For our current partners the important question is not whether we achieved our goal in the past, but whether inflation plus 10% is realistic from this point. We believe midteen returns are achievable based solely on the metrics of the businesses we own. The collective free cash flow yield of our companies is approximately 10% today –meaning that if revenues and expenses show no improvement, the businesses will deliver an annual free cash flow return of 10%. In addition, most of our investees have excess capacity that will allow them to grow their revenues in mid-single digits over the next 5 years with little or no expansionary capital spending. Beyond these implied double-digit returns that our holdings can generate in a static spending mode, additional gains will come if P/E’s migrate to historic averages. Finally, hindsight bias is fostering the expectation that the substantially lower ten year average returns of the last decade will be repeated in the next. Ironically, this hindsight is a poor predictor since the mathematic probability of returning to more normal multiples of earnings and cash flow is much higher following a prolonged period of depressed stock prices. The Longleaf Funds’ companies are worth a great deal more than their current prices, with P/Vs in the low-60%s range. Those values are conservative and growing. In more macro terms, given that both U.S. and international markets have delivered approximately 10% per year over multiple decades, and given the S&P 500’s current10 year performance of (0.4)% and EAFE’s paltry 2.6%, the law of averages would argue for a significantly more rewarding decade than the last for equity owners. We have the portfolio foundation to deliver our goal without a market reversion to the mean, but the rampant pessimism surrounding stocks and the level of macro-based fear increases the likelihood of a tailwind.Read the full text of Mason Hawkins’s 3Q10 Quarterly Letter to Shareholders here.
During the third quarter, these are the stocks that Mason Hawkins purchased the most and based on his purchasing criteria, you can be certain that he thinks these companies are undervalued by at least 40%:
No. 1: The Travelers Companies Inc. (TRV), Buy: 2.61% of the portfolio - Total: 11,189,460 SharesSt. Paul Travelers is a provider of commercial property-liability insurance and asset management services. The Travelers Companies Inc. has a market cap of $25.16 billion; its shares were traded at around $54.63 with a P/E ratio of 8.3 and P/S ratio of 1. The dividend yield of The Travelers Companies Inc. stocks is 2.6%. The Travelers Companies Inc. had an annual average earning growth of 28.3% over the past 5 years.
No. 2: Loews Corp. (L), Add: 2.48% of the portfolio - Total: 21,684,900 SharesLoews Corporation is a holding company. Its subsidiaries are engaged in thefollowing lines of business: property, casualty and life insurance; the production and sale of cigarettes; the operation of hotels; the operation of offshore oil and gas drilling rigs; and the distribution and sale of watches and clocks. Loews Corp. has a market cap of $16.01 billion; its shares were traded at around $38.47 with a P/E ratio of 13.6 and P/S ratio of 1.1. The dividend yield of Loews Corp. stocks is 0.7%. Loews Corp. had an annual average earning growth of 11% over the past 5 years.
No. 3: Campbell Soup Company (CPB), Add: 1.27% of the portfolio - Total: 18,936,174 SharesCampbell Soup Company, together with its consolidated subsidiaries, is a global manufacturer and marketer of high quality, branded convenience food products. Campbell Soup Company has a market cap of $11.58 billion; its shares were traded at around $34.49 with a P/E ratio of 14.3 and P/S ratio of 1.5. The dividend yield of Campbell Soup Company stocks is 3.1%. Campbell Soup Company had an annual average earning growth of 3% over the past 10 years.
No. 4: Vulcan Materials Company (VMC), Buy: 0.88% of the portfolio - Total: 5,343,100 SharesVulcan Materials Company is the nation's foremost producer of constructionaggregates, a major producer of other construction materials and a leadingchemicals manufacturer, supplying chloralkali and other industrial andspecialty chemicals. Vulcan Materials Company has a market cap of $5.46 billion; its shares were traded at around $42.52 with and P/S ratio of 2. The dividend yield of Vulcan Materials Company stocks is 2.4%.
No. 5: FedEx Corp. (FDX), Add: 0.69% of the portfolio - Total: 8,267,081 SharesFedEx Corporation is a global transportation and logistics enterprise that offers customers a one-stop source for global shipping, logistics and supply chain solutions. Fedex Corp. has a market cap of $29.6 billion; its shares were traded at around $94.09 with a P/E ratio of 21.5 and P/S ratio of 0.8. The dividend yield of Fedex Corp. stocks is 0.5%. Fedex Corp. had an annual average earning growth of 1.8% over the past 10 years.
Check out Hawkins's stock portfolio by clicking on Mason Hawkins