Top Guru Investors for 2012 - Blum, Eveillard, Chou, Muhlenkamp, Kahn
According to the score board, the Gurus with the highest average returns over the past 12 months were Richard Blum with 40.33 percent, Jean-Marie Eveillard with 37.22 percent, Francis Chou with 30.31 percent, Ronald Muhlenkamp with 21.8 percent and Irving Kahn with 21.25.
Richard Blum heads Blum Capital Partners, a firm that makes “strategic block and control investments” in public and private companies, using a strategies that applies a rigorous private equity process to the public markets and often takes an active role in unlocking value. His strategy stresses seeking companies that are undervalued due to temporary price dislocations caused by short-term phenomena in the market.
This year, the strategy paid off in spades. Blum’s portfolio, which contains just 14 stocks, has as its largest holding CBRE Group Inc. (CBG), which experienced a lift of 26% over the past year. Rounding out the top five are: ITT Educational Services Inc. (ESI) (down 66 percent), Avid Technology Inc. (AVID) (down 9 percent), Collective Brands (PSS) (up 51 percent), and JDA Software Group Inc. (JDAS) (up 35%).
CBRE Group Inc., which occupies more than a third of Blum’s portfolio, is the world’s largest commercial real estate services firm (based on 2011) revenue. In the third quarter, he carved off nearly one-third of the position to hold more than 15 million shares. He has held the stock since before the second quarter of 2007, and it has declined 18% over the past five years.
For the past three years, the company has been increasing both revenue and net income annually. It has cash of $2.62 billion and long-term liabilities and debt of $3.11 billion. Free cash flow also remained positive for the past three years.
The company currently has a P/E of 28.4, P/B of 3.7 and P/S of 6.1.
Blum appears rather bearish on the market in the third quarter as he only reduced and sold out positions and did not add to any existing holdings or buy any new ones.
Eveillard, head of First Eagle Funds, beat the market with the top holdings Cisco Systems (CSCO) (up 5%), Comcast Corp. (CMCSK)(up 61%) and Sysco Corp. (SYY) (up 8%).
In his firm’s semi-annual report from April 2012, the managers of the First Eagle Global Fund noted of the firm’s positioning:
“We believe that maintaining a clear goal is the most important navigational tool. At First Eagle, our goal is to attempt to preserve and grow real purchasing power, first and foremost by trying to avoid the permanent impairment of capital. We do this by investing in companies one security at a time, with what we feel is an appropriate margin of safety in price, capital structure and management temperament. In selecting these securities, we seek to identify some form of scarcity — as opposed to following the popular market trends of the day. In our view, one of the most disturbing characteristics of the investment landscape is the widespread adoption of thematic investing, where people feel the need to be heavily invested in broad sectors or geographic regions offering the promise of macro growth.”
Comcast, the largest gainer of Eveillard’s top three stocks, is a media, entertainment and communications company and majority owner of NBCUniversal. The company has seen its stock proceed upward relatively linearly over the last four years.
Eveillard has held the stock for over five years and increased his stake to 23,329,608 shares in the third quarter.
In the last five years the company has grown revenue per share at an annual rate of 17.4%, EBITDA at 15.2%, free cash flow at 32.1% and book value at 5.7%. See its 10-year financials here.
Comcast has a current P/E of 16.5, and its P/B at 2 and P/S at 1.6 are both close to their three-year lows.
Francis Chou, founder of Chou Funds, in his annual report dated Aug. 17, reflected: “In equities, we believe the financial and retail sectors are undervalued and have invested in them using a basket approach rather than concentrating on one or two stocks in either sector.”
His three largest stocks in the year were Berkshire Hathaway (BRK.A) (up 13%), Sears Holdings Corp. (SHLD) (down 24%) and Watson Pharmaceuticals Inc. (WPI) (up 2.1%).
The stock that was one of the biggest detractors of his portfolio in the first six months of the year, fifth-largest holding Overstock.com Inc. (OSTK), turned out to be one of the best in the second half. It gained 76% over the last year. Overstock is an online discount retailer.
Overstock particularly surged on release of its third-quarter earnings on Oct. 25. The company had a 7% increase in revenue year over year, and net income increased to $2.69 billion, from a loss of $7.79 billion a year previously.
Revenue increased primarily due to an increase in the number of unique visitors to the company’s web site and larger average order size, which offset the impact of fewer customer orders due to lower conversion rates.
Over the past five years, Overstock’s revenue per share increased at an annual rate of 6.1%, and it produced a profit in two of the last ten years – 2009 and 2010. See its 10-year financials page here.
Ron Muhlenkamp, head of Muhlenkamp & Company, summarized his investing perspective in his semi-annual letter from June:
“Our response to the investing environment described above has changed incrementally over the last six months. Our cash holdings remain at about 10% and the portfolio remains heavy in healthcare and technology names — that's where we are finding the strong balance sheets and good cash flows that we are looking for. We also have significant investments in financial companies, as we have found good values there. Generally, the environment for U.S. financials has been improving, though we remain mindful of the possibility of a traumatic event coming out of Europe. Our energy investments are concentrated in companies we think stand to benefit from the revolution in gas and oil production in the U.S. We have invested in several companies that provide products that allow consumers to choose between gasoline and diesel as a fuel and natural gas as a fuel. We think natural gas prices are very attractive to a number of industries and companies that provide the ability to switch from one to another will do well.”
The investor held Philip Morris International (PM) (up 17 percent), Microsoft (MSFT) (up 6.3 percent) and Alliance Data Systems Corp. (ADS) (up 28 percent) as his top positions.
Muhlenkamp’s top gainer of the three, Alliance Data Systems Corp., is a company that helps businesses improve their relationships with customers by understanding consumer behavior through its credit, marketing and loyalty programs.
Muhlenkamp has owned the stock since the first quarter of 2009 and ridden its increase all the way from an average of $37 per share to $60. Then he repurchased in 2011 for $77 and saw it increase to $135 per share in the third quarter of 2012.
In the last five years, ADS has grown revenue per share at an annual rate of 21%, EBITDA at 26.1% and free cash flow at 19.4%. In the same period, its book value declined an annual rate of 14.3%. At $144.83 per share, it current trades near its book value of $142. See its 10-year financial page here.
Irving Kahn manages over $700 million at Kahn Brothers Advisors and is a former teaching assistant for Ben Graham. He has over 78 years of investing experience and seeks undervalued and often unpopular securities with a margin of safety and potential for attractive capital appreciation.
His top three holdings are Pfizer (PFE) (up 25%), New York Community Bancorp (NYCB) (up 3%) and Merck Co. (MRK) (up 27%).
The biggest gainer of his top three, Merck Co. (MRK), has been in Kahn’s portfolio for over five years. He has been reducing the position since the second quarter of 2011.
In the last five years, Merck has increased revenue per share at an annual rate of 9.1%, EBITDA at 7.7%, free cash flow at 14% and book value at 23.3%. See its 10-year financials here.
In the third quarter, the company announced double-digit global sales growth for six of its treatments, offset by a 55% decline in one that lost its U.S. patent and declines in several others. Overall sales declined 4% year over year to $11.5 billion, while GAAP EPS was approximately flat at $0.56 per share. Sales to emerging markets accounted for about 20% of the company’s pharmaceutical sales in the third quarter, driven by China, which grew 19%.
Merck is currently trading for a share price of $44.63, which is close to its three-year high. Its P/B ratio at 2.32 and P/S ratio at 2.81 are both close to their two-year highs. It has a P/E of 20.53.
See how other Gurus performed this year and in the past six months at GuruFocus’ Guru Score Board.