Posts By: Geoff Gannon

Gannon to Barron’s: Berkshire Fairly Valued…As a Buffettless Empire!

Warren Buffett’s face graces (or disgraces) the cover of this week’s Barron’s. In big, bold print the weekly stock market mag says “Sell Buffett”. Inside, the message is equally gloomy: “Sorry, Warren, Your Stock’s Too Pricey”.

Is it?

Barron’s says:

The Street’s enthusiasm for Omaha-based Berkshire…might be excessive. Its stock now appears overpriced, reflecting a sizeable premium for the skills of the 77-year-old Buffett. What’s Berkshire worth? Our estimate, based on several valuation measures, is around $130,000 a share – about 10% below the current quote.

Valuation – In Five Minutes or Less

My estimate – admittedly based on only a single valuation measure (the one I would use to value any holding company / conglomerate / corporate hodgepodge) is around $141,000 a share. By the way, that’s an “ex-Buffett” measure – in other words, that number is my first stab at the value of any corporate hodgepodge – not a corporate hodgepodge with an investment legend at the helm.

I didn’t come up with a specialized measure just for Berkshire (BRK.B) – all I really did was “privatize” Berkshire at $141,000 a share. Of course, Berkshire’s too big to go private; Buffett’s continued leadership adds value; and Berkshire’s collection of businesses (both majority and minority owned) is far from average.

All those factors deserve special consideration.

But, before we consider those factors, it’s worth noting Barron’s is being a bit too cautious in valuing Berkshire. Even if Berkshire had a miserable 2007, the sum of the parts would still be greater than $125,000 a share which Barron’s sets as the low-end of the range ($130,000 a share is the high-end).

What’s Berkshire really worth? That’s hard to say. If you gave me five minutes, a pen, paper, and the 2006 annual report, I’d say $141,000 a share.

That figure is the result of taking Berkshire’s year-end 2006 businesses and securities, valuing Berkshire’s pre-tax earnings to yield 8% (an appropriate rate for excellent, but not necessarily fast growing businesses), valuing Berkshire’s securities at their market prices at the time of the 2006 annual report, and then correcting the combined value for the time elapsed since the 2006 annual report was published.

I did it this way so anyone could follow my logic without needing anything more than the 2006 annual report – you could look at Berkshire’s latest filings for more up to date earnings and portfolio data. But, there’s no real need to add so many complications merely to get an intrinsic value estimate that is nine months more timely.

Golden Years

Not surprisingly, Barron’s mentions Buffett’s age:

Buffett turns 78 next August, and his actuarial life expectancy is nine years. He’s likely to stay on the job for as long as possible, but in reality, few CEOs can handle the demands of the job much past 80. When Buffett departs, the stock is apt to drop as longtime Berkshire holders cash out and the investment community waits to see whether his successors can

Suggested Link: Sell Buffett?

If you enjoyed my response to Barron’s “Sell Buffett” cover story, you’ll also enjoy Jeff Matthews post.

Visit Jeff Matthews is Not Making This Up

Also, note the comment I just added to the post below. I got an email asking how I came up with a $141,000 per share intrinsic value estimate for Berkshire Hathaway (ex-Buffett). I copied the text of my email response into the comments section of my post “Gannon to Barron’s: Berkshire Fairly Valued…As a Buffettless Empire!” so those interested in the (five minute) valuation process could follow the steps themselves.…

Favorite Bloggers Add New Positions

Some of our favorite bloggers have been adding new positions.

On November 13th, Fat Pitch Financials added Western Sizzlin (WSZL) at an average price of $13.12 per share. George subsequently wrote a post valuing Western Sizzlin.

On November 23rd, Cheap Stocks added Avalon Holdings (AWX) then trading around $6.50 per share.

Finally, John Bethel of Controlled Greed just announced:

“I placed an order with my broker to purchase stock in a leading provider of office products and supplies. This will be a new position in the portfolio. Assuming the order gets filled, I’ll post my rationale for buying later today or this evening.”

During the past month some of our favorite bloggers have been finding stocks to buy.

Have you?

Visit Fat Pitch Financials

Visit Cheap Stocks

Visit Controlled Greed…

Happy Thanksgiving

Here are some of the blogs I am thankful for and some of their most recent posts:

Fat Pitch Financials – Adding Western Sizzlin

Controlled Greed – Buying Whirlpool

Value Blog Review – Future Blind Blog Review

Value Discipline – Happy Thanksgiving

Bill Rempel, a.k.a. No DooDahs! – Making Measurements of Risk

Cheap Stocks – New Life in the Land of the Forgotten: Ranks of Tiny, Profitable Net/Nets Growing

Happy Thanksgiving.…

Bill Rempel Wants Your Help

I try not to let this blog stray from the subject of investing – and I don’t think politics has ever been mentioned on this blog before – but, this recent post from Bill Rempel changes that.

Long-time readers of this blog know that Bill has inspired several posts, responses, and debates on this blog with what he has written on his blog. Especially in the first few months of this blog’s life, Bill was responsible for making it a better, more interesting place for readers and the author alike.

Bill has been a friend of this blog. And now he wants your help.

I encourage everyone who has enjoyed reading my blog to follow the link to Bill’s blog and read what he has to say. For other investing bloggers who have benefited from reading Bill’s blog as I have, I encourage them to link to Bill’s call for help.

You needn’t even agree with what he’s trying to accomplish – simply encourage your readers to visit his blog and decide for themselves.

Help Bill Rempel…

Interesting Items for Tuesday, November 06, 2007

A couple special situation announcements top today’s interesting item list.

Entergy (ETR) announced it will spin-off its unregulated nuclear plants. Read this 24/7 Wall St. post for details. Also, see this SEC Investor post.

This is potentially a very interesting spin-off (however, like all spin-offs, it will ultimately come down to price) because of the nature of the assets being spun off, expected major differences in the amount of financial leverage, earnings volatility, regulatory environment etc. between the parent and the spin-off, and because of the joint venture services company.

The spin-off is planned for some time around the third quarter of 2008. Watch this one carefully. Study it; value it; then, see where it starts trading and whether you ought to buy it. This spin-off has the potential to be one of the most interesting opportunities of 2008.

This next special situation will likely garner a few more headlines than the Entergy spin-off, because of the personalities involved – yes, I’m talking about IAC/InteractiveCorp (IACI). The break-up is being discussed in major media outlets. You can learn the basics there.

Here are three posts on the subject:

Street Capitalist – Special Situation: IAC/InteractiveCorp Breakup

SEC Investor: IAC Splits Up Into Five

Controlled Greed – Does IAC/InteractiveCorp Splitting Advance Diller/Malone Story?

Finally, let me mention something that Rick Konrad wrote that mentions something that I wrote – the topic is formulaic investing:

Reflections on Value Investing: Formulaic Investing

Value Discipline: Some Thoughts on Formulaic Investing

Visit 24/7 Wall St.

Visit SEC Investor

Visit Street Capitalist

Visit Controlled Greed

Visit Reflections on Value Investing

Visit Value Discipline…

Pompous Prognostication: Irish Banks

Many readers of this blog would like me to make more specific, actionable stock “calls”. This isn’t really that sort of blog; but, I’ll try to appease those readers with an occasional pompous prognostication. Here is today’s:

Irish stocks look cheap. Irish banks look very cheap.

The Irish banking industry is highly concentrated; a few players account for the majority of the industry. It’s been an excellent business for a long-time; and in the long-term I expect it to continue to be an excellent business.

In the short-term, the Irish economy is going to slow-down, house prices are going to drop sharply (more sharply than in the U.S.), and construction activity is going to drop dramatically (much more dramatically than in the U.S. – where a lot of uneconomic building has continued despite the dire headlines).

Two banks (with ADRs) worthy of your consideration are Bank of Ireland (IRE) and Allied Irish Banks (AIB).

Your time will be much better spent studying these two companies than trying to sift through the rubble and find a gem among the major U.S. financial services firms who face:

1. A tougher short-term credit environment
2. A less promising long-term economic outlook
3. An inferior competitive position

Furthermore, these major U.S. financial services firms – diversified though they may be – have shown no evidence of possessing corporate cultures more inclined to conservativism than the Irish banks mentioned above. So, basically, these great big behemoths are set to sail stormier seas with inferior crews.

I know you think you know Citigroup, JP Morgan, Bank of America, and Washington Mutual – and maybe you do. But, now’s the time to get to know these two Irish banks, which I think you’ll find are better buys than the domestic giants that constantly clog the financial media with headlines.

So that’s today’s pompous prognostication: Shares of Irish banks, Bank of Ireland and Allied Irish Banks, to outperform the biggest U.S. banks.

More importantly, shares of these two Irish banks look cheap for long-term investors, not just relative to the biggest U.S. banks, but relative to just about everything out there – in the U.S. and abroad.…

Interesting Items for Monday, November 05, 2007

I’ve reorganized the site. You can now browse all of the past 20 Questions interviews by clicking on the “Interviews” link on the right side of your screen.

If you’re an investing blogger interested in answering these 20 questions, send me an email.

I’m also open to doing occasional email interviews with others who want to get themselves in front of an audience interested in investing generally and value investing especially. So, if you’re the author of an investing book, the creator of an investment website, etc. feel free to email me to request an interview.

My conditions for all interviews are simple: They are conducted by email. I provide the questions; you provide the answers. We both get a veto on the final product. At any time, I can choose not to run the interview – however, you have my word that if I run it, I will run it in full exactly as I last showed it to you. I may decide not to put you out there for a variety of reasons (usually the direct result of an overly promotional or uninteresting interview subject); but, if I do put you out there, I won’t make you look like a fool or put my words in your mouth.

If you’d like to be interviewed, send me an email.

George of Fat Pitch Financials and Value Investing News interviews Vitaliy Katsenelson, author of Active Value Investing. Read the interview.

Cheap Stocks is Losing Patience With Tootsie Roll.

Fat Pitch Financials updates the performance of its Special Situations Real Money Portfolio. Since inception, the portfolio has achieved an annualized return of 25.4%.

Tom Brokaw interviewed Warren Buffett. Watch the full interview.…

Interesting Items for Saturday, October 27th, 2007

John Bethel of Controlled Greed writes about the Malone / Diller dance described in today’s Wall Street Journal. Read John’s post.

Two of Warren Buffett’s earlier letters to Berkshire Hathaway shareholders are now available online (in PDF). You can now find the 1973 and 1976 letters here.

The Berkshire Hathaway site only archives letters going back to 1977.

Note especially page four of the 1976 letter where a table of Berkshire Hathaway’s equity holdings is provided. Below, I’ve reformatted the table to show each position as a percentage of Berkshire’s equity portfolio at cost:

GEICO Convertible Preferred – 25.75%

Washington Post – 14.10%

Kaiser Industries – 10.97%

Interpublic Group – 6.01%

GEICO Common – 5.46%

California Water Service – 4.79%

Munsingwear – 4.51%

Ogilvy & Mather – 3.66%

National Presto – 2.24%

Other – 22.51%

To understand the rationale for each investment, you need to go back in time to look at the businesses as they really were in the 1970s and the prices they traded at when Buffett bought them.

A search through (online) newspaper archives is always a fruitful experience when researching Buffett / Berkshire. For instance, Buffett explains the logic behind his purchase of Kaiser Industries in the 1976 annual letter to shareholders. If you look through newspaper articles from 1976 – 1977 you will find several that fully explain the situation Kaiser found itself in, the large discount the holding company had traded at, and the manner in which the voluntary liquidation (“breakup”) was effected. You’ll also get an excellent feel for the way Buffett saw the situation. Remember, he reads a lot of newspapers.

By the way, there were a couple good contemporary articles on the GEICO debacle and that company’s subsequent resurrection. If I remember correctly, the best article (from an investor’s perspective) appeared in The New York Times.

It’s also fun to read several articles in succession and see how quickly analyst opinions changed on the company – though to be fair, there were some serious unanswered questions throughout much of that period both concerning GEICO’s capitalization and the full extent of its poor underwriting policies.

Buffett was quoted in a few of the GEICO articles, but he was rather tight-lipped except to say at some price he’d be willing to buy a whole lot of GEICO; at another price he’d be unwilling to buy any of it. Thirty years later, he still sounds much the same whenever he discusses a potential investment.

I highly recommend reading both letters – especially if you’ve already read all of the annual letters archived at Berkshire Hathaway’s own site.

Max Olson, who has written several excellent articles for this site – including Warren Buffett and the Washington Post – recently started his own blog. His latest post is entitled “PetroChina: A Look Back“. Max has carved out a niche for himself writing articles that “reverse engineer” great investment decisions. His PetroChina post is well worth reading.

Warren Buffett’s …

Book Review: Active Value Investing

Review by Geoff Gannon

Vitaliy Katsenelson’s “Active Value Investing” is one of the best investing books published in the last few years. The book is both readable and teachable. It focuses on general principles rather than specific strictures. Although “Active Value Investing” is written in an easily approachable manner, it is structured much like a good textbook ought to be. In this way, Katsenelson’s 282-page book captures much of the spirit of Graham and Dodd’s magnum opus without ever losing sight of our modern day market and the unique challenges it presents.

Katsenelson’s thesis is that the U.S. stock market won’t soon return to its old ways, the ever-rising crescendo of the 1982-2000 bull market on which many of today’s investors were weaned:

For the next dozen years or so the U.S. broad stock markets will be a wild roller-coaster ride. The Dow Jones Industrial Average and the S&P; 500 index will go up and down (and in the process will set all-time highs and multi-year lows), stagnate, and trade in a tight range. They’ll do all that, and at the end of this wild ride, when the excitement subsides and the dust settles, index investors and buy-and-hold stock collectors will find themselves not far from where they started in the first decade of this new century.

With this opening salvo, the reader might well expect the book to devolve into a barrage of unabashed bearishness.

Thankfully, it does not.

Instead the book argues that the bull/bear dichotomy is a false one. True, there are long-term bull markets – but, there are really very few long-term bear markets in the sense in which most people understand the term. Rather, unfavorable long-term market trends tend to be of the “cowardly lion” variety, “whose bursts of occasional bravery lead to stock appreciation, but are ultimately overrun by fear that leads to a subsequent descent“.

That’s the crux of Katsenelson’s book – and quite a crux it is. He has the data to support it – and anyone who has spent any time looking at long-term market trends knows that it doesn’t take much to demolish the bull/bear dichotomy which seems to fascinate Wall Street (and infect its literary output). Terms which may make a good deal of sense in the short-term are used as if they applied to long-term trends, when almost all of market history shows they don’t.

I’m sure it’s more fun to be unabashedly bearish – especially when writing a book – than it is to be realistic. But, the facts are the facts – and the facts say that the word “bear” doesn’t really belong in our long-term market vocabulary.

Katsenelson provides a great service when he demolishes the bull/bear dichotomy and shows his readers the truth – the boring, honest truth – that in the long-run, sometimes markets go up and sometimes markets go sideways; sometimes P/E ratios expand and sometimes P/E ratios contract. These trends can last a long time. …