Berkshire Hathaway (BRK.B) – 25% of net assets – Berkshire has been my largest holding by far since August to September 2011, and that won’t be changing anytime soon. While this stock has done well for me (up over 30% on a cost basis of $71), I peg intrinsic value north of $110 per share, and will continue to accumulate shares if we get back to the mid-80s per share – a level that looks increasingly unlikely since Warren bumped the share repurchase to 1.2x book.
Microsoft (MSFT) – 15% of net assets – Microsoft has been a large holding of mine for just over a year, and the stock has gone all of nowhere. My aversion to tech has been materially heightened by this position, and it causes me serious angst (I’ve learned that tech news, more than anywhere else, is littered with full of doom and gloom) yet my fundamental analysis continually suggests that MSFT remains significantly undervalued due to solid franchises in Office and Windows, the growing importance (and profitability) of Server & Tools, and the potential in other areas throughout the enterprise (and I love R&D accounting – a significant expense at Microsoft – that misaligns the expense and the eventual economic benefit of the investment).
J.C. Penney (JCP) – 15% of net assets – I’ve written about J.C. Penney extensively, and my interest in the company shouldn’t come as any surprise to regular readers. I used the recent pullback in the stock to average down (yet left myself with no cash when the stock got really attractive – a mistake that I’ve made previously and am hoping to learn from one day) and have a cost basis in line with the current price. The biggest update as of late has been a clear increase in the amount of discounting at the retailer, a change that should provide for some interesting commentary on the upcoming conference call (namely, if the pricing transformation was required to attract top-tier brands, will they still be interested in coming to JCP after the recent spate of clearance activity). I still see an attractive balance of risk and reward – from my view, there’s limited downside even if the strategy fails (management’s willingness to adjust is KEY), yet material upside (2 to 3x) in 24 to 36 months if the transformation plays out as anticipated.
PepsiCo (PEP) – 12.5% of net assets – I haven’t written about Pepsi as much as JCP and I think that speaks to the investment: slow and steady is the name of the game, with limited change from quarter to quarter or year to year (they still sell a lot of soda and potato chips in case you missed the last few years). The company has hit a rough patch lately, most noticeably as Coca-Cola (KO) has flat out dominated PEP in most competing categories (namely in the US). On the plus side, the company continues to dominate and grow in salty snacks (share leadership around the globe remains mouth watering), and didn’t listen to analysts who wanted a snacks/drinks split to give the stock a quick boost (it has since reached the levels expected by the analysts if the change happened). I’m not too tempted by the valuation, and simply consider myself content at this time; if the market lopped off 15% tomorrow and brought it back towards its’ 2012 lows, I would be accumulating shares of PEP in a heartbeat.
As you can infer from my position sizes, my portfolio is pretty concentrated by most standards – I have a total of eight holdings at this time, and find that’s a manageable level for me to stay on top of the SEC filings, conference calls, analyst events, etc. My activity over the past year came in the form of small additions to currently holdings and a few new adds (FRFHF and FLIR) that I wanted to start keeping a closer eye on (both of which I’m still very, very fond of); my only sale was of Travelers (TRV) common stock, which I dumped as it ran past my fair value measure (if I get the chance, I’ll happily partner up again with Mr. Fishman and his shareholder-friendly team).
As I noted above, what these stocks will do in the next 12 months is a mystery to me; for my money, these four companies are a great place to be for the years and decades to come.
About the author:I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.
I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over a period of many years.