Stephen’s Posterous

China is cooling on Western capitalism. Look at the rough treatment meted out to Coca-Cola, the US drinks giant, and a group of foreign bondholders in Asia Aluminum, a Guangdong-based metals group. Pragmatism and self-preservation are taking precedence over free-market ideology.

China’s monopoly watchdog rejected Coke’s $2.4bn bid for fruit-juice maker Huiyuan on March 18, 2009. It probably feared the loss of a big Chinese brand, and domestic jobs. Over at Asia Aluminum, non-Chinese bondholders face losing all their investment after a local government reneged on its offer to buy them out. Pressure from Beijing provoked the change of heart, according to a person familiar with the situation.

Direct foreign investment into China is falling, despite government assurances that barriers for overseas cash are coming down. Approvals for foreign purchases fell by 37% in January and February, versus the same period in 2008. The amount of US capital put to work in China over the two months fell by half. That may reflect in part the crisis taking place in investors’ home countries.

But foreign investment isn’t just diminishing in value, it’s also diminishing in importance to China. Most historic investment went into low-value added manufacturing business destined for exporting, 54% of it in 2008. As exports dwindle, to be superseded, eventually, by home-grown consumption, restoring that flow of capital isn’t a priority. China can be pickier.

Even plans for a Rmb4 trillion ($585bn) stimulus doesn’t put China under much pressure to keep its doors open. Prodigious savings, $1.9 trillion of foreign reserves and a wall of money held by pension funds and insurance companies, should make that easy enough to finance. Direct investments from foreigners in 2008 were just $28bn, a pittance in comparison.

A full move to Chinese autarky, shutting off flows of everything but what China can’t make itself, would be counterproductive for the country. In the long run, openness to foreign capital builds up skills, wealth and welfare.

But China, unlike the US, Europe or Australia, is in a position to pick and choose where that capital goes. In pharmaceuticals and green technology, foreign research and expertise is still indispensible. In fruit juice, probably not. Until the global imbalances that filled China’s pockets are unwound, expect more protectionist spats.

Source.

The top 10 stocks of the Yacktman Focused Fund (YAFFX) comprise nearly 70% of total assets. "We feel like we ought to focus our money on our best ideas," Yacktman says, rather than take "a Noah's Ark approach with two of every kind."

That approach has helped consistently put the fund at the top of its category. Based on annual returns, the fund ranks among the top five large value funds for the most recent one, three and 10-year periods, according to Morningstar.

Over the last 10 years, Yacktman's fund has produced an annualized total return of 2.5%, six points better than the Standard & Poor's 500.

The current climate now has Yacktman putting any leftover cash to work in names you might not consider. The fund's top holding is AmeriCredit (ACF), an auto-financing company that now trades at a 64% discount to its book value. The fund manager has also made a big bet in media stocks, such as Viacom (VIAB) and Liberty Media (LINTA).

We recently asked Yacktman about his investing strategies:

Barrons.com: As a value investor, has your investment criteria changed in the current climate?

A: No. We've done the same thing for years. There may be slight nuances hopefully improving the process, but it's the same basic process. When the market is up we tend to start having a harder time finding things to buy. We end up owning fewer stocks, and you'll find there is a component of cash in there. Going into last year, I think we had close to 30% in cash.

Now my feeling is if you are a value investor and you're not fully invested, then there is a disconnect because there are plenty of things out there to justify buying in this environment at low prices.

Q: So is this something of a dream market for value investors?

A: Sure. These are the kind of times where you may say, I wish I waited a little longer. We tend to be early on average. But you feel very comfortable on a long-term basis. And we have a 10-year horizon time. So we just don't think in terms of 10 days or 10 weeks or 10 months. An investor who thinks in those terms is going to be frustrated and whipsawed potentially. But somebody who can have that long horizon time will have a high-comfort index in this market.

Q: How do you pick stocks in this environment?

A: You stick to objectivity, and you should look at the long term. When I hear somebody talk about 15% growth rates indefinitely, I think that's just not realistic. So you come up with some realistic normalized numbers. Most of the companies we have tend not to be wildly cyclical. Their earnings aren't as gyrating as say an auto company or an airline.

In the fourth quarter and the last few months we have honed in on sectors like media, health care and insurance. So that has some cyclicality but they're low capital requirements.

Q: What are some of your favorite stocks right now?

A: You look at the largest holdings in our top 10 and the top three would be Coca-Cola (KO), AmeriCredit and Viacom. But if you look at the top 10 you will notice there is Viacom, eBay (EBAY), News Corp. (NWSA) and Liberty Media (LINTA), [which includes the QVC retail channel. News Corp, (parent of Dow Jones, the publisher of Barrons.com) cracks the top 10 of Yacktman's flagship fund (YACKX) but wasn't a top holding in the focused fund, as of Dec. 31, 2008.]

So there's a lot of media in there and the theme is very similar in a lot of ways in that they tend to use TV or media; they're heavily TV oriented. What has killed them is the advertising has just dried up dramatically in this environment. Yet they are very good businesses, and, long term, I think they will make very nice returns.

Q: So on the media side, are you particularly interested in the TV business?

A: I just think they are good businesses, and they are cheap. If you look at the list of properties that Viacom has, it's things like MTV, Nickelodeon and Comedy Central, but the stock has been under pressure.

Q: Do you think the advertising on television will come back?

A: To some degree. One of the problems is virtually every consumer company is trying to find where they can get eyeballs. It's tougher and tougher. The media world is more diversified, and it is much more difficult to hit [consumers] than it was 10 or 20 years ago when you had just a few networks.

Q: That said, with 20% of your fund currently invested in media do you think these companies are the ones that will or can figure it out?

A: I think they are some of the best ones. Part of the problem with Viacom was they were under tremendous pressure because National Amusements owns a lot of their stock and had some leverage, and I think people were nervous about it.

Q: Are those the kind of events that scare a lot of investors that you are willing to look past in finding value?

A: We view the market as kind of a manic depressant. We are constantly looking at news events, and when companies hit the headlines with negative news, that is usually the time to start sifting through and looking at the numbers. We do our own research. We aren't relying on somebody else for making decisions. But what happens is a lot of the other research may accelerate our learning curve, so that's why we have it available to us. But I think that's what separates the men from the boys.

Q: What else is on your mind in picking stocks right now?

A: I really don't like to spend a lot of time on macro issues, because the reality is that it is the specific investment choices that really make the money. Fortunately there are plenty of good opportunities out there. But I would be very concerned about holding a lot of cash, and that's where people are moving toward. I think that's just the wrong place because when the economy does turn and things improve, it looks like there is going to be an awful lot of inflationary pressure.

Q: So do you guys have a position in gold?

A: No gold. I would rather have Coca-Cola than gold any day of the week. The ability [for them] to raise prices is like a machine that prints money.

Q: Thanks for your time.

Source. Subscribe to Barron's. Cabot Money Management.

When the great fleet of American consumer goods finally sinks, the last sailor on board the last ship will likely be drinking a Coke. That at least is what Barry Diller appears to be thinking.

Diller, the chairman and chief executive officer of IAC/InterActiveCorp (IACI) and a director at Coca-Cola (KO), made a big bet on the beverage maker this week, plunking down $20 million. Diller bought 500,000 shares on Monday at an average per-share p rice of $39.91.

Coca-Cola raised its dividend 8% in February, giving its shares a yield of more than 4%. As long as the company doesn't cut the dividend, Diller just bought himself the American dream -- a nearly $1 million a year payout for doing precisely nothing.

Prior to this buy, Diller owned just 1,000 shares of the company, tied for the least shares owned by any director as of February 2008, according to the company's latest proxy statement. He also owns about 16,000 phantom stock units, which can be converted into cash when he leaves the board. Even with his recent buy, Diller owns less than 1% of the company.

After the filing, which came in to the Securities and Exchange Commission at 2:02 p.m. EST on Wednesday, the stock jumped 1.3% in the next 20 minutes. It closed the day at $39.73, up 2.3%.

Coca-Cola has not been immune to the economic downturn, shares were down 34% over the past year as of the March 3, 2009, close. The shares hit a 52-week low of $38.76. The company faces significant currency exposure because at least 80% of its operating income comes from overseas.

That said, the dividend increase should give investors confidence, and the company continues to increase volumes in China and India by double digits, says Damian Witkowski, an analyst at Gabelli & Co. who rates the stock at Buy. "The stock has gotten so cheap," Witkowski says. "I think he just likes the prospects of it."

Diller's interest in shares of the beverage company differs from his ownership pattern at his own company. According to his most recent ownership filing from Monday, Diller held a 26.7% stake in IAC/InterActiveCorp. But as of last January, when he last filed disclosures related to his holdings, Diller owned 33% of the company. Diller controls 58.3% of the voting power of the company, partially through control of class B common stock.

"Investors in IAC/InterActive might think 'What's the deal? Why isn't he buying his own company?'" says Lon Juricic, president of StreetInsider.com.

Source.

Berkshire Hathaway, the holding company led by famed investor Warren Buffett, reported its worst year ever in 2008.

The company's net fell to $4.99 billion from $13.21 billion in 2007. Berkshire said its book value per share declined 9.6% -- a performance far better than the S&P 500-stock index but only the second negative year suffered by the company since Mr. Buffett took over in 1965.

Berkshire predicted the economy "will be in shambles throughout 2009 -- and, for that matter, probably well beyond." Still, Mr. Buffett struck an upbeat note in his letter to shareholders. The chairman detailed the current woes of the financial system, saying we should "never forget that our country has faced far worse travails in the past. ... Without fail, however, we've overcome them."

The market tsunami was expected to wreak havoc on Berkshire holdings such as Coca-Cola, U.S. Bancorp, Wells Fargo, Moody's and Washington Post, among others. It was also a challenging year for Berkshire's insurance companies. It was the second costliest hurricane season on record, with damage estimated at $54 billion, according to the National Climatic Data Center. In 2005, storms including Hurricane Katrina caused $128 billion in damage, resulting in more than $3 billion of losses for Berkshire.

Still, its decline far outpaced the Standard & Poor's 500-stock index, which fell 37% in 2008, including dividends. Through 2007, Berkshire's book value per share averaged an annual rise of 21.1% over more than four decades, compared with the 10.3% rise of the S&P 500. Source.

Berkshire Hathaway Shareholder Letter 2008

It's been a challenging year at Berkshire Hathaway. While Chief Executive Warren Buffett has made a slew of savvy preferred stock and corporate-bond investments, the company's famed portfolio of stocks has been slammed in the ongoing bear market.

So far this year, Berkshire's class A shares have slumped 20% to $77,500, near the lowest level in five years and just over half the stock's peak reached in late 2007.

The investment company's woes come in spite of recent investments outside the common stock market. For example, the company has bought $2.6 billion of convertible securities from Swiss Re that pay a 12% interest rate. Berkshire also has bought a series of bond issues from the likes of Vulcan Materials, Harley Davidson, Tiffany and Sealed Air that pay 10% or more.

Berkshire's problems these days clearly stem from its equity portfolio, which could be down more than 25% in 2009, based on our calculation of the performance through yesterday of Berkshire's 17 largest investments, which historically have accounted for over 85% of the portfolio.

Wells Fargo has been the biggest disaster, as Berkshire's holding of 290 million shares as of Dec. 31, 2009, has lost more than half its value as Wells Fargo dropped to $12 from $29 on Dec. 31. That alone has cost Berkshire over $5 billion. Other losers include American Express, U.S. Bancorp, Procter & Gamble and ConocoPhillips.

Coca-Cola, Berkshire's largest holding at $8.5 billion, has held up relatively well, declining about 5% year-to-date, versus a drop of 17% in the Standard & Poor's 500 index. The total stock portfolio now may have dropped below $45 billion, down from $76 billion on Sept. 30.

Wall Street is eagerly awaiting Berkshire's fourth-quarter earnings release, which is expected late Friday, February 27, 2009, and the company's annual report on Saturday, February 28, 2009. The annual will contain Buffett's widely read shareholder letter, as well as more detailed disclosure on the $37 billion of long-dated equity puts on U.S. and major foreign stock markets that Berkshire had sold as of Sept. 30.

The rising value of those puts and the resulting losses on that derivative position have weighed on Berkshire shares partly because it's not easy to gauge the value of the puts, which have an average maturity of 13 years and can only be exercised at maturity.

The customized puts, which aren't traded on any exchange, had suffered a loss of $1.7 billion in the first nine months of 2008. Additional losses since then could top $5 billion. Berkshire also has suffered unspecified losses on some $10 billion of credit derivatives linked to junk bonds given that market's fall since Sept. 30.

Investors typically value Berkshire based on book value and earnings. Based on both measures, the stock looks attractive. We estimate that Berkshire's current book value is in a range of $62,000 to $65,000 a share, down from more than $77,000 on Sept. 30 and roughly $71,500 on Oct. 31.

This suggests that Berkshire now trades for about 1.2 times book value, below its average of 1.5 times book in the past decade. Berkshire's market value now is $118 billion. Based on third-quarter results, Berkshire's operating profits are running at an after-tax annual rate of about $5,300 per share. This means Berkshire trades for a relatively reasonable 14 times estimated '09 earnings.

Berkshire's results this year likely will be depressed by the economy since some of the company's wholly owned businesses are involved in retailing, building materials and manufacturing. Berkshire, however, will be helped by its new high-yielding investments, including the total of $8 billion of 10% preferred stock that it purchased from Goldman Sachs and General Electric in the fall.

Investors will be going through the '08 annual Saturday and focusing on year-end book value, which may have stood around $70,000 a share; the equity derivatives loss in the fourth quarter and guidance about how to value those puts, as well as Berkshire's cash position.

The company had nearly $28 billion of cash at its insurance units on Sept. 30, but that position fell in October as Berkshire bought $5 billion of Goldman preferred, $3 billion of GE preferred and $6.5 billion of Wrigley debt and preferred stemming from its buyout by Mars. Cash may have dropped to the $10 billion to $15 billion range at year end.

The declining cash position may have been a reason that Berkshire sold over half its equity holding in Johnson & Johnson in the fourth quarter, raising almost $2 billion. Berkshire is on the hook to purchase $3 billion of convertible preferred stock of Dow Chemical if it goes through with its deal to buy Rohm & Haas.

Berkshire has taken some lumps this year, but it remains a financial powerhouse at a time when credit is dear and investment opportunities are plentiful. This plays to Buffett's strength, although he probably wishes he had invested less in 2008 and had more cash to invest now.

Source.

Warren Buffett's Berkshire Hathaway bought $250 million of debt from jewelry giant Tiffany & Co. The debt sports a yield of 10%, according to Tiffany’s filing with the Securities and Exchange Commission. Half of the notes are redeemable in eight years, the other half is redeemable in 10 years. New York-based Tiffany said it will use the proceeds to refinance existing debt and for general corporate purposes.

The investment is the latest in a series of deals in which Berkshire has scooped up securities with yields of 10% or more as the cash-rich firm takes advantage of cash-starved companies. In late September, Berkshire bought $5 billion of Goldman Sachs Group preferred stock yielding 10%. It has also purchased high-yielding debt or preferred stock from General Electric, Swiss Re, Harley Davidson and a handful of other companies.

It’s an intriguing strategy for Mr. Buffett. A number of analysts and Buffett watchers have questioned whether the investor has lost his mojo amid the latest market mayhem. Berkshire’s stock lost 32% in 2008, hurt by large holdings such as Coca-Cola and Burlington Northern Sante Fe.

But with the market in such turmoil, it’s hard to argue with investments that lock up a 10% yield or more over the next decade, Mr. Buffett’s legions of supporters say. Investors now eagerly await Berkshire’s quarterly filing of its holdings, expected some time in the next several days.

Source.

Several consumer goods companies can claim a similar reach but few would be able to trumpet Coca-Cola’s ability to “bring simple moments of pleasure” to customers 1.6 billion times a day, at least not with a straight face.

And the benefits that such breadth brings were evident again yesterday: out of the eight large US listed food and beverage companies to report fourth-quarter earnings so far, Coke was only the second to show continued growth in volumes. The news prompted both a pop for shares in Coke and its peers.

Everything is relative, though. Coke merely beat lowered analysts’ expectations. A decline in sales for the fourth quarter thanks to currency movements indicates one of the challenges ahead for the coming year. At the same time, falling volumes in North America reflect the well-established shift in consumer behaviour away from colas and their carbonated friends. As with most consumer-related categories, optimists must now assume that no manufacturer or large retailer is pushed into starting a US price war.

Even so, Coke continues to pursue market share in emerging countries, particularly China, India and the Philippines. Comments from spirits maker Diageo support the view that such markets offer enduring growth.

The risk remains that expansion ends abruptly: the economic slowdown in Russia and eastern Europe prompted two profit warnings from bottler Coca-Cola Hellenic Bottling last year. But continued attempts to improve efficiency offer some comfort. Coke aims to find $500 million of cost savings by 2011 – equivalent to 6 per cent of current operating profit – which it intends to reinvest in order to keep growth fizzing along fairly nicely.

That does not quite leave Coke in the realm of reliable utilities. But a  4 per cent yield and 16 times earnings multiple puts it squarely in the basket of steady, defensive companies. In these markets, there are few such simple pleasures available.

Source.

We are cutting our estimates for Coca-Cola (ticker: KO) for 2009. Our earnings-per-share estimate cuts today to $3.11 for 2009 puts us at the lowest level of the sell side range of estimates after a few weeks of drifting and spreading forecasts.

We have now gleaned a better read from the early trading statements of other beverage companies such as SABMiller [a bottler of Coca-Cola products] and spoken with other emerging-market beverage companies, leading us to cut numbers across every almost geography.

But this cut seems largely priced in. Having met with investors in the U.K. and U.S. the past week, much of the buy side already seemed to be embracing an EPS range of $3.00-$3.10 for 2009. European investors, in particular, seem to have particularly low expectations of Coke, in line with our cut. This puts Coca-Cola shares just below the 14 times price-to-earnings range where the stock historically traded at for a couple of years coming out of the 1987 market crash.

Operationally, we expect flattish volume growth and earnings before interest and taxes, below long-term guidance. Latin American sentiment has continued eroding. India and the Philippines present different challenges as these are company-owned bottling operations. Central and Eastern European GDP results have continued to drift in January. We are not clear on the impact of a new Japan bottling model. Eurasia is eroding and the China juice deal looks expensive, with longer-term benefit.

Still a Neutral rating, but with a lower price target. With a lot of potential bad operating issues cited above apparently priced in, the one worry we still have is whether there is more downside to our numbers from currency pressures in some of the emerging markets where Coke does not hedge. Our new price target is of $47 (from $55) and assumes no forward multiple expansion. Source.