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Core Holdings from My Portfolio

September 02, 2012 | About:
Chandan Dubey

Chandan Dubey

97 followers
In this article, I discuss the stocks from my core portfolio. The choice of the stocks is guided by a small set of rules. These rules are heavily inspired by the "business wanted" ad run by Warren Buffett in his annual letters to Berkshire investors (see the last few paragraphs of shareholder letter 1984).

A business I understand, in an industry which is relatively stable and preferably unregulated.


  • For example, in the technology sector Groupon (GRPN) and Logitech (LOGI) are not good candidates but Applied Materials (AMAT) is. Let me explain. Groupon has almost no moat and no customer loyalty. I have already bought coupons from its competitors. I noticed no difference in the customer experience, while buying the coupons or while using them. Logitech has a small customer loyalty. I have paid a small premium for Logitech products like mouse and headphones in the past. But the computer accessory industry, which represents 73% of Logitech's revenue, is an area plagued with uncertainty. It is hard to see its situation in five years. On the other hand, Applied Materials builds machines which are used in making chips. Even though we see a major competition among the phone makers like Apple (AAPL), Nokia (NOK) and Research In Motion (RIM), there is a lot less uncertainty where Applied operates. Whoever wins the cell phone war, Applied Materials will keep supplying the equipment.
  • An able management with good compensation practice. For example, I like the management at National Oilwell Varco (NOV) and their compensation practices. On the other hand, I don't like the management at Freeport McMoRan (FCX). In 2008, when Freeport lost $11 billion, the CEO took home $77m in compensation.
  • A strong balance sheet. In some cases if I really like the management and have faith in them, I might invest even when the balance sheet is not great. Roche (RHHBY.PK) comes in this category.
  • Sufficient margin of safety. I like to buy cheap.


Here are the stocks I am most excited about.

Roche (RHHBY.PK)

A drug company based in Switzerland with sales of $42 billion. The company has dual class share structure. Around 50% of the voting shares are controlled by the founding Hoffman La Roche family. Not only that, Roche is also run like a family affair. An example was the way management went about the Illumina acquisition. When it became clear that the Illumina board would not agree on a reasonable price, Roche decided to walk away from the offer.

I bought Roche is 2010. There were multiple problems hounding the company at that time. Because of the Genetech acquisition, the long-term debt of Roche went from $2.9 billion in 2008 to $36 billion in 2009. Furthermore, its blockbuster drug Avastin, which represented 15% of the company's revenue was facing severe headwinds. In June 2010, the FDA claimed that the drug's benefits "were not sufficiently significant" in treatment for breast cancer.

The stock dropped from a high of SFr 187 and could have been bought for as low as SFr 125. I added it around this time and am now sitting on a capital gain of 29%. I have also collected a dividend of approximately 4% each year since then.

I am also happy to report that the management has come through on its promise of reducing debt after the Genetech acquisition. In the last two years the debt has come down to $24 billion from a high of $36 billion in 2009.

ABB Group (ABB)

ABB is Swedish-Swiss industrial conglomerate active mainly in the power and automation sector. It is one of the largest engineering companies in the world with over $40 billion in revenue.

ABB's management has been acquiring companies in their core area. Examples are Newave, Baldor electric, and Thomas & Betts. They are also quite profitable with nearly $2.5 billion in FCF for the year 2011. Furthermore, the debt to equity ratio is a very conservative at 0.20 (December 2011). The RoIC has stayed in the 15-32% range since 2006 (compare it to Siemens whose RoIC is 8% in 2011). They also pay a dividend of 4%.

ABB has a fantastic emerging market exposure. In 2008, for the first time the revenue from developing nations exceeded the revenue from developed nations. Furthermore, the continued upgrade of old infrastructure in the developed economies will act as a tailwind for the whole industry. I have added whenever the price has dropped below $15.5.

Tesco Plc (TSCDY.PK)

Tesco is a British grocery retailer with a world number three position in terms of revenue (after Walmart and Carrefour) and second in terms of profitability (after Walmart). It has stores in more than 13 countries around the world and holds nearly 30% of the home market share in UK.

The company has 4.5% dividend yield, which has been growing year after year. In a vote of confidence in the management, Warren Buffett has upped his stake from 3% to 5% of the shares outstanding in January 2012.

Even after setbacks in the home market, which saw a 25% drop in the share price to £2.9 per share, we should not forget that Tesco still has the number one position in the UK. At these prices, there is a very good margin of safety because Tesco holds prime real estate locations in the UK. This real estate is worth around £36 billion (Annual report 2011, page 46). Even after subtracting the net debt of £7 billion, we end up with £29 billion of real estate. With the current market cap at £27 billion, we are essentially getting the business for free.

Applied Materials (AMAT)

Applied makes equipments which are used in creating chips for the technology industry, including solar and LED TV.

Applied has a quality management. I have discussed their compensation practices before in my contest submission. The management is also quite share holder friendly. The dividend has increased from $0.06 in 2005 to $0.3 in 2011 and now yields nearly 3%.

The stock is selling at a cheapish 6x(FCF in 2011) and the management has put aside $3b for stock buybacks. The balance sheet is also quite strong with nearly $6b in cash and $2b in LT debt.

Arcelor Mittal (MT)

This holding is the farthest from my core philosophy. It is in a cyclical industry and sells a commodity. Furthermore, it operates in a semi-regulated industry and may not be run solely for the shareholders' benefit. The capital expenditure is also high and hence the free cash flow is hard to predict.

I hold it not because of the business but because of the management. The CEO of ArcelorMittal, Mr. Lakshmi Niwas Mittal, controls nearly 40% of the stake and has built this company from scratch. I continue to believe in him and given that a large part of his fortune is tied to the company, I believe that under his command, the shareholders will not be ignored.

The company has large debt but it is serviceable. The management has affirmed that reducing the debt is its top priority. They have stopped spending cash on the growth of the steel business but have targeted their efforts on the mining segment. This vertical integration will make MT a low-cost producer and will help the shareholders when the economy improves.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 4.0/5 (33 votes)

Comments

superguru
Superguru - 1 year ago
in my retirement accounts, I am also long MT, TSCDY and ABB.

Though I kind of regret not selling ABB when its stock was at high. I will look at Roche and AMAT.
cdubey
Cdubey premium member - 1 year ago
Hold on to ABB in my opinion. It will go there again at some point. Meanwhile you can collect the 4% dividend.
achill
Achill - 1 year ago
As for Tesco real estate holdings, please, don't forget that this is a quite a specific type of real estate, not just an ordinary apartment house which is easy to sell for rental purposes.

Second, you seem to take the £29 billion numbers from the official Tesco website, which,I doubt, is a real market valuation.

I'm not criticizing the Tesco stock, I'm holding it myself, but rather trying to make a point of not being so confident about the margin of safety.

Please leave your comment:


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