago him talking about the oversupply and how long it would take for there to become a demand for housing again.

 

Does anyone else remember this?

 

SmallCap

Link to comment
Share on other sites

How low can bond rates go?

 

Since I bought German 20 year bonds in May the rate has dropped from 3.25 to 2.72. I expect the rate to drop below the Japanese rate so my target is 1.62%. I recently added to XOM with a dividend of 3% for similar reasons. My analysis is that Asian surplus countries do not have the same propensity to consume 70% of GDP as seen in US and EU. I think China consumers account for about 40% of GDP. The difference goes into savings and investments. Saving rates are 30 to 50% of incomes and incomes are starting to rise now that the number of labour market entrants has started to decline sharply. Savers get negative interest rates at Chinese banks which creates a huge indirect subsidy for the banks which has allowed them to deal with extremely high bad debts. Politically motivated lending officers make consistently poor lending choices. To date the huge savings have therefore spilled over into the Chinese stock and property markets due to currency controls. As the currency controls are lifted instead of having only multi trillion dollar sovereign investors (who have had massive influence on rates already) we will have massive private savings seeking safety and returns. Japan's Mrs. Watanabe had huge influence on rates in the past decade. Mr. Wong will have an even larger influence on rates in the coming decades. If China reaches US GDP size with 5 to 10 times the savings rates and free movement of capital, any country that treats creditors well and any attractive private company like those listed will be flooded with capital. 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...