Saturday, September 30, 2006

Model Portfolio Launch

Here it is. The inaugural Margin of Safety Model Portfolio which achieved a 1-year total return of 15.2% vs. S&P 500's 8.5% through the end of September. The portfolio is an eclectic mix of businesses which I am happy to continue holding for now.

Here is a quick update on the holdings.

Berkshire Hathaway (NYSE: BRKA)
Most noteworthy recent news was Mr. Buffett's decision to give his wealth away to various charitable foundations. The main portion went to the Bill and Melinda Gates foundation. He recently visited Israel to meet the founder of Iscar for the first time. Earlier this year he bought 80% of Iscar for $4 billion. While there, he also teased investors by pointing out that Berkshire would likely acquire another 1 to 3 utilities over the next decade. Of interest was a comment about private-equity firms providing Berkshire with some competition for potential investments. No worries. Berkshire has the luxury to wait things out and be approached by the kinds of businesses it covets. Oh, one more thing, Mr. Buffett got married at the end of August to his 29 year companion Astrid Menks.

Sears Holdings (NASDAQ: SHLD)
Eddie Lampert is on the hunt. In the most recent quarterly earnings report, Mr. Lampert couldn't have been any more specific:

"Our strong financial position and cash flow generation provide us with the flexibility to capitalize on a wide range of market opportunities as they arise. In addition to investing in our business and acquiring our shares, we are prepared to invest substantial amounts of capital if we identify other attractive investment opportunities which have the potential for returns we believe appropriately compensate the Company for the associated risks." said Edward S. Lampert, Chairman of Holdings.

Stay tuned.

Wendy's (NYSE: WEN)
The spin-off is complete. On Friday Tim Hortons (NYSE: THI) was officially orphaned and will begin trading as a stand-alone beginning Monday. One more surprise, Timmy's will e added to the S&P/TSX index. This was somewhat unexpected and caught many shorts by surprise. Our bet to invest in the Wendy's shares before the eventual spin-off has paid off handsomely. We will hold on to our newly found Timmy shares. Wendy's portion of the business remains under-appreciated by the Street and we may add to our position if the opportunity presents itself.

Not much to say here except, FINALLY! Ok, so the market has been on a tear. But Intel seems to be on the right course again. A slew of new products are being launched and the recent layoffs and divestitures shows management can act fast and decisively. AMD (NYSE: AMD), bring it on.

Cisco offered a beautiful opportunity in August when it dipped below $20 after I posted my April post. The Scientific Atlanta acquisition is looking good and with broadband and content proliferating, Cisco looks to be well positioned. Recently the company uttered the D word for the first time. It's not a matter of if but rather when Cisco will pay us a dividend.

Morningstar (NASDAQ: MORN)
Not much to report here. Company recently launched a Hedge Fund section on its web site. The stock has taken a breather and briefly touched our original purchase price recently. If it goes there again, we will add to our position.

Chapparal (NASDAQ: CHAP)
The thesis remains intact here. Steel prices have cooled off a bit. But commercial construction continues apace and consolidation should play into Chaparral's hands.

Wal Mart (NYSE: WMT)
What do you know. The recent decline in gasoline prices seem to have pumped up Wal Mart shares. The company has left the German market and is in the process of figuring out how to appeal to upper scale shoppers by redesigning stores. A risky strategy which will surely cause some pain in the short-term. Still, Wal Mart's scale and competitive advantages are hard to beat. Let alone replicate.

Corning (NYSE: GLW)
As with Cisco, Corning also took a nice little dip below $20 in August. Some softness in the LCD market spooked the market. But the company is in the middle of a solid turnaround. And forget about the fiber optics business. How come nobody is talking about the clean diesel technology the company is keeping in its back pocket?

The naysayers seem to be quieter these days. The company is raking in phone subscribers after a slow start. The triple play of cable, broadband and phone are panning out. So now that the capital expenditures are over and done with, the cash is rolling in. The question is what are Comcast's plans when it comes to wireless. Will another round of mega dollar investments depress the shares? The shares have had a nice run and we may take some money off the table if the opportunity presents itself.

Divestments continue and dividends keep on rising. Music to our ears. And the supposedly stodgy CBS broadcast the NCAA tournament online. So there.

Heinz (NYSE: HNZ)
Mr. Peltz is now sitting on the board. Not all his nominees won a seat though. Still, Heinz management is implementing many of Peltz's recommendations without any admission.

Tyco (NYSE: TYC)
The plans to break up the company appear to be on track. The recent break out of the shares is also welcome. Stay tuned on this one.

Mittal (NYSE: MT)
Mr. Mittal and Arcelor have finally made friends. The merger is going through to create the world's largest steel maker. The industry remains fragmented and global demand should remain strong. The shares did dip below $30 after my March post and have since rebounded.

Electronic Arts (NASDAQ: ERTS)
Thank you Mr. Market for the the opportunity to snap up shares in the low $40s back in Q2. Lo and behold, analysts are coming out of the wood work after the recent run-up pointing out that the industry's fortune seem to be turning around sooner than anticipated. Date point: the company's Madden NFL 2007 generated $100 million in its first week after launch!

Home Depot (NYSE: HD)
Mr. Nardelli annoyed many people with his antics during the annual shareholder meeting. The housing market's roller coaster ride and high gasoline prices havent helped much either. Still, the stock price has languished even as Nardelli has significantly boosted Home Depot's financial since he took over. Meanwhile, the company continues to pursue its strategy of catering to professional contractors through Home Depot Supply.

Posko (NYSE: PKX)
See Mittal. The thesis hasn't changed here. The shares rallied nicely after I first mentioned the company in March but have since retreated some. Posco has forged closer ties with Japan's Nippon Steel to try and thwart any takeover attempts. Meanwhile, management is shedding non-core assets and is planning to expand globally through M&A. Did I mention the company has no debt?

Walter Industries (NYSE: WLT)
I first wrote about this company back in July. Since then the stock has been on a bit of a roller coaster ride. Coal and natural gas comprise one business segment for Walter. The entire energy sector has been under pressure. On top of that Walter's coal business has not performed as well as anticipated by some of the hedge funds that had loaded up on the stock. So some of the hot money has been heading for the exits. But the thesis remains intact. The Mueller spin-off is on track and on a sum of the parts basis, the shares seem significantly undervalued at these levels.

Budweiser (NYSE: BUD)

Things are looking up for the king of beer. Volume growth seems to be picking up, labeit modestly and prices are stabilizing. Meanwhile, August Busch IV has taken the helm putting the company under family control once more. Let's hope he is ready for the challenge.

Google has been busy taking market share and cranking out more products and alliances. The shares appear range-bound for now. We need a nice hiccup to add to our position.

Centex (NYSE: CTX) and Pulte (NYSE: PHM)
It's been a wild ride. The Fed is done. The Fed is not done. Inflation is under control. Inflation will force the Fed to raise rates again. Hard landing. Soft landing. Who knows. The shares were recently trading close to book value and have rebounded some as some data seems to be suggesting that the economy is cooling enough to entice the Fed to hold tight and maybe even cut rates. Not to mention the fact that oil prices have been falling easing inflationary pressures further. Meanwhile, homebuilder after homebuilder is ratcheting down earnings estimates and singing the blues. But nobody seems to be taking the CEOs seriously when they say they are being prudent with land purchases and new building projects. Nobody seems to believe that these companies are in better finacial shape than the last housing debacle and that the big boys could be in great position to consolidate and gobble up the smaller players. To be sure, risks remain. Adjustable-rate mortgages could come back to haunt those who didn't do their homework causing many to sell at any price, causing a housing inventory glut. And maybe the Fed will have to raise rates causing consumers to delay home purchases. None of these scenarios would be good for homebuilders. But no matter. If Mr. Market offers us the shares below book value, we will gladly take them off his hands.