I genuinely believe I’m not an inherently smart person. Therefore my best chance for success is to be around and learn from other intelligent people.
In 2005, working along those lines, I completed a study of Warren Buffett’s trading career (published by Wiley as Trade Like Warren Buffett) which detailed not Mr Buffett’s value investing but the other forms of investing Mr Buffett does – private investments in public equity (PIPEs), activism, merger arbitrage, convertibles, distressed debt, liquidations, and so on. So when Mr Buffett files a 13F-HR filing, it is usually something I pay attention to. I then try to pick it apart to see what is going on. This is the guy who was buying carpet companies and furniture stores immediately before the housing boom, and buying distressed energy companies right before oil spiked to what seems to be infinity.
First there are two new positions – Johnson & Johnson and Sanofi Aventis, both in the pharmaceuticals and healthcare sectors. Mr Buffett is not a hard-core value investor in the sense that he tries to buy things at a low price/earnings ratio or trading below book value. He is more of a demographic/macro investor. He looks at changes in population, demographic changes and other macro factors, chooses an industry he thinks will benefit and then backs up the truck on the stable, growing companies with consistent histories. Clearly he is guessing that an ageing population that will need ever-increasing amounts of medical care will drive up the prices of the stable, mega-cap companies in this sector.
J&J – which makes consumer products, pharmaceuticals and medical devices – appears fairly inexpensive. Due to several issues such as patent expirations and research and development setbacks, its recent results have not been impressive. But these setbacks are temporary and will not affect the long-term prospects of this company, which has had a consistent operating history since 1886. As J&J will increase earnings about 10 per cent to $4.05 a share next year, I expect the dividend to rise to about $1.60. With an authorised $5bn share buyback and a coming rebound in operating performance, Mr Buffett seems to be on a winner.
Another interesting company Mr Buffett owns is Iron Mountain, which provides administrative services that include record keeping, document keeping and information management. Since 1998, the group has acquired more than 40 administration-related companies. While there are short-term concerns – mainly its significant leverage, which is a negative in a rising-rate environment with higher gas prices – the longer term looks good, assuming the company can grow its storage segment.
With regulators more concerned than ever about a company’s ability to store all documents in hard and soft formats it is clear that Iron Mountain will be riding a demographic trend that is here to stay.
Then there is Comdisco Holdings. While Mr Buffett enjoys his growth and demographic plays, at heart he is still the 18-year-old kid learning from Ben Graham about buying stocks for two thirds of book value and waiting for them to liquidate. This strategy can take years to get a payout. In my book I detail some of the microcap liquidations that Mr Buffett has played in recent years with his personal portfolio.
More recently, through Berkshire Hathaway, he has been buying shares in Comdisco Holdings. The group was a dotcom-bust poster child – a good business that got caught up in the gusto and burnt itself out. Now its sole purpose is to liquidate its business as prescribed by the bankruptcy court and distribute those holdings to shareholders. Those assets are fairly difficult to understand but with the 13F-HR filing, we can piggyback on Mr Buffett’s research to look.
Since Comdisco’s emergence from Chapter 11 on August 12 2002, the focus has been the orderly sale of its remaining assets. The company says it has $90m in unrestricted cash and $102m in assets. This equates to $23 a share – pretty good for a company with no debt and a market price below $16 a share. The profits made from the sales of assets are to be returned to shareholders. Eventually this stock will be worth $0 but by then shareholders will have received $23-$26 in dividends, depending on how well the sale of assets goes. If you like a potential 50 per cent return in the next few years, in our low-return environment this looks like a good pick.
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