I follow Longleaf Partners fairly closely. They run a pretty concentrated portfolio and therefore tend to know their positions well which provides for good starting points for further research. I am especially interested in Chesapeake Energy which is one of their three largest positions. I think Chesapeake has an incredible resource/asset base and will be a terrific bargain at the current stock price should natural gas prices improve. I read a Morningstar Interview today with Staley Cates and in it he touched on a few things.
Cates said that he is optimistic on the potential for stock price increases for two reasons 1) Stocks are cheap on an earnings yield basis, especially against bonds with Cates believing the earnings for the S&P 500 would be $80 this year 2) Investors are very fearful, with everyone focused on macro items and not on micro..in other words yes there are things to be concerned with but this is already well reflected in stock prices
Cates had an interesting comment on how he and his analysts avoid commitment bias and stay fresh with stocks they have owned for a long period. The key is that all analysts are required to invest all of their money in Longleaf funds, so everyone working at the fund has a vested interest in maximizing performance and all holdings will be scrutinized all of the time.
On energy investing Cates noted that they don’t feel like they need to be in or out of the sector and that they don’t care at all about sector weighting. He said he thinks Chesapeake has the best natural gas assets through the shale plays that they got into early and into inexpensively. He believes that they are the best at what they do which I take to mean finding new large resource plays and locking up acreage quickly.
Cates mentioned that CHK is their most controversial holding mainly due to the pay package of CEO Aubrey McClendon. His assessment of Aubrey is actually quite similar to mine, which is that he has done an incredible job of investing $3 billion into various shale plays from which he has already received $12 billion in cash/drilling carries from partners and still retains 75% of the assets. But while he found these incredible assets for CHK he was incredibly stupid with his personal assets borrowing against CHK stock and getting hit with a margin call.
Also a very interesting answer was given as to which of his current holdings would still be in the portfolio in five years. The company Cates provided was Cemex, which has had its short term issues. Cates referred to it as a company with a 10% earnings yield at a time when everything has been going wrong. With time he believes there is considerable upside in both earnings and the stock price.
As to why Longleaf has such little exposures to financials he gave the common answer that it is very hard if not impossible to understand the assets of a bank which makes them an easy pass.
I would suggest that if you don’t know Chesapeake it is worth doing some research on. I’ve written about it before a couple of times and think it could have huge upside if there is an increase in natural gas prices:
Chesapeake value per share as explained by its CEO:
http://www.gurufocus.com/news.php?id=100055
At current prices you pay nothing for CHK’s move towards oil:
http://www.gurufocus.com/news.php?id=101898
