Arnold Van Den Berg is the chairman and co-chief investment officer of Century Management, which he founded in 1974. The firm’s flagship CM Value I Composite fund has achieved an annualized return of 13.4% net of fees, beating the S&P 500′s annualized return of 11.7% over the same period.
Arnold Van Den Berg is a value investor with a long term track record of success stretching back to the 70s. His portfolio has a fairly low turnover for an active manager, at only 10% quarter over quarter and it is currently focused on large caps, which is where he is finding value currently.
His investment strategy uses bottom-up fundamental value analysis, but he also strongly incorporates expectations of inflation or deflation into his macro strategy. Many of the top holdings in Van Den Berg's portfolio have moderate dividend rates and significant dividend growth, mainly due to the combination of dividend payouts and net share repurchases.
Since inception, Century Management has applied value investment strategies as its investment philosophy. The value approach to investing always considers the risk of an investment prior to evaluating the potential reward. This approach upholds four principles which are:
· Always Use a Business Approach.
· Always Use a Margin of Safety.
· The Market Acts like a Manic-Depressive.
· Price Determines Return.
Arnold Van Den Berg has explained Century´s approach at one of the company´s conference: “We approach the purchase of a stock as if we were entering into a business transaction. Therefore, we look at a business as an ongoing concern. If the business is not in a good industry, if sellers are asking too much, or if the business plan and process do not make any sense, then we don't buy the company.”
Using a "Margin of Safety" allows Century to create a favorable risk and reward scenario. It allows them to put the odds in their favor. The company characterizes the market as a manic-depressive, “At the extremes, the market is not very efficient or rational and is, therefore, subject to the manic-depressive swings of the investing public. The majority of investors let their emotions take over their decision-making process in deciding whether to buy, sell or hold,” he added.
Let's look at some of Van Den Berg's top buys
Jacobs Engineering Groupis a major engineering and construction company. Most of its revenue comes from the oil and gas industry, the chemical industry, and various government agencies.
It offers broad-based project consulting, management, construction, and maintenance services through a network of technical professionals in North America, Europe, the Middle East, and Asia.
The company enjoys good liquidity, backed by over $774 million of cash by the end of June 2011. The large cash balance and availability on the revolver are needed for Jacobs to carry out its performance or payment bonding requirements.
Use of excess cash is primarily for funding acquisitions, followed by paying down debt and, lastly, repurchasing stock. Given its existing backlog, the company can endure an extended period of volatility in the industries it serves.
Jacobs maintains price discipline during the bidding process and engages in tight internal cost control.
MEMC Electronic Materials Inc: MEMC Electronic Materials produces silicon wafers that are the basic materials used by chipmakers to fabricate semiconductors. The company operates manufacturing facilities in Europe, Japan, Malaysia, South Korea, Taiwan, and the United States. Customers include manufacturers of computer memory and microprocessors.
MEMC is in adequate financial health. At the end of the third quarter, the firm had $0.9 billion in cash and equivalents versus roughly $1.9 billion in debt on its balance sheet. The rapid emergence of the solar industry, combined with unit growth in the semiconductor market, will drive demand for silicon wafers. MEMC has been gaining some share in the semiconductor wafer market.
Berkshire Hathaway is a holding company with a wide collection of subsidiaries engaged in a number of diverse business activities. The firm's core business is insurance, run primarily through GEICO (auto insurance), General Re (reinsurance), Berkshire Hathaway Reinsurance, and Berkshire Hathaway Primary Group. The company's other businesses are made up of a collection of finance, manufacturing, and retailing operations, along with railroads, utilities, and energy distributors.
Berkshire remains one of the most financially sound companies with the firm managing its risk through diversification and a conservative capital position. In 15 years, Berkshire has exhibited an increasing trend.
Berkshire Hathaway's book value per share increased at a compound annual growth rate of 20.2% from 1965 to 2010. At the end of June 2011, Berkshire had $71 billion in float from its insurance operations.
Berkshire's strong balance sheet allowed it to take full advantage of opportunities in the months leading up to and following the collapse of the credit and equity markets in 2008, making lucrative investments in Goldman Sachs, General Electric, Swiss Re, and Wrigley.
Cisco Systems Inc: Cisco Systems is the world's leading supplier of data networking equipment and software. Its products include routers, switches, access equipment, and network-management software that allow data communication among dispersed computer networks. The firm has also entered newer markets, such as video conferencing, web-based collaboration, and data center servers.
Cisco's balance sheet is extremely healthy, with far more cash than debt, and free cash flows average of more than 20% of revenue over the past several years. Cisco generated double-digit year-over-year order growth across each of its key customer segments and geographies.
As Internet traffic grows, demand for Cisco's networking gear will grow too. UCS servers are showing early signs of success. Although they now have relatively low gross margins, these servers will potentially expand Cisco's footprint in its customers' data centers.
Cisco's current share price assumes inflationary growth and 8 points of margin deterioration over time. With nearly $5 per share in net cash and nearly $1.50 per share in normalized free cash flow, downside risk is limited at current levels.
Emerson Electric Co. Emerson is made up of five business segments: process management (28% of sales), industrial automation (21%), network power (27%), climate technologies (16%), and tools and storage (7%). Primary products include motors, drives, valves, switches, test equipment, air conditioning compressors, electric tools, and home storage solutions.
Fourth quarter sales were up 12% to $6.5 billion, with a double-digit increases in 3 segments. Underlying sales growth was 9%, led by strength in emerging markets. Operating profit margin expanded 170 basis points from the prior-year quarter to 19.1%, which reflected record quarterly profitability. Net earnings per share of $1.01 were also a record for the quarter.
Emerson has diligently returned value to shareholders, with an average of 80% of free cash flows coming back to shareholders via stock buybacks and dividends.
The company has a number of investments to expand its presence in emerging markets and has a strong position relative to other firms.