Tuesday, December 25, 2007

Studying the Gurus:Eddie Lampert

Came across an old article about Eddie Lampert and his investment approach.It's a great article so do take the time to read through the entire article

Studying the Sage

If Lampert does turn Kmart into the next Berkshire Hathaway, he could simply follow Buffett's blueprint. Buffett started with an investment fund he founded at age 25, the same as Lampert when he started ESL. Then in 1962, Buffett started to buy shares of the textile company and by the late 1960s he was using the mill's excess cash to invest in other businesses -- first a Nebraska insurance company and then an Illinois bank. By 1970 he had dissolved the fund, selling off its investments and giving the partners a choice of cash or shares in Berkshire Hathaway. Many investors believe that Lampert is poised to do the same: using Kmart to make new investments while keeping ESL for his earlier investments, or alternatively dissolving it at some point by selling its assets.Lampert has carefully studied Buffett for years. He started reading and rereading Buffett's writings while working at Goldman after college. He would analyze Buffett's investments, he says, by "reverse engineering" deals, such as his purchase of insurance company GEICO. Lampert went back and read GEICO's annual reports in the couple of years preceding Buffett's initial investment in the 1970s. "Putting myself in his shoes at that time, could I understand why he made the investments?" says Lampert. "That was part of my learning process." In 1989 he flew out to Omaha and met Buffett for 90 minutes, peppering him with questions about his investing philosophy.Like the Sage of Omaha, Lampert targets mature and easily understandable businesses that have strong cash flows. Both focus on a company's ability to generate large amounts of cash over the long haul, so neither is particularly fazed by sharp ups and downs in profits and stock prices. In fact, says ESL President William C. Crowley, "Lampert would rather earn a bumpy 15% [return] than a flat 12%." And just as Buffett progressed from minority stakes, where his influence isn't guaranteed, to majority stakes, where he has control, Lampert is currently following the same path. Kmart marks his first majority play, and Lampert says it is the type of investment he plans for the future. "In a control position, our ability to create value goes up exponentially," he explains

Link to the entire article

Monday, December 24, 2007

How to earn 300% in a global credit crunch

Interesting articles about hedge funds were able to make billions during the recent meltdown in the credit derivatives market

Article 1

Article 2


Insights into Burlington Northern Play

Burlington Northern has been one of Buffett's biggest plays (estimated stake of nearly 5 billion USD)

Came across an excellent analysis of Burlington Northern and wish to share with the rest of the readers

1) Company has bought back shares since 1998 at an average cost of 37.50 and are aggressive in buying back their shares.This year after 9 months 11 million shares were purchased at an average cost of 83.50 .the total shares outstanding is 351 million and the company is still buying of course Warren owns 17.2% of the shares and with these buybacks and his "permissionn" to buy up to 49% the amount of "available shares" are decreasing and BNI is using "free cash flow" to keep buying back the stock.

2) Company's EPS only rose a couple percent in 2007 because of "fuel hedges" which helped them in 2006. This years EPS of about 5.20 should increase by 7-10% over the next 5 years in pricing power and increased volume growth and the EPS show grow by 9% or more when factoring in the repurchases .

3) companies revenues are about 35% consumer and container boxes and automotive 20% coal 25% industrial and 20% agricultrual .Look for consumer and coal to be higher growth areas. Of the earnings 50% come from international products and 50% are domestic

4) company had "excess capacity" for along time now they finally have pricing power

5 ) Bottom line is the company has 29000 miles of track which costs about 3 million dollars per mile to "replace" . which totals about 87 billion

Land which is on the book at 1.7 billion dollars has a "conservative"average cost basis of about 50 years ( some of the purcahses are on books pre1900) at a 3% annual appreciation the land is probably worth more than 8 billion and chances are that number is UNDERSTATED

The terminals probably are worth another 3 billion conservatively and the long term debt which includes leases is about 11 billion .So 100 billion dollars of assets -11 billion of debt is about 89 billion dollars.The whole company can be purchased for under 28 billion at todays closing price

the entire transcript of the message post can be found here

Buffett's stock picks in the aftermath of the Credit Crunch

In the aftermath of the credit crunch, speculation was rife that Buffett would purchase stock of ailing mortage lender country wide financials and come to the rescue of Bear Sterns.In fact,quite the opposite has taken placed.Looking at Buffett's most recent purchases in Wells Fargo and US Bankcorp, Buffett has stayed within his circle of competence and stuck with companies with good ,rational managements who avoided playing risky financial instruments.In fact, a line from the 2004 BRK Shareholder meeting gives us some insight into Buffett's thought process regarding his recent stock purchases...

On Wells Fargo and Its Derivatives Risk [A shareholder asked why Buffett felt comfortable owning Wells Fargo stock, and even buying more, given its exposure to derivatives. Buffett replied:]

WB:I don’t have Wells Fargo’s annual report here, but I’d bet that J.P. Morgan Chase is far larger [in terms of exposure to derivatives]. I don’t think of them [Wells Fargo] as being a big player in the derivatives game.

It's clear that Buffett has made use of Mr Market's recent mood swings to buy well managed good businesses at attractive prices.With his cumulative knowledge built up over the years reading annual reports, it seem almost intuitive to purchase these companies..

Here is a link to his most recent stock purchases

In addition, here are his most recent comments about the recent turbulence in the financial markets and how he approaches it

WB:It is the nature of capitalism to periodically have recessions. People overshoot. So, it isn't the end of the world. I mean, as a matter of fact, for an investor, you know, it turns out to be the times when you make your best buys. I made by far the best buys I've ever made in my lifetime in 1974. And that was a time of great pessimism and the oil shock and stagflation and all those sort of things. But stocks were cheap.

Guess it's time to start digging through all those 10ks and 10qs


Michael Price on Sears

Michael Price talks about his biggest holding(Sears) and discusses why Eddie Lampert's strategy in remaking Sears.Price firmly believes that Lampert's push towards having Sears focus more on profitable merchandise and reducing volume sales.Such a strategy, make work as Sears is a much smaller entity compared to Target and Wal Mart and cannot rely on a large store base for a volume based discount business model.Moreover, Sears has aggressively been buying back its stock which augurs well for shareholders who are willing to wait out Mr Market's unduly pessimistic outlook on the stock at the moment.

The link to the video

A short bio of Michael Price (taken from Gurufocus.com)

A renowned money manager learned finance as a $200-a-week research assistant under Max Heine. Mr. Price earned reputation for buying undervalued companies, raising hell: tussled with management of companies held in his portfolios. He sold Heine Securities in 1996 to Franklin Resources for $670 million. Now manages private firm, MFP Investors: $1.6 billion under management, much of it his own money