Berkshire is cheaper than it was in 2008/2009... A bottom in CRE?... Defaults peak... Zell is buying (a little)... The Reich fantasy... Paulson's rise and stumble... OPEN insiders exiting fast...
The stock market has fallen for six straight weeks, as measured by the S&P 500. As the stock market falls, the conversation tends to turn from what was weak and overvalued to what's strong and undervalued.
We're very, very early in that conversation. Most stocks are still overvalued. But one of our World Dominator stocks has gotten cheaper than it's been since the bottom of the 2008 crisis...
As we noted in Monday's Digest, shares of Warren Buffett's holding company, Berkshire Hathaway, are trading at 52-week lows. Today, I received an e-mail from hedge-fund manager Whitney Tilson, a Buffett disciple, discussing a recent Wall Street Journal article about Berkshire.
The article notes shares of Berkshire Hathaway hit $109,925 yesterday, their lowest level since last June. At a current book value of $97,081, Berkshire is trading around 1.1 times book value. The stock's historical median valuation is about 1.7 times book value. And since 2000, it has been around 1.6 times book value. At that level, shares should be worth $155,000 today.
Tilson commented on Berkshire in his e-mail:
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With the stock at $111,000, with intrinsic value close to $170,000 [Tilson's estimation], it's just about the cheapest we've EVER seen it (it was cheaper at $75,000 in November 2008 and $70,000 in March 2009, but there was tail risk then). As Buffett has said, had the U.S. government not stepped in to save the financial system, Berkshire would have been the last to go, but it would have gone. Today, there's no tail risk, so on a risk-adjusted basis, it's CRAZY cheap. |
Berkshire Hathaway isn't the only long opportunity out there, though it's easily one of the most obvious…
In a more cautiously bullish tone, we ask... Is the bottom in for commercial real estate?
Doug Wilson, founder of Doug Wilson Companies, is often asked by the courts to oversee troubled real estate assets. His firm has worked for 100 different companies, overseeing $12 billion in assets. Speaking at the National Association of Real Estate Editors' annual conference in San Antonio today, Wilson said he thinks commercial real estate defaults have peaked, and he's seeing fewer incoming distressed properties.
Sam Zell is back in commercial real estate, too. He's the famous "grave dancer" who bought hundreds of properties on the cheap in the real estate collapse of the early 1990s. He reportedly just purchased a controlling stake in a 40-story office tower in Chicago that he can see from his own Chicago office. Zell's purchase values the building around $106 million.
Bad ideas thrive unchecked in government and academia.
A former Labor Secretary and Ivy League economics professor Robert Reich recently said on his blog that the U.S. should have "a 70% marginal tax rate on the rich."
I love it when academics and bureaucrats start talking about the rich, like success is some kind of cancer on the world. Reich doesn't seem to understand that taxing something gets you less of it. Tax rich people more, and they'll leave the country (or learn to hide their money in assets).
Nor does Reich remember when the highest income tax rates were between 70% and 91%. Tax receipts went up as a share of GDP when President Kennedy lowered the highest marginal tax rate from 91% to 70%. Tax receipts went up again when Reagan lowered the highest rate to 50%. When the highest rate was cut to 28% in 1996, tax receipts went down just slightly.
It's one of the great ironies of finance... Money always flows in accordance with headlines. When something is popular, people want to invest. That's why we had the tech bubble and the housing bubble. Eventually, prices have run too far and no one's left to buy.
It's the same with hedge-fund managers. Everyone wants to throw money at them after a spectacular year. But once these fund managers accumulate huge assets under management, outstanding returns are harder to achieve. A perfect example is billionaire fund manager John Paulson...
Through the 1990s and early 2000s, Paulson was a little-known but well-respected manager of a merger arbitrage fund in New York City. His returns were good, around 10% a year, but nothing spectacular. Then, Paulson, with the help of his analyst Paolo Pellegrini, formulated the short-housing thesis. He purchased loads of credit default swaps (insurance policies that pay out in case of default) on the nastiest subprime mortgages. He also bet against troubled banks like Lehman Brothers.
When the markets crashed, Paulson and his investors made billions of dollars. His flagship fund returned 590% ($15 billion in profits) in 2007, netting Paulson a reported $3.7 billion. Fame and fortune followed. Paulson was the biggest name, and one of the wealthiest players, on Wall Street. Total assets under management at his firm, Paulson & Co., reached nearly $40 billion. Following the crash, Paulson pocketed another billion dollars going long financials. For a fun read on Paulson and his housing trade, check out The Greatest Trade Ever by Gregory Zuckerman.
Nothing lasts forever, especially in the financial markets. Now Paulson is stumbling. He recently made headlines for losing $500 million in Chinese timber company Sino-Forest. Paulson owned nearly 35 million shares of Sino-Forest – more than 14% of the shares outstanding. The stock price has fallen 80% since May (a short seller alleged the company had fraudulent accounting).
Paulson also owns loads of bank stocks, including Citigroup and Bank of America, which have fallen 14% and 21%, respectively, since March 31. Paulson's $9 billion Advantage Plus fund lost more than 13% this month through June 10, leaving it down 19.65% for the year. Despite the hiccup, Paulson remains bullish on financials. And he continues to hold a huge position in gold and gold stocks.
Anyone who spent 10 seconds thinking about initial public offerings (IPOs) would never consider buying them. Most companies should never go public at all. They simply don't have anything to offer long-term shareholders.
But when they do go public, it's because somebody wants to sell. An IPO is an exit, not a sale. It's a way for people who own the company to cash out. And that's exactly what OpenTable executives are doing today. The top officers at the online restaurant reservation company, which went public in May 2009, have sold about 286,000 shares since the stock hit its all-time high in April. Seven OpenTable insiders, including the chief financial and executive officers, have sold shares since the stock peaked on April 25 at $115.62 – almost six times the IPO price.
OpenTable was up about 50% earlier this year, right before it reported first-quarter earnings. Insiders were selling all the way up. Then, lousy "lower-than-expected" earnings, a management shake-up, and the competition everyone's been predicting would appear started to bring the share price back to reality. It fell 22% in May… And it still sells for 120 times earnings.
"It's easy to sell at the peak, but the recent activity suggests that even after a pullback, executives are finding a reason to liquidate their positions and may suggest the shares are overvalued," Morningstar stock analyst R.J. Hottovy said. He says OpenTable's fair value is $40 a share. It's trading around $77 today.
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New 52-week highs (as of 6/15/11): None.
Stocks have been falling for six straight weeks. Has that changed your views on the market? Are you bullish… or bearish? Write to us at feedback@stansberryresearch.com.
"As an Iowa native with a BS in Agribusiness, I can say that several semesters of Ag Economics taught me one great lesson – everything, especially crops and livestock – is cyclical. For instance, it takes about 6 years to start, grow and improve a herd for that big profit in the beef market. Hogs, of course, less time – they produce more at one time than a cow does!! Chickens, much faster (I now live in a very productive chicken farm area of the country). Crops are the same, pure or hybrid. It just takes time to deplete reserves, build them again and 'guess' which crop to plant, aside from crop rotation methods, to beat the market.
"It takes years of practical application to get the groove of it, but as has been said by your column, you buy when no one else wants it and sell when all are 'discovering' it. Just common sense, but we know how that goes. Places that have recently had a disaster are prime for buying now – doesn't matter if it is from storms, fires or foreclosures. Their time will come in the cycle of things." – Paid-up subscriber J. Aselton
"I just finished driving from Montana to Ft Lauderdale, up the coast to Maine then New Hampshire to attend my daughter's graduation. From Virginia up the coast and all the way across the country everyone has corn in. Every little patch of ground has corn. There could be a bumper crop. Today while on my final day's drive back to MT, I heard that a proposal to immediately cut off the ethanol subsidies failed but I get the impression that it may be cut off after this year. If that happens I wouldn't be surprised to see the price of corn take a hit. It will be interesting to watch." – Paid-up subscriber Andy Liddell
Goldsmith comment: Corn prices would absolutely fall if the government stopped ethanol subsidies... probably around 15%. The reason you see so much corn is because farmers are reacting to incentives.
"Got a laugh out of the e-mail from the person who said you should recommend stocks that people 'like.' I've always thought that you could make a ton of money buying stocks that people hate. Microsoft, Exxon Mobil, Monsanto, McDonald's, Altria, Phillip Morris, Wal Mart, BP and Halliburton all seem like great ideas to me – maybe even Goldman Sachs. Hmmm... 'Stocks People Hate.' There's your next successful newsletter!" – Paid-up subscriber Jim Heath
Ferris comment: Warren Buffett says when a wonderful business meets a one-time, huge-but-solvable problem, there's an opportunity. I owe a substantial portion of my current standard of living to this idea.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
June 16, 2011