Top Buys in the Last Quarter from John Hussman
Dr. Hussman manages Hussman Strategic Growth Fund, which invests primarily in U.S. stocks, and Hussman Strategic Total Return Fund, which invests primarily in U.S. Treasury and government agency securities.
In the last 10 years, his Hussman Strategic Growth Fund averaged 9.9% a year, and has a cumulative gain of 118%, while the S&P500 lost more than 23%. For the 12 months ended Oct. 31, 2008, his fund lost 0.3%, while the S&P500 lost more than 40%.
Prior to managing the Hussman Funds, Dr. Hussman was a professor of economics and international finance at the University of Michigan.
Hussman has two principles to base himself before investing: valuation and dimension. Favorable valuation means that stock prices appear reasonable in view of the stream of earnings, dividends, revenues and cash flows expected in the future. Dimension is the quality of market action, which considers the behavior of a wide range of securities and industry groups, in an attempt to assess the economic outlook of investors and their willingness to accept market risk.
These two principles make up four basic “Market Climates” associated with various combinations of valuation and market action. For stocks, in order of most favorable to least favorable, these climates are:
· favorable valuation
· favorable market action
· unfavorable valuation
· favorable market action
· favorable valuation
· unfavorable market action, and
· unfavorable valuation
· unfavorable market action.
In the most favorable Climates, Dr. Hussman will typically hold an aggressive allocation to market risk, while in the least favorable climate, he will typically attempt to remove the impact of market fluctuations from the portfolio through hedging or reduction in the average maturity of bond holdings. The most defensive position is a fully hedged position in which the entire value of long positions is hedged.
Ross Sandler, from RBC Capital Markets has published an article analyzing Dr. Hussman and his company and said “Dr. Hussman's Market Climates are very reasonable. Indeed, Hussman ability to invest according to them has enabled him to pick up the best companies.”
His last top-five conviction buys have been the following:
Intel Corp. (INTL): Intel is the largest chip maker in the world. It develops and manufactures microprocessors and platform solutions for the global personal computer market. Indeed, it was the pioneer of the x86 architecture for microprocessors.
From a financial standpoint, Intel is in good shape. At the end of the third quarter of 2011, the firm had $10.9 billion in cash and short-term investments compared with $7.1 billion in debt.
That is not all. The firm has sustained its position at the forefront of technology by investing heavily in R&D. In addition, it has an immense budget for capital expenditures, allowing it to maintain the most cutting-edge semiconductor manufacturing technologies in the world.
The firm subsidizes marketing efforts by customers when they highlight the Intel brand. As a result, it benefits from powerful brand recognition.
Exxon Mobil Corporation (XOM): Exxon is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2010, it produced 2.4 million barrels of oil and 12.1 billion cubic feet of natural gas a day. The company is the world's largest refiner, with 36 refineries, and it is one of the world's largest manufacturers of commodity and specialty chemicals.
With S&P's AAA credit rating, ExxonMobil's financial health is beyond reproach. Cash flow from operations remains sufficient to finance capital expenditures while increasing dividend payments and buying back stock. Shareholder return is a focus of management. Over the past five years, Exxon paid almost $40 billion in dividends and repurchased $130 billion worth of stock.
With high-performing operations and global integration, Exxon is one of the best-positioned firms to weather a drop in commodity prices.
MasterCard Incorporated (MA): MasterCard manages a group of global payment card brands, including MasterCard, Maestro and Cirrus, which it licenses to financial institutions that issue cards to their customers. The firm acts as the payment processor by facilitating the authorization, clearing, and settlement of transactions on its proprietary networks.
With the shift to electronic forms of payment, MasterCard is well positioned. In addition, over the past year, shares of MasterCard have risen by over 42%.
MasterCard's global brand strength is a strong competitive advantage when entering new or developing markets. MasterCard's processing network has plenty of room to grow before additional capacity is needed. Currently, the network runs at only about 70% capacity on a peak day.
International Business Machines Corp. (IBM): IBM is one of the largest information technology companies with an array of offerings including system hardware, infrastructure software, outsourcing, and systems integration services. The firm has operations in more than 170 countries and generates about 65% of revenue from abroad.
Financially speaking, IBM has almost $17 billion in cash and cash equivalents and nearly $30 billion in debt. The firm generates adequate cash from operations to cover its debt obligations while continuing to invest in growth opportunities.
Commercially speaking, increasing emerging market investments in financial services and telecom sectors have provided growth opportunities. Furthermore, IBM closely knows customers requirements, thus benefiting new product development and research initiatives.
IBM is uniquely positioned with no rivalry thanks to the products and services it offers. Last but not least, the surge of cloud computing will drive large enterprises to develop their own private clouds, and IBM is well positioned to build and manage such clouds for customers.
Nike Inc. B (NKE): Nike is the world's largest designer and wholesaler of athletic footwear and apparel. It has more than 700 company-owned stores through which it sells. It is present in more than 170 countries.
In terms of sales and revenues, North American Nike brand sales are projected to account for 36% of revenue in fiscal year 2012, followed by Western Europe (18%), emerging markets (14%) and China (10%). Other businesses, including Cole Haan, Converse, Umbro, and Hurley, should represent 13% of revenue.
Nike is in excellent financial health. Its debt/capital is around 0.06, EBITDA covers interest expense by more than 75 times, and its cash flow cushion is 4 times.
Its widely recognized status enables Nike to get advantage from pricing power. The company gets higher gross margins in footwear than competitors. Nike's footwear and apparel assortment spans several geographies and categories, mitigating exposure to any particular product or market.
In addition, Nike remains committed to returning cash to shareholders, something that is of importance for investors.
The firm has established a solid foundation in key markets across Eastern Europe, the Middle East, Africa, China and Latin America.