Car Parts For Xmas

With all the uncertainty swirling around the markets combined with December tax-loss selling, prices are down and value ideas continue to pop-up here and there. I have initiated an opening position in Magna International (MG), the car part giant @$34. MG is a wounded giant that is out of favour. Being a consumer discretionary industrial exposed to Europe is not helping MG right now. MG has suffered from problems with some European operations, reduced margins due to high commodity prices (steel and resins) and poorly priced contracts written during the last few years. However, there is good news:

- margins may improve if commodity prices fall. MG purchases $3billion/year in steel and resins.
- under performing operations are being fixed or sold, writedowns taken accordingly.
-car sales are strong even with the global economic uncertainty. 13.6 Mill units in Europe, 13.0 Mill U.S.
-new contracts with Asian OEM's, diversifying revenue base.
-expanding plant capacity in emerging markets like Brazil and China.
-OEM's are reducing there supplier base, signing deals with larger more stable suppliers like MG.

MG is trading at <6X pre-tax earnings power and close to tangible book value. The balance sheet is super strong with no net debt and $6.50/share in cash. A dividend yield of 3%. Some overhang has also been removed with the elimination of the dual class share structure at MG, a longtime criticism of the firm. The downside appears to be limited with MG.

MG's Canadian competitors include Linamar (LNR), EXCO (XTC) and Martinrea (MRE) and as group trade at a premium to MG with average an P/Book of 1.2X, P/S 0.5X.

MG's American competitors include Johnson Controls, BorgWarner, TRW, Meritor, American Axle, Dana and Superior Industries. These companies, many of which are debt laden, trade at and average P/Book of 2.0X and P/S of 0.6X.

MG is worth somewhere in the low $50's and should produce a fine investment result over the next 2-3 years.

Good News Gone Un-Noticed - Canam Group

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Stay The Course

An old French Proverb: "buy on the cannons, sell on the trumpets"


I was recently asked "where is the market going?". I have no idea. Nobody knows. What I do know is, that if you own a basket of undervalued assets with a margin of safety, then you will do well over time. For the last 3 years, we have witnessed an almost unprecedented level of uncertainty/chaos in global markets. Many have extrapolated what has happened recently ( last 3 years ) far out into the future. Many believe the problems that face the Greece, U.S., Europe and the world will continue forever. These problems will get solved, but the medicine will be hard to swallow for many. On a recent Canadian business news network call in show, a private investor called in and proclaimed "doomsday". He completely liquidated his RRSP, paying the associated fees and penalties, and invested all the proceeds in gold and silver bars to keep at home. To me this is a kin to financial suicide and ringing a "buy bell" at the bottom of the market. When the "herd" are so negative and can only look backwards to recent events, with no regard to valuations or the future, then it's time to be invested. I suspect, looking 3 years out, this investor will be very disappointed with his gold and silver bar rate of returns.

In the mean time, as I've outlined before, it's time to be invested with a nose for value. If you overpay, then you can get hurt - I can attest to that. However, the cross-currents in the markets do provide opportunity, if you look around. I recently added to my position in Big Lots (BIG) which just reported their Q3 results. Analysts, had already taken down their estimates for BIG' s Q3, accounting for losses on a recently acquired retail chain in Canada ( Liquidation World ). BIG, fell short of analyst's estimates by $0.02, yes only two cents a share. The market turned on BIG, upset by the short term losses on their new retail chain, and proceeded to bid down BIG's shares by almost 10% in one day. The market shaved $220 million off BIG's market value, for a $15 million shortfall, as compared to last year ( even though management raised guidance for the rest of this year ). Who says the markets are perfectly efficient? I stepped in at $36.04 and added to my BIG position by 10%. There are other opportunities out there - BAC, CSCO (<17), LOW (<23) or MSFT (<24.50), but it will be a bumpy ride.

Research In Motion And Book Value

RIM and "book value" (BV) are three words that you generally don't hear in the same sentence, until now. There has been much ta-doo, regarding the fact the RIM is trading below it's "book value". Many are now assuming/saying that RIM is a buy. For RIM to be a buy, we have to figure out what it's worth. The mere fact that RIM is trading around BV tells us little about what RIM is really worth - or it's intrinsic value (IV). Many confuse BV with  IV.  BV is what has been put into a business and IV is what can be taken out of a business over it's life. Book value, depending on the business, can be a good starting point in an exercise to figure out what a given company is worth. However, you have to closely examine what makes up BV. There can be a lot of fluff in the numbers. In the 1970's, the Pennsylvania Railway Co. had on it's balance sheet "assets" which included tunnels through mountains and old useless rail cars. While these "assets" contributed to the BV of the company by normal accounting conventions, they provided little in the way of value to the owners/shareholders of the business. This kind of fluff is not unusual. Thousands of companies maintain goodwill and intangibles on their balance sheet that, in many cases, offer little or no value. A quick review of RIM's financials show the following;

as of August 2011...

Assets               13.9B
Liabilities            4.0B
Equity/BV          9.9B or $18.70/share

However if you strip out goodwill and intangible assets od 2.9B ( yes, their brand and patents may have some value, but how much?) you now shrink RIM's owners equity or BV to 7.0B or $13/share. So, at $19/share, RIM doesn't look like such good value. For me it's easy pass. It is difficult to figure out what RIM is worth, as IV is dependent on many factors including a company's competitive position, growth, future prospects, asset values, management and earnings power. Many of these are extremely uncertain for RIM right now. This one is on the "too hard" pile.

Disclosure: No position in RIM

Chanos Chims In

                               VS.                      

The famed short-seller, Jim Chanos, recently spoke at the Value Investors Congress in New York. As the largest short fund (bets on the stock price of a company going down) in the world with assets of 6.7 billion, he is the king of the bears. Chanos, is worth listening to. He has been "pounding" the table on several areas where he sees problems. He spoke about "value traps" in Chinese banks (and most other things China related), commodity companies dependant on one large consumer - like China, Brazil, large integrated oil companies like Exxon (XOM) and digital distribution of media (blockbuster gone bust, with more to follow) and lastly, for profit education companies.

His mention of oil companies is very interesting considering I have just taken a position in a large integrated oil (Total SA at $45-$46) which I wrote about here. The crux of his arguement is that the finding and development cost of a barrel of oil has increased from $5 in 2000 to $22. Also, the cost of production has tripled from $5 to $15/barrel. Not to mention increased SG&A. This has squeezed the oils into "paying up" for reserve replacements. He cited, XOM's huge purchase of XTO for $31B in 2009. Exxon is betting on the future of natural gas and paid a hefty price for that bet. XOM's balance sheet has suffered going from $25B in net cash in 2007 to net debt of $6B now.

I don't know if Chanos is bearish on all integrated oils (or talking his book - he could be short XOM) but I'd agree that many of the North American oils are expensive, with some like XOM trading at 2.5x book value and 1x NAV. However, at the risk of opposing Chanos - not all the oils are expensive. The European oils (TOT, BP, RDS.A, STO) are much cheaper with more "bad" news priced and therefore provide a greater margin of safety. You can buy some the Euro oils for 6x's earnings with hefty dividend yields and 0.75 of NAV (based on $80 oil). If history is any indicator, then if the cost for oil has risen that significantly, then commodity prices should only trade at a small premium to that marginal cost of production. So that means, $140 oil (2007) is not likely to return soon nor is $30 oil.

Twist and Shout

The Fed recently launched the $400 Billion operation twist. A program, also used in the early 1960's, where the Fed will sell $400B in short-term treasuries and buying an equivalent amount of longer dated bonds. The result is a flattening of the yield curve. The chart below shows how the curve flattened slightly after the fed announcement - with more to come. The Fed is helping homeowners and businesses by lowering long-term borrowing costs to incentivize longer dated asset transactions ( buying a house or building a factory with borrowed money ). However, this program doesn't come free. The net interest margin for banks will be under pressure and insurance companies with long-dated bonds to match their long-dated liabilities will be squeezed. So now what? Well, some argue that with rates already quite low, Twist will have minimal impact.
I agree. I'll sit tight and monitor the results of the financial companies I own, focusing on capital levels to ensure that twist doesn't squeeze too hard. It may take longer for the financials to turn the corner.


source: Bloomberg

I own positions in BAC,WFC,MFC

Baffled In Beijing

I just returned from a very special trip. My family and I were in China for over 2 weeks helping with some charitable work for two causes very close to our heart. We chronicled our trip, which if you're interested, you can read about it here. Although our charitable work was the primary focus of the trip, I couldn't help but to keep an eye out as to what's happening in China's economy. I noticed a tremendous amount of growth since my last trip in 2003. China is a country that is in a hurry. The building of roads, bridges, airports and buildings continues at a feverish pace. During our visit to 3 "smaller" cities ( populations of 2-3 million each ) Changsha, Datong and Changzhi I saw a total of approximately 125 ( yes, 125 ) high rise condominiums under construction. And, that's only in the areas of those cities I was in. A few of the sales centres indicated that over 90% of the units are unsold - based on the broken English of the sales reps I met in Changzhi. Prices are high and supply is coming on strong. I wouldn't be a buyer of Chinese real estate right now. However, on the flip side, the economy there is big and growing. There is great demand for metals, coal and all things agriculture related (corn, soy and vegetables). There is a growing middle class that want North American products. I noticed several brands that have a good foothold in China including, Coca-Cola, Pepsi, Kraft, GM, VW, Caterpillar, Audi, Starbucks and Kraft (I love the orange/mango oreo's). Owning stock in some of these brands-but not at any price, going forward, is a good way to participate in China's growth without the worry/risk of directly owning Chinese stocks. There is a lot of room for efficiency in the Chinese economy. That will happen over time.

Being in China for a better part of August's major market pull-back was a blessing. Having no CNBC, BNN or North American newspapers insulated me from the overwhelming negative tone. While there are concerns about the economy and issues in Europe, stocks have generally priced those issues in already. There has been significant indiscriminate selling of equities, as evidenced by the record mutual fund redemptions in August. The herd is selling when they should be buying. Several sectors have become very cheap over the summer. These sectors include technology, retail, energy and agriculture (too a lesser extent). Energy is probably the one stand-out sector. Since the market sell-off, oil has come down from $100 in July to $80 at the August lows ( now approaching $90 at time of this post ). This pull-back is minor, considering oil bottomed out at $47/barrel in March of 2009. The market is telling us that demand is still there, and no double-dip recession is on the horizon - contrary to what the headlines indicate. However, oil stocks, particularly the large integrated oils (in U.S. and Europe), have sold off much more. Many of the large European integrated oils have been double-whacked, compounded by the debt crisis in Europe. These European oils are very well capitalized and have access to the cheapest capital in Europe and abroad, so the debt crisis is only a minor irritation to these companies. The market is pricing the European oils as if they will NEVER grow earnings in the future - that's a postion I'm willing to bet against. The following European oils are "pound the table" cheap: British Petroleum (BP), Royal Dutch Shell (RDS-A), Total SA (TOT). These companies are trading at close to book value with hefty ( 5%+) dividend yields and single digit P/E's. While one could argue they do deserve a slightly lower valuation than our large Canadian oils, due to lower reserves (oil in the ground) and production growth, the valuation gap is just to big. On the flip side, one could argue that the European oils deserve equal valuation due to their exposure to emerging markets and experience/success in growing reserves in politically difficult areas like Africa. Which would you buy?

                                                                     P/Book            P/E*         Div Yield

Canadian Natural Resources (CNQ)               1.7x               10x          1.0%
Cenovus (CVE)                                              2.8x                15x         2.3%
Suncor (SU)                                                    1.3x                9x          1.5%

British Petroleum (BP)                                     1.1x                5x           4.6%
Royal Dutch Shell (RDS-A)                             1.2x                7x           5.1%
Total SA (TOT)                                               1.1x                6x           7.0%
                         
* I used forward P/E's, which I don't normally put much weight on. However, using trailing P/E's, which reflects recessionary earnings, gives a false indication on the valuation of these companies.

As I've written in previous posts, it's a good time to pick away at cheap stocks on down days. It's a good time to upgrade your portfolio. Many high quality companies with good dividends are on sale. If you can ignore the daily noise and look 3 years out, the market is cheap, and you will be well rewarded.

Disclosure: I own TOT

Now What???

As the markets take a turn off of Greed Street on to Fear Avenue (which started in April ), it's time to pull-over to the slow lane and watch the traffic jam. People are running for the exits. The S&P downgrade has spooked the market. It's important to note that the other rating agencies like - Fitch and Moody's don't feel the same as S&P. The CBO ( Congressional Budget Office ) has commented that S&P has made a 2 Trillion dollar "mistake" in their 10 year calculations. But S&P's downgrade/outlook is for the next 2-3 years -what gives? You would expect the rating agencies to have a longer-term outlook for a sovereign like the U.S.  At the end of the day, you have to ask yourself if the companies in your portfolio are really worth 15%-20% less now, then a couple of months ago. In most cases they are not. It's also interesting to note that Carlos Slim ( currently the richest guy in the world ), made his mark by buying  businesses AFTER the 1982 Mexico debt default (not downgrade, but actual default). Businesses still have value that on the whole, will increase over time. As I wrote recently, it's good to have cash. There are now many high quality companies available at discount prices. But, you have to move slowly, as not to get run over. So now is not the time to go "all in" but just pick away. With the current market conditions, it is also a good reminder why it's important to have an unlevered ( little or no borrowings against your portfolio ) account. It's time to sit tight, with no bothersome calls from your broker's credit department, and pay close attention to the price your paying for stocks. There is no hurry - move slowly.

Remember Buffett's quote: " the market is there to serve you, not instruct you"

Mid-Summer Gyrations



uncle sam



You have no doubt heard by now that the U.S. debt ceiling deal has been passed. For interest sake, the debt ceiling has been raised 78 times over the past 50 years. Many of those previous deals never made the front page news. This time, it hit the front page of every news paper around the world as the U.S. struggles with chronic deficits. As a bottoms up ( looking at individual companies ) investor, I don't spend much time trying to figure out what's happening in the overall economy. I just look for good cheap stocks. It reminds me of the famous investor Peter Lynch's quote:

  

 "Predicting the economy is kind of like trying to predict the weather.  Yes, you can get close
      but very rarely are you completely right."



After all, how many people accurately predicted the 2008 financial collapse? Not me.
However, the pessimism that has gripped the markets for the last while, has created opportunity.
I recently wrote, that it's a good time to have cash. Well, now it's a good time to start deploying that cash - but slowly. But remember, we are only 5-7% off of all-time highs, so you have to be very price sensitive as not to overpay. But there's value for long-term buyers of equities. I've recently added to CSCO, BAC and BIG.

There's also value in FFH.TO, WFC, MFC

Disclosure: I own FFH.TO, WFC, MFC, CSCO, BAC, BIG

Say What?

Famed value investor - Bruce Berkowitz has been under fire lately for the "poor" performance of  his flagship Fairholme fund. The fund has experienced $2.5 Billion in redemptions (still has $14 Billion under management)  in the last 3 months alone. Retail investors, in their short-sightedness, have run for the exits. This behaviour proves why markets are not perfectly rational - as some think. The market as a whole is impatient and cycles back and forth from optimism to pessimism and back again. I have been an avid reader over the years of anything Berkowitz related - he is a great teacher. His is truly one of the great investors of our time. Since inception of the fund in 1999, he has returned 13.90% compounded annually, while the S&P 500 has returned approximately -1% over the same time period (see chart below - WOW!- sorry for the small chart). He was named manager of the decade (last year) by Morningstar, for good reason - he has clobbered the indexes. The herd/short-term mentality will continue to hurt mutual fund investors as they try to move in and out of funds with precision. They usually end-up selling or buying at precisely the wrong time.  If you own mutual funds, study the manager's track record, style and investing framework. Then, if it suits your style and temperament, buy for the long-haul. Berkowitz is a BUY.

 

Click here for Fairholme Fund Chart -stretch out time frame to 10 years.

Just About Time

Here is the cover of this week's Time magazine. This reminds me, although to a lesser extent, of the famous Business Week cover from 1979 - published just before the start of the greatest bull market in history - 1979 to 1999.






It's important to note that these publication are not wrong in the data they present. In fact they are basically right on, with respect to the problems the economy faces both then and now. The problem is their timing - they are out of sync with the market. They are reporting on issues and events that are already discounted in the market. The current soft patch is baked into the cake. So, anyone reading this cover would get the idea that it's time to sell. Remember the market looks out 6 to 12 months. The recovery is happening, just not at the brisk pace that everyone expects or wants. The S&P 500 is down 7.1% over the past 6 weeks. The TSX is down 9.1%. Prices are more reasonable now then 6 weeks ago - but you still have to be selective. My crystal ball is no clearer than yours, but lower prices are good - for buyers. It's good to have cash now, for those down days when you can pick away at good & cheap stocks. There's value in BIG, CSCO, BAC (bought some today @ 10.61) and BRK-B. It's just about time - to buy.

Move Over Costco

As a follow-up to my last post about the retailers - I failed to mention that I also closely follow Costco (COST) as they are one of North America's best retailers. Jim Senegal is one of the best CEO's out there. It's a company I'd love to have in my portfolio, but it never seems to get cheap enough for me to pull the trigger and buy. My wife is personally responsible for the steady same store sales increases at select stores throughout Ontario - she loves a deal.

The retailers continue to be under pressure. I have taken an opening position in Big Lots (BIG) earlier this week with an average cost of $32/share. This is not a deep value asset play, but a discount to earnings power play. BIG is a good business with a good future and good management - worthy of hitching my wagon to. BIG has sold off over the past 3 months as several potential private equity buyers failed to offer enough to take BIG private and worries about a softer economy ahead. CEO, Steven Fishman is well aligned with shareholders and has made the right decision by staying public - for now. It's nice to see a CEO who is so focused and will publicly speak about areas of the business that need improvement, (see page 5 of the 2010 AR) not just tell shareholders about what has gone well. The crew at BIG are very good capital allocators. Just look at some of these statistics:

EPS growth 10 yr:           11%
Cash flow Growth 10 yr:   8%
Long-Term Debt: NIL
Share buybacks: bought back 1/3 of the company in the last 5 years.
ROE: consistently >20% - even more impressive as they have no debt.
Rising op. margins over the last 5 years. 5.7% ------> 8.8%
Free cash flow: a little over $200 million, for a FCF yield of 10%

BIG recently lowered guidance for the year - which for me doesn't matter - but the "street" has become a little pessimistic. I'm looking out a few years - if Fishman and his team just continue to do what they have done in the past BIG shareholders will do well. On a conservative ( little or no growth) basis, the company is worth somewhere around $45/share and maybe as much as $55 if they just grow at modest rates going forward. If another buyer does emerge - and is willing to pay $55 - I'll tender.

I will continue to add to BIG over the next few months if the market moves lower.

Retailers Getting Whacked

The market seems appears to be moving from a period of greed to a period of fear. World markets are pricing in re-newed problems in Europe, particularily in Greece, where Government bonds yields recently reached 17%. The market is also fretting about higher energy and material costs, combined with slower growth ahead. Finally, investors are pricing in the end of QE2 ( the US government's program of adding liquidity and capital to the economy - boosting asset prices) in June. Some of the first casualties of this downward repricing has been the retailers. Several retailers over the last month or so have been whacked -for the reasons above. Most of these retailers depend on discretionary spending to survive and prosper. Investors are clearly worried about the future of consumer spending and the economy.

I would expect the sell off in commodities and cyclicals to continue as the market grinds lower over the summer. This pull back in retailers will - at some point - present a buying opportunity. But it's early, so I'll wait for lower prices. My short list of retailers includes Rona, Big Lots and Best Buy.

Now is a good time to have cash.

The Golden Arch - Buyout Not Burgers

In a recent post I suggested it's time to re-evaluate my metal and mining stocks. I suggested that many resource stocks (excluding forestry and ag companies) are fully priced, with little upside left and more risk on the downside. On May 2nd, a company in which I hold shares was bought out - at a significant premium. International Coal Group (ICO) has been purchased by Arch Coal (ACI) in an all cash deal valued at $3.4 Billion or $14.60/share. The deal is expected to close in Q2, so I won't sell into the market, and I will wait for the commission free capital from ACI. In the meantime, I'll pray the Canadian dollar weakens.This event was a pleasant suprise as I didn't expect ICO to be bought out. I first purchased ICO in January of 2010 with the intent on holding for many years. So, with two buy-outs ( ICO, LUN.TO) my resource exposure will fall dramatically.

 I do expect another corporate event to occur with another miner I own - Hudbay (HBM) - but that's no reason to buy HBM now. I'll wait patiently for developments at HBM.

Stubbed My Toe On A Gold Bar - Feeling Some Pain

As I've noted in earlier posts, I'm currently short gold. That trade has worked against me so far. Like most value investors, I'm wrong before I'm (hopefully) right. I have added to my position today as gold has reached a new high.

Adding To BRK

Well, it looks like BRK has sold off more than I expected. I try to resist making short term market calls, as my track record for calling short term events is poor. I'm using this "unscheduled" pull-back as an opportunity. I added to my position, this week, by 14% @ $80.70. BRK is now my 2nd largest holding with a 9.5% weighting.

Trimming The Metals

Nothwithstanding the latest little pull-back, the markets have done very well over the last year or so. As I noted in another post http://valuevestor.blogspot.com/2011/01/time-to-add-risk-hmmm-not-sure-about.html
it's time to be price sensitive as not to overpay for a stocks. Most stocks are fully priced. There are areas of value, as there always are in any market, but the choices are fewer. It's also important to sell companies that have reached their intrinsic value. Many resources stocks, particularily the metals have reached full value, give or take a few percentage points. The NAV's aren't providing the margin of safety they did 2 years ago. I don't see NAV's moving much higher from here. Over the next few weeks I will be looking closely at my major metal/mining holdings and reviewing my intrinsic value estimates and likely trimming some positions. I do hold shares of a mid-tier Canadian miner ( LUN.TO ) that is involved in a potential take-over, so I'll move slow on that one. A big premium buyer could emerge.

The soft commodity stocks still have room to run. I'll continue to hold oil and oil service stocks for now.
I'm turning a little more defensive and plan to raise the cash component in my portfolio.

An Upset In Omaha

News crossed the wires yesterday after the market close that one of Berkshire Hathaway's senior executives suddenly resigned. David Sokol, a highly regarded manager, was CEO and Chairman of several Berkshire subsidiaries. Sokol was thought to be one of four managers that would succeed Buffett to oversee all the operating businesses of Berkshire. In a stunning revelation, it appears Sokol purchased close to 100,000 of Lubrizol (LZ), a specialty chemicial maker, shortly before he recommend to Buffett that LZ would be a good candidate for BRK to purchase. His investment was worth nearly $10 million. In fairness to Sokol, he did not know if Buffett would decide to buy LZ. However, Sokol's opinion is highly valued by Buffett as evidenced by the duties Sokol has performed across BRK businesses. Then, on March 14th, BRK announced it would buy LZ in an all cash deal worth $9.7 Billion or $135 per share. The buy-out netted Sokol close to a $3 million profit - in 3 months. While Sokol maintains that no laws were broken, this transaction does raise the eyebrows of the "street" and BRK shareholders. This event raises the concern as to whether Sokol's fiduciary responsibility to BRK shareholders was maintained. One could argue that Sokol had inside material information about the pending transaction ( he met with Citi bankers about LZ ). Buffett has always played well inside the confines of the law. He tells his managers to imagine that their actions were published on the front page of the local paper. How would your mom react if she read that headline? I don't think this event passes the front page test. Buffett also likes to say, that your reputation takes a lifetime to build and can be lost in a second. At the end of the day, this situation has made a small dent in the otherwise sterling reputation of BRK. I don't believe this event will detract materially from the long-term intrinsic value of BRK. The management pool is fairly deep at the senior level at BRK. The stock is trading down 1.5% today. If the sell-off continues, which I DON'T expect, then BRK is a buy under $80-$82.

If you are interested in reading the news release from BRK, written by Buffett himself, click here:

http://finance.yahoo.com/news/Warren-E-Buffett-CEO-of-bw-1903759416.html?x=0&.v=1

Bank Of America In The News Again...

B of A (BAC) is in the news again, regarding the Fed's decision to not allow BAC to raise their dividends. Several other banks like Citi (C) and Wells Fargo (WFC) were allowed to return capital to shareholders in the form of higher dividends and share buy backs. This has spooked the street. Several stress tests were applied to the banks to make sure they have enough capital to comply with the new Basel III capital standards. Effective 2015 banks will be required to hold 6% tier 1 capital, to which that requirement will increase over time to 8.5% in 2019. While the street doesn't like the Fed's decision now. It's worth the wait, to allow BAC to increase their capital buffer. There will be plenty of capital to return to shareholders. Wallstreet analysts are collectively estimating that BAC will earn around 30 Billion through 2012. They will likely need 20-25 Billion to meet the Basel III requirements. That leaves 5-10 Billion in "excess" capital, that will be available to shareholders in the future. BAC is perceived as a weaker bank in light of the stress tests. That's providing a buying opportunity. BAC is down from $15 at the begining of the year. I have added to BAC today @ 13.38.

The Master Speaks

Warren Buffett's annual letter to shareholders is one of the most interesting investment reads out there. Having read every letter since 1977,  you come away with a very good education in business and investing from the greatest investor of all time. You can find the letters here http://www.berkshirehathaway.com/letters/letters.html
Over the years Buffett has been reluctant to comment on what he thinks the intrinsic value of his company - Berkshire Hathaway (BRK) is. He and his partner, Charlie Munger, admit they would both come up with different numbers. That's ok, because intrinsic value is a moving target and difficult to calculate precisely. The good news is that you don't have to be too precise, you just have to be sure you in the correct "range" of intrinsic values. Then you can buy at a discount to this value and sleep at night. Buffett likes to say " it's better to be mostly right, than precisely wrong" - how true.

In this years annual letter, Mr. Buffett dropped a rare pearl of data for shareholders. He disclosed what he thinks (conservatively of course) BRK's normal earning power of their assets are. Here is what he said,

I can estimate that the normal earning power of the assets we currently own is about $17 billion pre-tax and $12 billion after-tax, excluding any capital gains or losses. Every day Charlie and I think about how we can build on this base.

(W. Buffett, 2010 Berkshire Hathaway Annual Letter)

Knowing this, we can value BRK (conservatively) and be confident in the value we derive, using Buffett's data as a pillar of support for our appraisal. So using a two-prong back-of-the-envelope approach to value BRK we can see it's roughly worth $100-$110 per share ( B shares). However, it's important to recognize that the $100 valuation is not static. With Buffett at the helm, it is not unreasonable to assume BRK's value will grow at 7%-10% over the next few years. So BRK could be worth $122 in 3 years. So how did I come up with $100? Here's the quick answer.

Investments (stocks/bonds) per share..................... $94,370
Pre-tax earnings per share X 10 multiple*............... $59,260...........using a 12 multiple $71,112
Plus net cash**.......................................................    N/A
Total Value per "A" share........................................ $153,630.....................................$165,482
Value per "B" share ( 1/1500 of an A share )...........  $102.......................................... $110

* I used a 10 multiple on pre-tax earnings as a conservative measure, you could easily argure that BRK's earnings stream, due to it's stability and growth, could be worth a 12X multiple. That's where valuations can be an art as opposed to a science.
** Net cash = Cash - Debt, BRK's cash basically cancels out it's debt. It's also important to note that BRK takes in 1 billion of cash per month (yes, per month, not a typo) that is added to the balance sheet. So debt is not an issue at BRK. That cash rate is also likely to increase over the next while as business conditions continue to improve.

So BRK is not dirt cheap right now, but looking out 3 years, you could be buying BRK at 0.70 cents on the dollar. I won't be adding here, but will continue to hold.