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Mason Hawkins of Longleaf Funds Answering Investing Questions Now

Holly LaFon

Holly LaFon

261 followers
GuruFocus welcomes renowned investor Mason Hawkins for an interview in which he will be answering readers’ questions. To ask your question, post it in the comments section below.

Mason Hawkins is chairman and chief executive officer of Southeastern Asset Management Inc., an investment advisory firm with $34 billion in assets under management. At Southeastern, he and his team seek to achieve long-term absolute returns with minimum risk in their portfolio of 18-22 businesses, focused on their best ideas.

These are Southeastern’s long-term beliefs:

- Long-term investment horizon provides opportunity for "time horizon arbitrage."

- In-depth, conservative business appraisals underpin all decisions.

- Stock price volatility offers opportunity.

- Margin of safety determines entry and exit limits based on price-to-value ratio (P/V).

- "Cheap" is not enough – sustainable competitive advantages that lead to value growth are equally critical.

- Corporate management's capability, incentives, and business decisions greatly impact our outcome.

- Concentrating in the 18-22 most qualified opportunities adequately diversifies, reduces risk, and improves return.

- Bottom-up, benchmark agnostic portfolio construction enables superior returns by owning only the highest quality, most discounted businesses.

Mason aims for a target return each year of 10% or more plus inflation. Since inception, his fund has beat the S&P 500 1186.85% to 729.75%, but more recently lagged, losing 5.64% compared to a gain of 5.45% of the S&P 500 in the last year.

In addition, he uses a valuation metric called the “price-to-valuation” ratio to measure the value of a company compared to the price the market has placed on it.

Holdings

Southeastern is the largest shareholder of Chesapeake Energy (CHK), the embattled energy company whose CEO drew criticism earlier this year for controversial business practices. Hawkins, along with investor Carl Icahn, have since pushed for and achieved significant changes at the company. They now believe that the company has the best board they have seen, along with the best physical assets they have owned, which makes them enthusiastic about keeping CHK as a core fund holding.

Company
Dell Inc. (DELL)
Chesapeake Energy (CHK)
DirecTV (DTV)
Loews (L)
Walt Disney (DIS)
Aon Plc (AON)
The Travelers Companies (TRV)
Level 3 Communications (LVLT)
FedEx (FDX)
Bank of New York Mellon (BK)


Learn more about Mason and his views on the present economy in his second-quarter letter here. See his portfolio here.

To ask Mason your investing question, post it in the comments section below. We’ll be publishing the answers soon.


Rating: 3.8/5 (20 votes)

Comments

pescobar
Pescobar - 2 years ago
HRT PARTICIPACOES EM PETROLEO has gone from 24 to 36 R$ after the IPO to 5.78 R$. losing 84% of its market value from it´s high. Considering the margin of safety with which LongLeaf invests, how much of the loss is permanent impairment of capital and how much is paper loss? If there is permanent impairment of capital, what were the mistakes made in the investments. If the thesis hasn´t changed why haven´t you added heavily to this investment do to the bargain that it would theoretically represent at this price.

The same questions apply to the ACS story.

Thanks!!!
pescobar
Pescobar - 2 years ago
HRT PARTICIPACOES EM PETROLEO has gone from 24 to 36 R$ after the IPO to 5.78 R$. losing 84% of its market value from it´s high. Considering the margin of safety with which LongLeaf invests, how much of the loss is permanent impairment of capital and how much is paper loss? If there is permanent impairment of capital, what were the mistakes made in the investments. If the thesis hasn´t changed why haven´t you added heavily to this investment do to the bargain that it would theoretically represent at this price.

The same questions apply to the ACS story.

Thanks!!!
pescobar
Pescobar - 2 years ago
HRT PARTICIPACOES EM PETROLEO has gone from 24 to 36 R$ after the IPO to 5.78 R$. losing 84% of its market value from it´s high. Considering the margin of safety with which LongLeaf invests, how much of the loss is permanent impairment of capital and how much is paper loss? If there is permanent impairment of capital, what were the mistakes made in the investments. If the thesis hasn´t changed why haven´t you added heavily to this investment do to the bargain that it would theoretically represent at this price.

The same questions apply to the ACS story.

Thanks!!!
rsheeley
Rsheeley premium member - 2 years ago
will the presidential election cycle have a positive impact on the market this quarter?
vsmalik
Vsmalik - 2 years ago
What is your investment thesis behind DTV? In your letters, you have mentioned GAAP earnings understate the true earnings power because capex is comprised of subscriber acquisition costs, which is largely discretionary. Can this be interpreted to mean that if DTV did not acquire new subscribers and maintained somewhat of a "steady-state" business, the free cash flow would materially increase - the earnings power really show though - and the company could be conceptualized as more of a utility-type business? What do you think DTV is worth?
vsmalik
Vsmalik - 2 years ago
What do you estimate to be DTV's true earnings power and what do you think the company is worth? Do you see any future threat from Apple TV or other media?
vsmalik
Vsmalik - 2 years ago
How do you think about DTV in terms of competitive advantage and valuation?
vsmalik
Vsmalik - 2 years ago
Have you ever looked a Leucadia, particularly since it's trading at 80% of book value?
vsmalik
Vsmalik - 2 years ago
Have you ever looked at buying Berkshire? If so, what do you think is the best way to value the company?
Koheleth
Koheleth - 2 years ago
Jim Chanos has suggested CONSOL Energy could be a value trap and Wilbur Ross thinks the US coal industry is in secular decline. What is your long-term outlook for CONSOL and the coal industry overall? Will coal's desirability as a fuel for power generation continue to deteriorate in the long term? What happened to clean-coal technologies? And would you suggest a basket approach to investing in coal stocks given the extreme decline in the sector or stick with concentrating in CONSOL?
Koheleth
Koheleth - 2 years ago
What is your near and long-term outlook for Europe, the euro and the European Union? Given the protracted recession and financial repercussions, is now the time to search for bargains across the board in Europe? And if so, what sectors or companies in particular offer the most compelling values? Do any European banks offer compelling values or are their intrinsic values and potential for further stockholder dilution put them in the 'too hard' pile to figure out?
Adib Motiwala
Adib Motiwala - 2 years ago
You invested in some really leveraged companies such as Cemex and CHK. Also these companies spent a lot on capex. How did you get comfortable with their valuations and margin of safety?

At what point, does the debt become an issue and overrides the attraction of an investment due to potential growth / FCF etc.
stevenramsey
Stevenramsey - 2 years ago
A fan of yours from nearby, in Jonesboro, AR - I'm curious as to what initial measures/qualitative factors catch your attention? Is it a depressed stock price? Secular shifts in an industry? Great business or management? Price/FCF?

And this may be too generalized, but when observing companies whose prices are depressed due to problems, what is key factor to determine in distinguishing if the problem is short-term or permanent?
mohmand
Mohmand - 2 years ago
What is the thesis behind their BK position? Also, would they consider regional US banks or Bulge Brackets.. say GS/BAC.
cpan
Cpan - 2 years ago
What is your thoughts on GM? Why did you choose to own the warrants vs. the common stock?
pescobar
Pescobar - 2 years ago
Regarding ACS in Spain, in LongLeaf annual letter, it was established that ACS was trading at half of the estimate to intrinsic value. Since ACS has dropped aproximately 50% from january to date, that would mean that ACS is trading today at 25% at LongLeaf estimated conservative value. Considering the very large proportion of the initial investment in ACS which would show the confidence in the comany´s fundamental, is this a classic miscalculation of Mr. Market. If so, why isn´t Long Leaf investing more heavily on this type of deep discounted ideas where the confidence is so big. Wasn´t it a mistake not to have invested more in CEMEX when the price was at a bargain level having had the research and knowledge to take advantage of the incredible opportunity the market gave you.

Regards.

luishernadez
Luishernadez premium member - 2 years ago
Dear Mason,

What is your view on BNY Mellon´s economic moat and its source? How wide do you think it is?

Loews trades at 15% discount to book value (this is nice). The question is: what rate do you estimate the BVPS to grow over time? They basically have 5 low-to-mid quality businesses that earn average returns on capital. CNA is a low quality insurance company that is improving. Diamond is a mid-quality oil and gas driller (highly cyclical business), Boardwalk is a utility type business (mid-quality) and Highmount prospects are not that clear. The hotels are tiny in relation to the whole. Do you have a different opinion? What is your view on management?

What is your view on Travelers competitive advantage? How troubling is the huge fixed income portion of their investment portfolio? (in relation to future inflation). How much do you like Jay Fishman? I really like the fact they are aggresively repurchasing shares and the fact that it is trading at book value, which I estimate to earn around 13% (ROE).

Do you consider troubling DTV´s high debt burden? How wide do you consider their moat to be? What is your view of their business 10 years from now?

Sincerely,

Luis Hernandez

shb600
Shb600 premium member - 2 years ago
DELL is down a lot and trading at incredibly cheap valuation.Are you pushing them to do an enormous buyback? Buying 20% of the shares this year would be a lot better than throwing more money away on value destroying acquisitions. What would the share count be if they had not made any acquisitions and instead purchase stock in the past 5 years? IBM gets it and DELL and HPQ don't.
kirrct
Kirrct - 2 years ago
What have you learned from your investment in olympus?
arurao7
Arurao7 - 2 years ago
Dear Sir,

You mentioned in your second quarter letter that one of the lessons of commodity investing is that the commodities market can remain depressed for a long period of time. In the case of Chesapeake, what are the consequences of a prolonged slump in natural gas prices. Are you thinking of hedging against prolonged natural gas prices and if so how, because I see that as the biggest risk for all natural gas companies. From what I have read they need $5 natural gas to start generating profit.

Thanks!
pescobar
Pescobar - 2 years ago
Continuing my questions with HRT Participacoes em Petroleo, it´s price today is trading at BRL 5,01, for a company that has aproximately that amount in cash per share and has no debt, with huge acreage potential for gas and petroleum in Solimoes Brazil and in Namibia. Can the market present such big miscalculations ( opportunities ), or is there something that LongLeaf is missing? Can this big drop in price affect the future of the company, like it´s ability to sell it´s assets at a fair price or be able to access the debt markets if required? Maybe the People part of the equation is not as the initial analysis showed, because reading there presentations, it feels like there is a lack of sincerity in their reports, lacking the straight talk of tackling the real issues that have made there stock sink this year. Reading there reports it feels like nothing has happened, yet the stockholders that invested in the IPOs have lost there shirts to date.

What risks do you see in HRT that you didn´t see when the initial investment was made? How big is the risk that a hostile takeover would be made and the actual investors wouldn´t be able to harvest the potential of the acreage HRT has? Why was the clause in the contract for the companies that have been invited to see the information in the Namibian farmout , accepting not to make a hostile takeover just for 18/24 months? That time frame doesn´t seem very prudent.

How safe do you consider this investment. Does LongLeaf still believes HRT ¨Could Be Their Your Most Exciting Investment Ever¨, quote that is a very powerful and confident one.

Thanks again.
chiavacci
Chiavacci premium member - 2 years ago
Mason,

Thank you for this Q&A. As a long time partner in your International and Partner’s Funds I have admired your work and discipline for years.

If you take purely analytical look at your investing successes and disappointments what do you find?

What % of your stock picks have outperformed their benchmarks?

Have you and your team been especially strong in specific industries or market sectors?

Has your effectiveness in stock picking increased or decreased over the last 10 years or so?

To improve your risk / return profile should you hold fewer or more names?

To improve your long term reward profile should you hold fewer or more names?

Thank you!

Louis

pescobar
Pescobar - 2 years ago


In your latest filings, you have added to your ACS position. Yet your HRT position has remained the same. Since both positions started with similar percentages in your Internationsl Funds and have both have fallen aproximately 75 percent from your initial purchase, could you please give us guidance on the strategies/guidelines you follow regarding adding to a position.

Thanks again!!!

rfarland
Rfarland premium member - 2 years ago


In your semi-annual report you wrote that Dell's "new appraisal equates to the company's value a year ago". Just to be clear, is this figure referring to where Dell was trading a year ago, or where Southeastern was valuing it a year ago? Can you be more definitive on your current appraisal of Dell given disappointing second quarter results? Thank you.

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