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The Portfolio of Donald Yacktman Analyzed with the Buffett Ratio

The following is an analysis of the most current non-financial portfolio of Donald Yacktman. This analysis will use a system that I designed that is based on the ratio that Warren Buffet released to the public in 1986, which he coined “Owner Earnings.” For those new to this type of analysis, I would recommend reading an introduction to my system by clicking here. My goal is ultimately to analyze the portfolios of each guru highlighted here on GuruFocus, and then to re-analyze them every quarter when possible as changes are made. My purpose in writing these articles is to show the power of Buffett’s ratio in analyzing stocks, ETFs, mutual funds and individual portfolios. If one can fill their portfolios with companies that score high using my system and avoid those which fail, one should be able to increase the probability of becoming a successful investor in my opinion.

Profile of Donald Yacktman:

Yacktman is the president and co-chief investment officer of Yacktman Asset Management Co. He is also a co-manager for The Yacktman Funds. Prior to founding the firm in April, 1992, Yacktman served for ten years as the senior portfolio manager of Selected Financial Services Inc. During that time, he also served for nine years as the portfolio manager of the Selected American Shares mutual fund and was named Portfolio Manager of The Year by Morningstar in 1991.

He joined Selected Financial Services Inc. in 1982 from Stein Roe & Farnham where he had been a portfolio manager since 1968. Yacktman holds a B.S. magna cum laude in economics from The University of Utah and an MBA with distinction from Harvard University.

GuruFocus does a wonderful job in showing how each Guru has done vs. the S&P 500 Index in total return. Here is Yacktman’s GuruFocus performance table, so you can quickly measure his relative performance vs. the S&P 500 Index over the years:

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As you can see from the tables above and below, his performance has been excellent over the years and since starting his fund in 1992, he has achieved an average annualized return of 9.1%.

Here are his numbers from 1993-1998:

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I first decided to analyze Yacktman’s portfolio after watching these two wonderful interviews that GuruFocus contributor Canadian Value posted over the last couple of months:

Bloomberg Interview

CNBC Interview

When analyzing a guru, it is always helpful to read as many articles as you can about them before taking the plunge and following their strategy. This information is very hard to find, even if you use search engines in doing so. GuruFocus comes to the rescue again and solves this problem by providing an articles tab, that houses all the articles written for GuruFocus on each guru. You can locate all the articles written on Yacktman by going here. This is what separates GuruFocus from their competition, as knowledge is power! With all the easily accessible data (that GuruFocus’ premium service provides) at your fingertips, as a premium subscriber you will always have the advantage as an investor.

From watching those videos and by going through the GuruFocus premium subscriber data, I was very impressed with Yacktman and wanted to see if he is a big fan of Owner Earnings. Here is his portfolio analyzed:

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Right from the beginning we can clearly see that he is a big fan of Warren Buffett’s ratio; out of his 46 non-financial holdings, only three (6.5%) came in with a final score of zero and an amazing 16 (34.7%) came in with top final scores of three. Then 41 (89%) scored a one and passed our CapFlow test, and 37 (80.4%) came in with price to owner earnings of less than 15. Finally, 23 (50%) came in with an FROIC greater than 15%. So we clearly have the best results of any guru we have analyzed so far and the table below reflects that point by showing why Donald Yacktman deserves the No. 1 spot in our Guru Final Portfolio Score, coming in with a final score of 2.09.

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I own many of the stocks in his portfolio for my clients, such as Coca-Cola (KO), United Parcel Service (UPS), Johnson & Johnson (JNJ), Philip Morris International (PM), Colgate-Palmolive (CL) and Pfizer (PFE) as part of my permanent holdings. I have 25 stocks that I call my foundation stocks that I have put 1% of my clients' assets in, that I hope to never have to sell (only sell if they hit zero) because they all have elite management in place and are part of an exclusive club I call the “Economies of Scale” (EOS) Club. EOS (for those who don’t know), is the increase in efficiency of production as the number of goods being produced increases.

Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. So the bigger these companies become, the lower the cost per unit and the greater their owner earnings end up being. This occurs because they are not only increasing their cash flow, but are also relying on fewer capital expenditures in doing so. Thus their owner earnings consistently on average go up each year, meaning they rarely become overvalued as their stock price usually goes up in tandem with their owner earnings. That is the secret behind my and obviously Yacktman’s success. Buffett laid out the blueprint in 1986 and has made owner earnings investing a powerful tool for those who practice it.

Disclaimer: Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment adviser, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.

About the author:

Mycroft Psaras
Mycroft has spent most of his life as an equity analyst studying the works of the masters. He is an expert in Qualitative and well as Quantitative investing and lives by the motto of “Capital Appreciation through Capital Preservation”. He has worked as an advisor for friends and family and worked for The Motley Fool Organization for a while. Prior to starting Mycroft Research, he spent the last decade writing investment newsletters and providing research to a large following of clients.

From his work on free cash flow in the investment process, Mycroft has now decided to bring his theories to the field of money management as well as work as an independent consultant for Hedge Funds, Pension Funds and ...More Institutions in general. His dream is to someday soon open a mutual fund where he can help as many people as he can benefit from what he has learned over the years.



Visit Mycroft Psaras's Website


Rating: 3.3/5 (15 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 2 years ago
Why only 1%?
mycroftpsaras
Mycroftpsaras - 2 years ago
Hi Alberta,

I Invest 1% in each stock that I find for diversification reasons. I start with 25% foundation stocks and the add new ones when they show up. I use a proprietary system for my clients that is more advanced then what I present here and grade stocks -5 to +10. Therefore I short -5's and go long +10's and when I can't find anything either way I go to cash. This way I limit the risk on any one stock damaging the portfolio if it turns out bad. Also when their is great uncertainty "Cash is King" and when there is no uncertainty "Cash is your Enemy". Obviously we are in a period of great uncertainty so cash makes up the majority of my portfolio now.

Mycroft
wbt
Wbt - 2 years ago
Peter,

I love your work & always enjoy reading your articles but I am a bit confused on how to calculate owners earnings for WMT or any retail stock using value line as they do not provide capital spending per share. Could you please enlighten an novice investor on how this is done using value line.

Thanks,

WBT

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