Grantham’s outlook for 2013 is expressed at length in his fourth quarter letter. Primarily, he believes managers should be increasingly careful as the market is overpriced:
Courtesy of the above Fed policy, all global assets are once again becoming overpriced. This reminds me of the idea sometimes attributed to Einstein that a workable definition of madness is constantly repeating the same actions but expecting a different outcome! But, as always, asset prices are not uniformly overpriced: emerging markets and, we believe, Japan are only moderately overpriced. European stocks are also only a little expensive, but in today’s world are substantially more risky than normal. The great global franchise companies also seem only moderately overpriced. Forestry and farmland, which is not super-prime Midwestern, is also only moderately overpriced but comes with our nook and cranny sticker attached. But much of everything else is once again brutally overpriced.
New Oriental Education & Technology Group (EDU)
Grantham bought 1,746,241 shares of New Oriental Education & Technology Group for $18 per share in the fourth quarter. The company’s market value plunged by more than half in July of last year. After a further 12% decline this year, its shares are priced at $17.11 on Wednesday.
EDU is China’s largest provider of private educational service, such as English training, test prep and school tutoring.
In its second fiscal quarter ended Nov. 30, 2012, EDU’s net revenue increased by 30.4% year over year to $165.9 million, as it had a net loss of $9 million, compared to net income of $7.5 million a year previously.
Part of the net loss was due to internal investigation and regulatory proceedings, in addition to its most profitable schools, in Beijing and Shanghai, underperforming as competition increases. Another fraction had to do with significant cost and expense pressure resulting from its rapid expansion recently.
The company also had 7.2% more students in total enrolled in tutoring and test prep classes, and expanded to 744 schools and learning centers, from 726 in the previous quarter.
It expects to return to profitability this quarter as it attempts to execute its strategy better.
Buenaventura Mining Company (BVN)
Grantham bought 796,584 shares for GMO’s portfolio at $35 per share on average in the fourth quarter. Its stock price has since slumped 23% from his average purchase price.
Buenaventura is the largest publicly traded precious metals company in Peru and a major holder of mining rights in Peru. Its operations involve gold, silver and other metals.
The company’s growth has been exception over the past five years: Revenue grew at a rate of 18.2, EBITDA at a rate of 25.4%, free cash flow at a rate of 26.2 and book value at a rate of 24%, annually.
In the third quarter BVN’s net income declined 11% year over year to $185.6 million, while net sales declined 6% year over year to $394 million. The lower results were due to less gold sold, depressed silver and base metal prices, and higher cost for contractors and supply.
BVN has a P/E of 8.9 and P/S of 3.94.
PSS World Medical (PSSI)
Grantham purchased 956,612 shares of PSS World Medical for $27 per share on average in the fourth quarter.
PSS World Medical distributes medical supplies and equipment to physicians and healthcare providers in an effort to improve caregivers’ financial performance by 20%.
The company’s stock bolted up more than 30% in October when it was announced that McKesson Corp. (MCK) would acquire the company for $29 per share in cash, in a plan to combine it with McKesson’s medical surgical business. The total transaction is valued around $2.1 billion.
Southern Copper Corporation (SCCO)
Grantham purchased 708,800 shares of Southern Copper Corporation for $36 per share on average.
SCCO is one of the world’s largest copper producer, also mining molybdenum, zinc, lead, coal and silver. It operates in Mexico, Peru and Chile. Its stock price in the past 12 months gained almost 25%.
In the fourth quarter of 2012, SCCO’s net income was 1% lower than the fourth quarter of 2011 at $531.8 million, and net sales were 1.1% lower at $1.65 billion.
In the past five years its revenue grew at a rate of 4.2%, EBITDA grew at a rate of 3.2% and book value grew at a rate of 3.5%. Meanwhile, free cash flow declined at a rate of 6.3%.
SCCO has a P/E of 17.4, P/B of 5.2 and P/S of 5.08.
See Jeremy Grantham and GMO’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Jeremy Grantham.