When investing in stocks, Hussman looks at both valuation and the quality of market action to determine his willingness to take risk. Favorable valuation occurs when stock prices are reasonable compared to the expected earnings, dividends, revenues and cash flows in the future. Market action considers the behavior of a wide range of securities and industry groups to assess the economic outlook of investors. Combined, these two dimensions create four "Market Climates" that affect Hussman positions, spurring him to become more aggressive in more favorable climates and more hedged in unfavorable climates.
According to Hussman's second quarter portfolio update, his biggest moves were new positions in Exxon Mobil (XOM), St. Jude Medical (STJ), and AT&T (T) as well as in increase in his holdings in Barrick Gold (ABX) and Coca-Cola (KO).
Exxon Mobil Corp. (XOM)
Hussman has previously owned holdings of Exxon Mobil, netting a 50% gain on his investment in 2006 when the average price of Exxon increased from $60.50 to $90.50 over a two year span. He bought back into Exxon in 2009, though he lost roughly 4% on that investment when he sold out the next year. Most recently, he initiated a new position of 1,000,000 shares of Exxon at an average price of $82.35, impacting his portfolio by 1.31%. The price of the stock has since dropped 3%.
Exxon Mobil Corporation's principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacturing of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. Exxon Mobil is a major manufacturer and marketer of basic petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a wide variety of specialty products. Exxon Mobil is engaged in exploration for, and mining and sale of coal, copper and other minerals.
According to Exxon's second quarter report, revenues for the quarter increased by 35.7% year-over-year, from $92.5 billion to $125.5 billion. Production increased 10% on an oil-equivalent basis, with liquids production driven by increased production in Qatar, the U.S., and Iraq while natural gas production increased due to additional U.S. unconventional gas volumes and project ramp-ups in Qatar. Improved downstream results and continued strength in chemicals also helped increase revenues. As a result, net income for the quarter increased 41.3% year-over-year, from $7.56 billion to $10.68 billion. Overall, first half earnings for 2011 increased 54%, from $13.9 billion to $21.3 billion.
Capital and exploration expenditures for the company were a record $10.3 billion, up 58% from last year, while cash flow from operations and asset sales was $14.4 billion. The company announced two major oil discoveries and a gas discovery in the deepwater Gulf of Mexico and concluded the acquisitions of two Phillips companies to double their Marcellus acreage footprint.
During the second quarter, the company purchased 67 million shares of its common stock for the treasury at a gross cost of $5.5 billion, bringing first half gross share purchases to $11.2 billion. The company expects another $5 billion stock repurchase in the third quarter of 2011. Dividends per share increased by 7% year-over-year to $0.47.
Exxon has a market cap of $392 billion. The stock trades with a P/E ratio of 10.5, below its ten-year average. Its P/S ratio is 1.0, even with its ten-year average. Its P/B ratio is 2.5, slightly under its ten-year average. Revenue per quarter has bounced back after taking a severe fall in the fourth quarter of 2008 and has increased for each of the past nine quarters. Earnings per quarter has for the most part tracked the growth in revenue, trending upwards for each of the past nine quarters as well.
St. Jude Medical Inc. (STJ)
Hussman previously owned St. Jude Medical in late 2008, holding 2 million shares at one point before selling out in 2009. He initiated a new position this past quarter in St. Jude, purchasing 1,000,000 shares for an average price of $50.71, impacting his portfolio by 0.77%. The price has since decreased 11%.
St. Jude Medical Inc. is dedicated to making life better for cardiac, neurological and chronic pain patients worldwide through excellence in medical device technology and services. The company has five major focus areas that include cardiac rhythm management, atrial fibrillation, cardiac surgery, cardiology and neuromodulation.
According to St. Jude's second quarter report, total sales increased 10% year-over-year from $1.31 billion to $1.45 billion. After adjusting for the impact of foreign currency, revenue for the second quarter increased 4%. Sales in the U.S. were down 2% as a result of weakness in the U.S. cardiac rhythm management market, but international sales increased 23% and now represent the majority of the company's business. Cardiovascular sales led the way with a 35% percent increase in sales over last year to $342 million. This was helped in part by the acquisition of AGA Medical Inc. which St. Jude acquired last November. Atrial Fibrillation product sales increased 18% over last year to $208 million, and neuromodulation products increased 9% to $104 million. Net earnings decreased year-over-year from $254 million to $240.9 million, but excluding after-tax charges relating to the AGA Medical acquisition and the restructuring of the company's cardiac rhythm management business, adjusted net earnings for the quarter were $283 million.
St. Jude's has a market cap of $14.8 billion. The stock trades with a P/E ratio of 14.5, very near its historical low. Its P/S ratio is 2.9, below its ten-year historical average. Its P/B ratio is 3.1., also near its historical low. Revenue growth for the company has been remarkably consistent over the past 10 years, increasing almost every quarter since 2000. This has earned the company a five-star predictability rating by GuruFocus.
AT&T Inc. (T)
In the past five years, Hussman has held shares of AT&T, holding 1 million shares of the company in 2006 when the stock traded for an average of $26.60. He reduced his position in 2007, first selling 700,000 shares for an average price of $36.72 and later selling the remaining 300,000 shares for an average price of $39.78. He decided to buy new shares of the stock this past quarter, purchasing 1,500,000 shares for an average price of $30.90, impacting his portfolio by 0.76%. The price of the stock has since decreased by 4%.
AT&T Inc. is a premier communications holding company. Its subsidiaries and affiliates, AT&T operating companies, are the providers of AT&T services in the United States and around the world. Its Wireless segment offers wireless voice communication services, including local wireless communications service, long-distance service, and roaming services. Its Wireline segment provides voice services, application management, integration services, data services, Internet access, and high-speed connections. AT&T also publishes yellow and white page directories.
According to AT&T's second quarter report, consolidated revenues for the quarter increased to $31.5 billion, up 2.2% from last year. This marks the sixth consecutive quarter with a year-over-year revenue increase. The increase in revenues was driven by a 9.5% growth in wireless service revenues, from $13.2 billion to $14.2 billion, and a 7.1% growth in data revenues, from $6.9 billion to $7.4 billion. However, voice revenues decreased 12.2% year-over-year, from $7.2 billion to $6.3 billion, and directory revenues decreased 16.5% from $1,007 million to $841 million. Net income totaled $3.6 billion, or $0.60 per diluted share, down 10% from last year's $4 billion in net income, or $0.67 per diluted share. Operating cash flows totaled $9.0 billion, and capital expenditures totaled $5.3 billion, leaving $3.7 billion in free cash flow.
Among the quarter's operational highlights, wireless subscribers increased 1.1 million in the quarter to reach 98.6 million subscribers in service. Smartphone sales were second-quarter record at 5.6 million, increasing more than 43% year-over-year. Branded computing subscribers increased by 377,000 in the quarter, reaching 4.0 million and doubling last year's numbers. Wireless data revenues, driven by Internet access, applications, messaging, and related services, increased by 23.4%, up $1 billion over last year to $5.4 billion. AT&T U-verse TV added 202,000 subscribers to reach 3.4 million in service, and AT&T U-verse High Speed Internet gained 439,000 subscribers to reach a total of 4.1 million.
AT&T has a market cap of $174.8 billion. The stock trades with a P/E ratio of 8.5, below its ten-year average. Its P/S ratio is 1.4, also below its ten-year average though in line with its three-year average. Its P/B ratio is 1.5, roughly even to its seven-year average. Revenue per quarter has been nearly flat over the past three years, while earnings per quarter have also been relatively even for the past three years excluding a large spike in the third quarter of 2010.
Barrick Gold Corp. (ABX)
Hussman has had a long history with Barrick Gold, having adjusted his position in the company nearly every quarter since 2006. When the price of the stock rose in late 2007, Hussman sold out his 350,000 shares in the company. He bought 950,000 new shares in 2008 as prices came back down and nearly sold out in 2009. As prices rose in late 2009 and early 2010, Hussman once again added to his holdings before nearly selling out again in the fourth quarter of 2010 for a 13.6% return. In the first quarter of 2011, he amassed 611,000 total shares. In his most recent move, he more than tripled his position in Barrick Gold, adding 219.15% to his position for an average price of $47.73, impacting his portfolio by 0.98%. The price has since increased by 1%.
Barrick is the gold industry leader, with interests in 26 operating mines and a pipeline of projects located across five continents, in addition to large land positions on some of the most prolific mineral districts.
According to Barrick's second quarter report, revenue for the quarter increased 30.7%, from $2.6 billion to $3.4 billion. This was a result of both higher realized gold and copper prices as well as higher gold sales volumes. Gold production was 1.98 million ounces at total cash costs of $445 per ounce and net cash costs of $338 per ounce. Gold cash margins increased 33% to $1,068 per ounce and net cash margins increased 30% to $1,175 per ounce. Copper cash margins increased 39% to $2.51 per pound. Net earnings rose 35% from $859 million last year to $1.2 billion. Free cash flow was a loss of $378 million.
Barrick completed the acquisition of Equinox Minerals in July, adding two copper mines and increasing their leverage to strong copper prices while maintaining their gold exposure.
The company has a market cap of $48 billion. The stock trades with a P/E ratio of 12.3, very near its historical low. Its P/S ratio is 4.4, below its ten-year average. Its P/B ratio is 2.2, roughly in line with its ten-year average. Revenue per quarter has been growing at a consistent rate in each of the past nine quarters.
Coca-Cola Co. (KO)
Like his relationship with Barrick, Hussman has held multiple positions in Coca-Cola for the past five years. He amassed 1.5 million shares of the company by the end of the first quarter of 2007 when prices were at an average of $47.79. He then sold 1 million shares the next quarter when prices increased to $51.72 and he sold out his remaining shares when prices increased to $61.19. He soon bought back into the company, amassing 2 million shares by the end of the third quarter of 2008 when prices were dipping back down, but he sold out his shares at a loss when prices continued to slump. He has recently been adding to his position that he initiated in 2009. In his most recent move, he added 75% to his position in company at an average price of $66.84, giving him a total of 1,750,000 shares and impacting his portfolio by 0.81%. The price of the stock has since risen by 1%.
The Coca-Cola Company is the world's largest beverage company and is the leading producer and marketer of soft drinks. Along with Coca-Cola, recognized as the world's best-known brand, The Coca-Cola Company markets four of the world's top five soft drink brands, including diet Coke, Fanta and Sprite. Through the world's largest distribution system, consumers in nearly 200 countries enjoy The Coca-Cola Company's products at a rate of more than 1 billion servings each day.
According to Coca-Cola's second quarter report, net operating revenues were $12.7 billion, up 47% from last year's $8.7 billion. This was driven by worldwide volume growth of 6% in the quarter, including 24% in China and 17% in Russia. The acquisition of Coca-Cola Enterprises' North American operations in the fourth quarter of 2010 also contributed to this growth. Worldwide sparkling beverage volume grew 5% in the quarter, and worldwide still beverage volume grew 7% in the quarter, driven by Minute Maid Pulpy's 35% growth in the quarter. water grew 10% in the quarter as well. However, cost of goods sold was up 69% in the quarter, land SG&A expenses increased 54% in the quarter. This resulted in a net income of $2.80 billion, an 18% increase over last year's $2.37 billion. Free cash flow was $2.35 billion, down from last year's $2.53 billion.
Coca-Cola has a market cap of $153.5 billion. The stock trades with a P/E ratio of 18.3, slightly below its eight-year average. Its P/S ratio is 4.4, slightly above its eight-year average. Its P/B ratio is 4.4, almost at a historical low.
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