Dodge & Cox Comments on Individual Stock Holdings
We see significant growth opportunities for the company, both from its existing search business as well as from the newer areas of mobile and video. And we see its selling at a very reasonable multiple of its current cash flow, with potential for that cash flow to grow.
Another company that’s viewed as more of an older technology company, Microsoft, we see a dominant franchise, a global franchise, an opportunity to increase its earnings in the emerging markets, grow with that secular growth story. And again, selling at a low multiple of its cash flow and low multiple of earnings.
In the international arena, as investors were concerned about the macro outlook for Europe, they were avoiding investing in Europe, and we were finding individual companies that while domiciled in Europe had broad global reach particularly in the emerging markets. So we made meaningful adds to LaFarge (LFRGY), for example, the French construction materials company, has 60% of its revenues and 70% of its installed capacity in the emerging markets, trading at a discount to asset value, for example.
We made a significant add to Milicom (PINK:MIICF), the wireless services company. It’s incorporated in Luxembourg, but virtually of its business is in Africa and Latin America, again at a very reasonable multiple of earnings and cash flow.
Some of the investments we have in China are not domiciled in China. They have the economic exposure in China, but they aren’t domiciled there. An example of this would be Naspers (NPSNY), which is a South African company that we’ve invested in. Eighty percent of Naspers’ market cap is attributable to its 35% stake in Tensen, which is a Chinese internet company. So through an investment in Naspers we get exposure to the rapidly growing Chinese market and the even more rapidly growing Chinese Internet market. But we don’t have the country of domicile as China, we have it as South Africa. And that has an advantage for our investors as well, in that in South Africa you generally have better corporate governance than you have in China. You have better developed legal system, provides more protection to investors, and with Naspers in particular, you have a company with good corporate governance and a very strong shareholder oriented management team. And we think that combination of the economic exposure to a growth area, plus a shareholder oriented management team, good corporate governance, good legal structure, is a very positive one for our investors longer term.
Hewlett-Packard and Nokia
Many of our investors have asked, Hewlett Packard (HPQ), Nokia (NOK), both have continued to perform very poorly over time, and why do you continue to hold those? And you know, if you look at our approach to those kinds of companies which have not done well, the important thing is approach them, take a clean sheet of paper, ignore the fact, not be biased by the past performance, and look at the facts as they exist today, regarding the long-term outlook, fundamental long-term outlook for the company, and weigh that against the valuation, which in the case of these things that have performed poorly is usually much lower, and so discounting more potential bad outcomes and offering you more potential opportunity on the upside if things don’t turn out to be so negative in the future.
In the case of both Nokia and Hewlett Packard, we see some very positive long-term potential for those companies, and we see very, very low valuations, and so that’s an attractive combination for us. And we think that provides a good potential for long-term success of those investments for our shareholders.
Now this firm has a long history of investing in names that sometimes initially don’t work out very well, but that approach of being objective and sticking with our convictions has worked out well over time. An example from this year in fact of one that turned around was Sprint (S) which a number of people questioned why are you continuing to hold Sprint? That’s performed quite poorly over time. But as we looked at it mid-year, we could see on the fundamental side, some real improvements that management had made in the operating characteristics of that company. We saw some significant long-term value in the franchise, and a very, very low valuation that had gotten lower just because the stock price had gone down. And so we added to the position. And in the second half of the year, that was one of the best-performing stocks in the portfolio.
See Dodge & Cox’s equity portfolio here.