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Low P/E Stocks in Ruane, Cunniff's Portfolio - Are They Cheap?

January 24, 2012 | About:
roydamico

roydamico

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William Ruane was the founder of Ruane, Cunniff & Goldfarb Inc., a privately owned investment manager. Ruane passed away in 2005 but the firm continues operating. Apart from investment managing, the firm provides advisory services to its clients. Its customer database includes individuals as well as investments companies, pension and profit sharing plans, pooled investment vehicles, charitable organizations and corporations. It manages mutual funds for its clients.

The company was formerly known as Ruane, Cunniff & Co. Inc.

In a letter to Fortune magazine in 1988, Ruane said he was neither bear nor bull. "I have always thought of myself as a meek little lamb who is afraid of being fleeced," he wrote.

Now Ruane, Cunniff & Goldfarb Inc. is led by chairman and CEO Robert D. Goldfarb. Its flagship, Sequoia Fund, ranks in the top two percentile in its class by Morningstar.

Despite the turmoil that has been affecting the business in the last three years, the fund has remained a respectable firm.

The fund's philosophy is similar to the one developed by Benjamin Graham and applied by Warren Buffett. It looks for undervalued company with growth perspectives. The management team focuses on long-term deals.

In order to analyze which stocks to pick I use a tool called FAST Graphs, that lets me compare the current stock price versus the fundamental justified price that each stock should have. That justified price is calculated using a Graham valuation formula plus normalized multiple analysis. I researched stocks that gurus hold in their portfolios that also have a clear undervaluation in FAST Graphs methodology.

Leucadia National Corp. (LUK): Leucadia National is a diversified financial services holding company principally engaged in personal and commercial lines of property and casualty insurance, life insurance, banking and lending and manufacturing.

The company is shareholder oriented. It concentrates on ROI and cash flow to increase shareholders' wealth. It does so instead of turning to volume or market share.

The company's diversification into a variety of businesses, such as real estate, gaming, mines, oil drilling, manufacturing, etc., will help generate growth in the future.

According to FAST Graphs, LUK is not cheap. The price line (black) is trading above the earnings justified valuation line (orange line). LUK has a very low growth rate and currently it holds several businesses with fundamental problems, such as Jefferies.

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First Solar Inc. (FSLR): First Solar Inc. manufactures solar modules with an advanced thin film semiconductor process that significantly lowers solar electricity costs. FLSR holds meaningful intellectual property, while also designing and custom building its own production lines.

The combination of its activities has enabled to the company to put into practice a cost structure that cannot be imitated by competitors. Sixty percent of the production in 2012 will be represented by North America, thus making the company profitable and with capacity to generate cash.

Despite certain headwinds in the solar industry, FSLR has been able to stand in good shape. Indeed, it is in very good position to survive and continue moving forward.

The company is now calling for fourth-quarter EPS of $1.47-$1.72, and 2012 EPS of $3.75-$4.25. First Solar expects 2012 revenue to be between $3.7 and $4 billion.

First Solar has a strong balance sheet and a solid pipeline that will enable it to take advantage with respect to competitors.

Corning Inc. (GLW): Corning Incorporated creates leading-edge technologies for the fastest-growing markets of the world's economy. Corning manufactures optical fiber, cable and photonic products for the telecommunications industry; and high-performance displays and components for television and other communications-related industries.

The market for high-end phones and tablet computers is growing rapidly, driving the demand for sophisticated glass products like Corning's Gorilla Glass. Corning is a leading innovator in the glass substrate industry.

By 2013, the company expects to reduce spending as it completes capacity expansion and upgrade projects.

In terms of LCD panels, Corning is in an excellent position. It will better serve demand. Despite certain downturns in the market, the demand is expanding. Actually, all LCD panels shipped in 2011 will be LED in nature. Corning has long-standing relationships with TV makers that have proved beneficial for the company.

The company also continues with its expansion initiatives. Actually it is using cash on its balance sheet to diversify the business. Examples of diversification and expansion include the acquisition of Plaslab S.A.S in 2010.

GLW is trading cheap when I see its price (black line) and its justified valuation line (orange). After 2008, the market started valuing GLW business with a price tag below its intrinsic value. The Company has a very low P/E and while its growth rate was volatile, the Company kept expanding. I find GLW a very compelling opportunity for further research.

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JPMorgan Chase & Co. (JPM): JPMorgan Chase & Co. is a leading global financial services firm. The firm is a leader in investment banking, asset management, private banking, private equity, custody and transaction services and retail and middle market financial services.

Despite the bad news coming from the situation in Europe, the results in the U.S. will certainly support the company in the upcoming years.

Credit metrics have been gradually improving since the last quarter of 2009 and JPMorgan will definitely benefit from its leading businesses and large scale acquisitions. For instance, in May 2008, JPMorgan acquired Bear Stearns Companies and in September 2008, it acquired the banking operations of Washington Mutual Bank. In July 2010, JPMorgan acquired RBS Sempra Commodities LLP for $1.6 billion.

Management guarantees that these acquisitions will soon be profitable.

In terms of international expansion, JPMorgan is strengthening its presence in Asia and other emerging markets. Actually at the end of 2010, the company acquired a majority stake in a Brazilian hedge fund to expand its platform.

Although dividend hike and share buyback programs were prohibited during the recession to avoid suffering from the inability to offset other problems, the company has now received the Federal Reserve's approval to hike its dividend.

JPM is one of the most solid financial firms and it could trade as high as $60 according to its justified valuation line. I find JPM a very solid opportunity in the financial space and an interesting bet for a housing and consumer credit future recovery.

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Applied Materials Inc. (AMAT): Applied Materials develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. The customer database includes semiconductor wafer manufacturers and semiconductor integrated circuit manufacturers, who either use the ICs they manufacture in their own products or sell them to other companies.

Applied has been benefited by the popularity of flat-panel displays, which have become a growth engine for the firm.

After years working with the semiconductor business, the company started with the solar equipment product line.

Last but not least, the company has put into practice a low cost structure. The company announced restructuring plans.

Financially speaking, stock trades at $10.7 and the market cap is $14 billion. P/E ratio is 7.4 and forward P/E ratio is 9. Operating margin is 22.8%, and net profit margin is 18.3%. Fortunately the debt ratio is only 0.2. In terms of debt, AMAT is characterized for paying dividends and it has been able to boost the payout ratio. Current yield is 3% with a payout ratio of 21%.

Similar to GLW, AMAT is trading below its orange earnings justified line, but its undervaluation is smaller than the one in GLW. I think AMAT is a solid but volatile business that is not easy to predict. For example, its EPS % change has a huge range, growing 557%, 53% and 55% in 2004, 2006 and 2009 but falling -42% and -41% in 2007 and 2011.

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Rating: 2.8/5 (9 votes)

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