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John Hussman’s Biggest Fourth-Quarter Buys
Posted by: Holly LaFon (IP Logged)
Date: January 31, 2012 05:27PM
John Hussman’s primary aim at his Hussman Funds is to invest for long-term returns while managing risk. In 2008, when the S&P lost 37% in its worst year of the decade, Hussman’s Strategic Growth Fund (HSGFX) lost just 9%. His average return since inception is 6.52%, compared to 0.55% for the S&P. He has a Ph.D. in economics from Stanford University, a double masters in education and social policy from Northwestern University, and a bachelor’s degree in economics. Hussman is also a prolific writer and author of the Hussman Weekly Market Commentary.
His fund’s principle investment strategy involves buying common stocks that demonstrate favorable valuations and/or market action. He primarily considers the relationship between the current price and the present value of expected future cash flows, but takes into account other valuation measures, such as P/E and stock price to revenue, analyzed in relation to expected future growth of cash flows to determine underlying value and probable long-term returns.
John Hussman just released his fourth-quarter buys and sells, according to GuruFocus’ Real Time Picks. His three biggest new buys are: Vertex Pharmaceuticals Inc. (VRTX), Procter & Gamble Co. (PG) and Marathon Oil Corp. (MRO).
Vertex Pharmaceuticals Inc. (VRTX)
Vertex Pharmaceuticals Inc. discovers, develops and markets small molecule drugs that address major unmet medical needs. Vertex Pharmaceuticals Inc. has a market cap of $7.25 billion; its shares were traded at around $34.74 with and P/S ratio of 50.5. Vertex Pharmaceuticals Inc. had an annual average earnings growth of 13.3% over the past 10 years.
Hussman bought 1.8 million shares of Vertex in the fourth quarter at an average price of $35 per share.
Vertex’s shares sunk to their 52-week low of $26.50 in November 2011, off of a 52-week high of $58.57. Meanwhile, the company was working on FDA approval of the first drug to treat the underlying cause of cystic fibrosis, called Kalydeco. The drug received approval on January 31 and sent shares up 9%.
The company’s revenue has been slipping over the last several years, but saw a major jump in the third quarter of 2011 to $659.2 million, compared to $23.8 million for the third quarter of 2010. The increase was primarily a result of $419.6 million in net revenues from INCIVEK, a treatment for people with chronic genotype 1 hepatitis C, which became available in the third quarter. More than 25,000 Hepatitis C patients have begun treatment with INCIVEK as of Jan. 8, 2012. The company also received $200 in milestone revenues from collaborator Jannsen in the quarter.
In January, it set forth its 2012 key business objectives. Jeffrey Leiden, M.D., Ph.D., who will become Vertex's CEO on Feb. 1, 2012, commented, "Entering 2012, we are focused on becoming a sustainable business with strong revenues from INCIVEK and the planned global launch of KALYDECO for cystic fibrosis. Importantly, we are pursuing opportunities to further improve treatment with our all-oral regimens in development for hepatitis C and efforts to study our cystic fibrosis medicines in a larger group of people with this devastating disease. As these and other pipeline programs advance, we will manage our business with financial discipline and focused investment to ensure the greatest benefit for patients waiting for new treatments and for our shareholders."
Procter & Gamble Co. (PG)
The Procter & Gamble Company manufactures and markets a broad range of consumer products in many countries throughout the world. Procter & Gamble Co. has a market cap of $173.91 billion; its shares were traded at around $63.21 with a P/E ratio of 16.1 and P/S ratio of 2.1. The dividend yield of Procter & Gamble Co. stocks is 3.3%. Procter & Gamble Co. had an annual average earnings growth of 8.9% over the past 10 years. GuruFocus rated Procter & Gamble Co. the business predictability rank of 3.5-star.
Hussman dealt in Procter & Gamble shares at least twice previously. He bought 1 million shares in the second quarter of 2008 at an average price of $66.50, and sold all 1 million in the next quarter at an average price of $68. Then, in the second quarter of 2010, he bought 986,000 shares at an average price of $62, and sold 686,000 shares in the fourth quarter of 2010 at an average price of $63 per share, and the remaining 300,000 shares in the first quarter of 2011 at about $63 per share. Most recently, he bought 500,000 shares in the fourth quarter of 2011 at an average price of $64.
Donald Yacktman commented on the rare cheapness of blue-chip stocks the market has proffered recently. “I’ve been doing this for over forty years, and I can’t remember another period of time where I’ve seen so many high quality, profitable businesses selling at prices relative to the market this cheaply. To give you an illustration, the 30 year treasury today [January 5th, 2012] has a lower yield than many of these companies like Pepsi (PEP) or Johnson & Johnson (JNJ) or Procter & Gamble (PG). That’s a very unique period of time,” he said in an interview with Consuelo Mack on WealthTrack in January.
Procter & Gamble has achieved 7.2% revenue per share growth in the last 10 years, and book value growth of 21.3%. No doubt the P/E ratio of around 15 in the fourth quarter appealed to Hussman. In the last five years it has been much higher, as high as almost 22 in late 2007, and has fallen to much lower levels since then.
The P/E is even lower now as the stock price has fallen 5.5% year to date.
The stock price has declined on news that the company’s second quarter profit dipped to $1.69 billion or $0.57 per share, from last year’s $3.33 billion or $1.11 per share. Yet the company’s net sales increased 4% to $22.13 billion, from $21.35 billion last year. The company also cut its earnings per share forecast to $3.85 to $4.08, from a previously anticipated $4.15 to $4.33. They lowered expectations mainly due to the negative impact of foreign exchange.
Marathon Oil Corp. (MRO)
Marathon Oil Corporation is an energy company engaged in the worldwide exploration, production and transportation of crude oil and natural gas. Marathon Oil Corp. has a market cap of $21.79 billion; its shares were traded at around $30.96 with a P/E ratio of 7.2 and P/S ratio of 0.3. The dividend yield of Marathon Oil Corp. stocks is 1.9%. Marathon Oil Corp. had an annual average earnings growth of 10.5% over the past 10 years.
Marathon Oil become extremely cheap when it dropped 38% on July 1, the day it spun off its downstream business into an independent, publicly traded company called Marathon Petroleum Corporation. Marathon Oil shareholders received one share of MPC common stock for every two shares of Marathon Oil common stock held at the close of business on the record date of June 27, 2011. Marathon Oil is now an independent upstream company.
"As an independent upstream company, we have the capacity to perform at a higher level by focusing on strategic priorities while providing greater transparency for investors. Operationally, we're poised to capitalize on a broad base of opportunities by exhibiting the speed, agility and flexibility of an independent and retaining our proven ability to accomplish large and technologically challenging projects,” said Clarence P. Cazalot Jr., Marathon Oil’s chairman, president and CEO, in a statement.
Marathon Oil’s revenue increased from $9 billion in 2009 to almost $13 billion in 2010, with net income of $1.5 billion in 2009 and $2.6 billion in 2010. Management had also increased cash flow to a record $3.2 billion in 2010.
On November 1, the day it announced its third quarter results, the company closed on the Hilcorp acquisition of 141,000 net acres in the Eagle Ford shale, largely in the core of the play. The company reported that they had already seen better-than-expected performance from the assets. The assets will contribute the most to the company’s production growth, enabling them to achieve 5% to 7% compound average production growth from 2010 to 2016. Production for 2012 is expected to grow by 5% over 2011.
See more of John Hussman’s portfolio here.
Guru Discussed: John Hussman: Current Portfolio, Stock Picks
Stocks Discussed: VRTX, PG, MRO, HSGFX,