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The Portfolio of Mr. Zeke Ashton Analyzed - Buffett Ratio Guru Portfolio Analysis
Posted by: Mycroft Psaras (IP Logged)
Date: January 13, 2012 05:38PM

The following is an analysis of the most current portfolio of Mr. Zeke Ashton. The analysis will use a system that I designed that is based on the ratio that Mr. Warren Buffet released to the public in 1986, which he coined “Owner Earnings.” For those new to this type of analysis, I would recommend reading an introduction to my system by clicking here. My goal is ultimately to analyze the portfolios of each Guru highlighted here on Guru Focus, and then to subsequently re-analyze them every quarter when possible as changes are made. My purpose in writing these articles is to show the power of Mr. Buffett’s ratio in analyzing stocks, ETF’s, Mutual Funds and individual portfolios. If one can fill their portfolios with companies that score high using my system and avoid those which fail, one should be able to increase the probability of becoming a successful investor in my opinion. Profile of Mr. Ashton:

Mr. Ashton is the managing partner of Centaur Capital Partners and manages the investments for the Centaur Value Fund. He is also manager of the Tilson Dividend Fund (TILDX), which is ranked 5 stars by Morningstar. Previously Mr. Ashton was employed as an investment analyst for The Motley Fool (TMF). While at TMF, Mr. Ashton developed and produced investing seminars, subscription investing newsletters, and stock research reports in addition to writing online investing articles. Mr. Ashton also wrote investment columns with an emphasis on value investing for TMF on a free-lance basis. Prior to his work at TMF, Mr. Ashton was employed as a senior analyst and project manager in the Zurich, Switzerland office of Infinity Systems, where he provided financial system consulting to Swiss regional and private banks. From 1995 to 1999, Mr. Ashton was employed as a senior analyst and project manager for Wall Street Systems, a New York-based treasury and risk management software company. In this role Mr. Ashton provided consulting services to various clients in Germany, Italy, and the United Kingdom. Mr. Ashton graduated from Austin College in Sherman, Texas in 1995 with degrees in Economics and German.

Before I begin this analysis, I would like to first disclose that I know Zeke personally as we worked together at the Motley Fool from 2000-2001. I also did not discuss this article beforehand with Mr. Ashton prior to writing it. Though I personally consider Zeke one of the best value investors living as well as a great portfolio manager (from my following his career closely for more than a decade) but that does not mean I will take it easy on him in this analysis. I will let his portfolio do the talking for him and the objective results will be derived from putting him through the same rigorous system analysis that I will put every other Guru through.

So let us begin by presenting his portfolio as analyzed by my system:



As you can see from the high rankings in the table above that Zeke is a serious student of Warren Buffett and must be a true believer in the power of owner earnings. Out of the twenty non-financial stock holdings in this portfolio he has 14 (70%) coming in with a price to owner earnings of less than 15 and 15 (75%) coming in with a CapFlow of less than 50%. Only in the FROIC department has he underperformed with only 7(35%) of his stocks coming in at 15%+. Like Mr. Weitz (that I wrote about yesterday), it is very hard to find companies that are pure value plays that also have strong FROIC’s. This is so because as a classic value investor (which Zeke clearly is) price to book value plays a big part in any classic value investor’s stock selection.

I am very impressed with his stock pick P.F. Chang’s China Bistro (PFCB) and will have to look into that for my own client’s portfolios. Just that one example shows you the power of GuruFocus as a research tool. In my work I go through 7000 stocks every quarter and I find it refreshing to be able to look at what other Pros are buying and selling without having to do all the research on my own. I can also type in a ticker in the quote search box and find out which Guru’s own a stock I am interested in, within seconds. GuruFocus gives me a clear advantage over my fellow pros, who don’t subscribe to the premium service. Performance is everything in my business and having over 100+ Guru’s best ideas at my fingertips helps me find some very interesting stocks to buy. Dr. Charlie Tian has created something amazing here and someday it will become part of every pro’s and serious individual investors research. How else can you find great stock picks like PFCB that Zeke found?

But with every compliment I also am not shy about criticizing and I took a look at his smaller holdings like TransAtlantic Petroleum (TAT), Himax Technologies (HIMX) and IDT(IDT) and couldn’t come up with a reason why he bought those and walked away scratching my head. But those are just tiny holdings so we will let them slide. I also can’t understand his Coinstar (CSTR) purchase but he is up big on that one, so he must have found out some point that eludes me in my research.

Zeke is a Hedge Fund manager and thus has the ability to buy Puts and Calls and from reviewing those positions I am especially impressed with his Puts that you can find by going here

With the Eurozone ready to blow up, I think with the puts he has in place he will be able to practice “capital appreciation through capital preservation” as those three positions will make him a lot of money if the Eurozone blows a gasket due to the downgrades that are coming from the major rating agencies.

Therefore when we do our final score on Zeke’s portfolio we get 1.80, so he is still below the master Warren Buffett, but being considered second to Warren Buffett is not a bad thing. The final score is a non-weighted average of each portfolio’s total score divided by its total non-financial holdings.



Disclaimer: Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.




Guru Discussed: Zeke Ashton: Current Portfolio, Stock Picks
Stocks Discussed: ATVI, CSTR, DELL, CSCO, WDC, XRX, EMC, AAPL, HOLX, WSTL, DO,
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Re The Portfolio of Mr Zeke Ashton Analyzed - Buffett Ratio Guru Portfolio Analysis
Posted by: Adib Motiwala (IP Logged)
Date: January 15, 2012 12:01AM

MyCroft,

Thanks for this analysis. I agree that Zeke is a really good investor and Portfolio Manager.I have a comment and a question or two.

Comment: You refer to Zeke as a classic value investor and that he would rely a lot on Price to Book. I am not sure I agree with this assessment. From what I know and read about Zeke, he relies a lot on FCF or Owner Earnings.

Question: Are you using TTM numbers for this analysis? I am surprised to see 0 for WDC, a stock I own.

This is my analysis based on my interpretation of your system and using numbers from FY 2011. For owner earnings, I used Cash From Ops - Total Capex. (Means I included working capital changes)

In FY2011, Op Cash Flow was $1900 million. Capex was $761 million. Owner Earnings = $1137 million.

Capflow = 761/1900 = 40% (+1).
FROIC = 1137 / 5650 = 20% (+1)
P/Owner Earnings = 7800 / 1137 = 7 (+1)

Total 3/3.

One more point that I keep thinking as I read your articles. You refer to "Owner Earnings" and my understanding of Owner Earnings is Net Income + Depreciation/Amortization - Maintenance Capex. ( _http://en.wikipedia.org/wiki/Owner_earnings ). It ignores Working Capital changes and growth capex. While for free Cash Flow, I use Cash From Ops - Total Capex, which accounts for working capital changes and subtracts total capex including growth capex. It seems FCF definition is more conservative in some sense. (Though there are times when working capital changes over the year makes FCF look much better than it really is. In those cases, I always compare FCF to Owner Earnings as well). ValueLine seems to be using the latter definition and not the owner earnings definition.

So, if you do not mind, can you provide the numbers for Owner Earnings and capex for WDC that you used for this article.

thanks a ton for this series. It is quite interesting.

Adib

Disclosure: I am long WDC, BIG and PFCB from the above list. I also own TILDX.





Guru Discussed: Zeke Ashton: Current Portfolio, Stock Picks
Stocks Discussed: ATVI, CSTR, DELL, CSCO, WDC, XRX, EMC, AAPL, HOLX, WSTL, DO,
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Re The Portfolio of Mr Zeke Ashton Analyzed - Buffett Ratio Guru Portfolio Analysis
Posted by: mycroftpsaras (IP Logged)
Date: January 15, 2012 08:00AM

Hi Adib,

In the article I proved that Zeke is a big fan of FCF or Owner Earnings as I call it. I am sure all investors are a bit growth and value investors, But I believe a classic value investor to be a person who first looks at the the fundamental ratios of Price to Sales, Price to Book and Price to OE before they would ever think of looking at the FROIC and CapFlow ratios. I consider myself a Growth Investor and the first thing I look at is FROIC as I want to know is how much in Owner Earnings the company I am analyzing is making for every dollar of Total Capital employed. I like to own companies that have at a minimum of 15% in FROIC and then try to buy them at 15 or less their P/OE. So a classic Growth investor will shoot for FROIC first while a classic Value investor shoots for P/OE first. At least that the way I see it. A growth investor will sell at 30+ times P/OE while a value investor may sell at 20 . As you can see in both Mr. Weitz's and Zeke's portfolios, FROIC does not play a major role, while in my client portfolios it is paramount.

I do not use TTM numbers and like to go out to 2012 estimates (soon to be 2013 estimates) by Value LIne because I want to look forward at all times. Once I find a great FROIC, CapFlow, and P/OE only then do I open up my huge database and then go all the way back to 1962 and do a complete analysis of the companies quantitative history. From there I then implement Philip Fisher's 15 points analysis, check for lawsuits and then see how the company fits in my Macro-Economic Analysis. I love for example Defense stocks as their numbers are fantastic, management supreme and are all unique toll bridges. But even though their numbers are great I can't own them because Obama is shrinking the size of the Military, we just left Iraq and soon will leave Afghanistan. If Obama is anything like Jimmy Carter then he will continue to gut the military to the extreme. When that happens these stocks will fall to such a low lever that they will become extreme value plays. I know this from experience because I was buying McDonell Douglas, Lockheed and General Dynamics back in the early 80's once Reagan got elected because I knew that a 600 ship navy was coming.
If you read my article on the Homebuilder Industry that I wrote before the crash you will see the dangers of investing with current or TTM numbers as your guide :

http://www.investorgeeks.com/articles/2006/07/05/homebuilder-industry-analysis/

Had you used the Homebuilder's numbers at the time I wrote the article and bought heavy you would have made the mistake that Classic Value Investors like Bill Miller made and loaded up on them. The first rule as a value investor is to never try to catch a falling knife. My job as an analyst is to figure out ahead of time before it starts it initial fall so I can get my Clients out way before such things happen. This requires a tremendous amount of research and that's where Fisher Analysis comes it.

One of the greatest investment minds in history was Arnold Bernhard and he was the founder of Value Line in 1931. He created something amazing back then and I am where I am today because I have been using his service since the early 1980's . Here is one of the only articles about him you will find anywhere. His Mutual Fund firm was managing over $7 billion back in 1987 so just imagine and he was on the Forbes 400 list back then:

[legacy.betterinvesting.org]

My data goes back to the 1960's but I would love to get into the Value Line archives and get OE data from 1935 onwards. But unfortunately Value Line has never digitized their sheets going back that far.

Value Line is also held in high esteem by that most successful of investors, Warren Buffett. "I don't know of any other system that's as good . . ."

and Walter Schloss

[www.forbes.com]

I use five things in my work.

1) Value Line
2) GuruFocus
3) Morningstar
4) Wall Street Journal
5) Yahoo Finance

As for Western Digital here is my data:

With Western Digital Value Line has for 2011:

Cash Flow per share of $5.70
Capital Spending per share of $3.34
Total Capital Per share of $24.88

So we have owner earnings per share of $5.70-$3.34 = 2.36
So at a $33.35 price we have 14.13 as P/OE

CapFlow= 3.34/5.70 = 58%

FROIC = 2.36/24.88 = 9.4%

So it gets a "1" in 2011

But going forward to 2012 Value Line has;

Cash Flow per share of $2.65
Capital Spending per share of $3.25
Total Capital Per share of $24.91

So we have owner earnings per share of $2.65-$3.25 = -0.60
So at a $33.35 price we have a negative result for P/OE

CapFlow= 3.25/2.65 = 122%

FROIC = negative

Value said the reason for dropping their estimates so dramatically is because of this

"Western Digital encountered significant setbacks during the recent
September period. Specifically, flooding in Thailand devastated much of the company’s
operations in the region. It will likely be a challenge for WDC to get back
on its feet over the next several quarters.And lean inventory levels, which are
usually a positive, may amplify the problem.We think the top line fell 29% during
the December period, largely related to the capacity constraints. Top-line woes may
continue through much of the current fiscal year."

So as you can see we have great uncertainty here and I don't like uncertainty. I have a basic macro-economic rule that I follow. Where there is great uncertainty "Cash is King" and where there is little uncertainty "Cash is your Enemy" . With European downgrades all around and retail number being terrible I am 75% cash right now.

I don't compete against anyone and just operate my shop as a businessperson would. My benchmark is the NYSE Index and I have handily beat that over the years, but I am not in a race with it and only use a benchmark as people always want to know how I did performance wise. If it wasn't for that reason I would not compete against any benchmark and just buy great stock like I did with NetFlix in 2010 when it was $45 and then sold it when it hit 35 times its forward P/OE. I missed a lot of upside in selling but still sold for more than where it trades currently. So he that laughs last, laughs best!
Its all about buying low and selling at fully valued and maximizing your profits by minimizing your losses.

Warm Regards and I hope that answers your questions,

Mycroft



Guru Discussed: Zeke Ashton: Current Portfolio, Stock Picks
Stocks Discussed: ATVI, CSTR, DELL, CSCO, WDC, XRX, EMC, AAPL, HOLX, WSTL, DO,
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Re The Portfolio of Mr Zeke Ashton Analyzed - Buffett Ratio Guru Portfolio Analysis
Posted by: Adib Motiwala (IP Logged)
Date: January 15, 2012 03:37PM

Thanks for the detailed response. You answered my questions and helped me understand the difference why even the 2011 metrics for WDC are different than what I computed. For Cashflow per share, I used Cash From Operations while VL uses Net Income + Depreciation/Amortization. My number for Cashflow per share was $7.16 which would explain the difference in capflow and FROIC calculations.

Also, the uncertainty that was mentioned in the recent VL for WDC was true but it was a very fluid situation. Already the company came out with press release that production is back in its factories in Thailand and the drop in sales wont be as bad as earlier projected. In fact, VLs metrics for Cash flow per share climb from $2.65 to $9 for the 2014-2016 time frame with flat capex per share.

thanks and look forward to your analysis of other Guru investors such as Yacktman, David Einhorn, Joel G, Arnold Van Den Berg, Tweedy Browne...



Guru Discussed: Zeke Ashton: Current Portfolio, Stock Picks
Stocks Discussed: ATVI, CSTR, DELL, CSCO, WDC, XRX, EMC, AAPL, HOLX, WSTL, DO,
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Re The Portfolio of Mr Zeke Ashton Analyzed - Buffett Ratio Guru Portfolio Analysis
Posted by: carefull (IP Logged)
Date: January 23, 2012 06:11PM

Thanks again for the in-depth analysis, and the personal asides. I see Xerox seems to be coming back to life..is it still a 3, or is it going the way of Kodak?



Guru Discussed: Zeke Ashton: Current Portfolio, Stock Picks
Stocks Discussed: ATVI, CSTR, DELL, CSCO, WDC, XRX, EMC, AAPL, HOLX, WSTL, DO,
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Re The Portfolio of Mr Zeke Ashton Analyzed - Buffett Ratio Guru Portfolio Analysis
Posted by: mycroftpsaras (IP Logged)
Date: January 23, 2012 08:21PM

Hi Carefull,

Xerox is a great company that should break out someday, but they need to get their FROIC up inorder to do so.

Mycroft



Guru Discussed: Zeke Ashton: Current Portfolio, Stock Picks
Stocks Discussed: ATVI, CSTR, DELL, CSCO, WDC, XRX, EMC, AAPL, HOLX, WSTL, DO,
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