In Part I and Part II of this series, I discussed the differences and similarities between Berkshire Hathaway's (BRK-A) Warren Buffett and Fairfax Financial Holding Limited's (FFH) Prem Watsa in investing. There, I sort of gave away some of what I am going to discuss now.
GuruFocus.com has a feature called “Aggregated Guru Portfolios” (Premium membership required, free trial available. For more information click here). When I used the feature to find the aggregated portfolio of Warren Buffett and Prem Watsa, I found there are twelve (12) stocks that are owned by both Gurus. Table 1 is the list:
Warren Buffett has invested $17 billion of his $52 billion stock in these stocks, and Prem Watsa has almost $1 billion invested. Given the fact that each of them owns only around 40 stocks, the strong overlapping of portfolios of the two value-investing Gurus is not a coincidence. Today I only review the first three (3) of them, saving the rest for some other days.
1. Wells Fargo & Company (NYSE:WFC):
Warren Buffet bought into the company in the last Real Estate crisis in 1989-1990 and has held since then. Apparently he sees the value that other people don’t see; for in late part of 2008, as we first reported he bought over $2.2 million share in his personal account. For Prem Watsa, it is a new holding; in the fourth quarter of 2008, he bought 3.52 million shares.
WFC is a subject of public debate lately. Time Magazine published an article Can Your Bank Pass the Stress Test? by Stephen Gandel. Relied on the loan-loss estimates of New York University professor Nouriel Roubini, a.k.a. Dr. Doom, the author made the following claim on Well Fargo:
Loan losses: When Wells Fargo acquired Wachovia late last year, it more than doubled its loan book. In good times, that would be a major coup. These days, it's major trouble. Home buyers owe the bank $360 billion, up from about $150 billion just three months ago. Next, Wells has $154 billion in commercial real estate loans, as well as $200 billion in other types of commercial debt. Apply Roubini's overall 13% loss projection, and the conclusion is that Wells may be sitting on a $117 billion loss.
Capital cushion: The good news for Wells is that it has been aggressive in identifying problem loans — $37 billion from Wachovia alone. Wells officials argue that will lead to lower losses than its competitors'. But if not, the bank could be in trouble.
Even after the $25 billion Wells got from the government last year, it has just under $100 billion in equity, trailing other major banks by more than 50%.
Prognosis: Defibrillator. Stat! Wells Fargo is generally considered one of the banks that are least likely to fail. But our stress test says otherwise. Even with its $58 billion loan-loss buffer, Wells is still in the hole for $59 billion, or 60% of its capital. With $40 billion remaining and an expected $5 billion in income, the bank could sink to a less-than-rosy leverage ratio of 3.7%.
Nouriel Roubini’s claim invited sharp rebuttal from Tom Brown, again and again. Tom Brown think Nouriel Roubini simply made an arithmetic mistake:
Dr. Doom strikes again! There’s just one problem with his Wells loss estimate, though: he’s bollixed up its calculation. In particular, Roubini apparently neglected (and I’m at a loss to see how he managed to do this) to take into account the $37 billion in marks Wells already took against Wachovia’s loan book when it acquired the company at the start of the year.
How do I know Roubini messed up? First, compare his loss estimates for other big banks with other stress-case loss estimates lately being published, notably by Sanford C. Bernstein. (The Bernstein base stress estimates, by the way, are nobody’s idea of bullish fairy tales; the firm sees huge losses coming for all the big banks.) Yes, Roubini’s estimates are higher for sure—but by only 10% to 20%. He sees cumulative losses of $106 billion at Citigroup, for instance, while Bernstein’s stress-case loss estimate (twice its base-case estimate) is $98 billion. JPMorgan Chase? Roubini, $97 billion; Bernstein, $80 billion.
But when it comes to Wells, the two sets of estimates aren’t just different by 10% or 20%; they’re miles apart. Against Roubini’s $117 billion estimate, Bernstein’s stress-case number is just . . . $66 billion.
But if you subtract the $37 billion in Wachovia marks Roubini apparently forgot, you’re down to $80 billion, or 20% more than the Bernstein estimate and roughly in line with the gaps between the estimates for the other two banks.
Roubini’s $117 billion loss estimate for Wells is bogus. It’s not that the Doctor has come up with assumptions we don’t agree with. Rather, he messed up his basic arithmetic.
Of course, readers of this article know where Warren Buffett and Prem Watsa stand in this debate. For Warren Buffet, it was his personal money. For Prem Watsa, it is fresh new capital. Wells Fargo has declined substantially since they bought in Q4, 2008.
Market value ($million)
Market value ($million)
Wells Fargo & Company
Kraft Foods Inc.
Johnson & Johnson
Burlington Northern Santa Fe Corp.
General Electric Company
Wesco Financial Corp
WalMart Stores Inc.
Gannett Co. Inc.
2. Kraft Foods Inc. (KFT)
This is a food and beverage company gained semi-independence in 2001 when its former parent company Philip Morris Company (Now Altria) sold 12% of KFT to the public. In March 2007, Philip Morris finally managed to cut cord with Kraft Foods by issuing a KFT stock dividend to its shareholders, and that was when Warren Buffett started to accumulated the shares. GuruFocus reported he started to buy into Kraft Foods in the first half of 2007 and delayed reporting until February 2008. As of year end 2008, Warren Buffet owns 138 million shares and Prem Watsa just bought 11 million shares in Q4, 2008.
In the past eight years (2001-2009), KFT has been growing revenue per share by an average of 4.25% per year, and EPS by the 3.54% per year, helped by its steady share buy back of 1.75% per year, yet its share price had dropped from $30 to $23. Fortunately the company is paying a dividend of 4.6%.
According to the 10-year evaluation graph below, Kraft has never been traded this low since its inception of trading. Given the unprecedented economic times, people still need to eat and drink, perhaps Warren Buffett did something right two years ago by buying into the food company, and Prem Watsa smelt a better opportunity here in Q4, 2008?
3. Johnson & Johnson (NYSE:JNJ)
We said in Part II, Warren Buffett bought 21 million shares were bought in 2006, 43 million shares were bought in 2007, but he reduced about 50% recently. Maybe the Guru saw better opportunities somewhere else? Opportunities such as Perpetual Preferred Stocks that pays 10% a year?
Warren Buffett’s action did not stop Prem Watsa from holding on his JNJ shares and adding some more in Q4, 2008. In his 2008 Chairman’s Letter to Shareholders, he summarized why he bought JNJ so well that it worth repeating here:
Johnson & Johnson has perhaps the best long term track record we have come across. They have compounded sales and earnings for the last 100 years in excess of 10% per year. The growth prospects for their products on a worldwide basis are unlimited. We own 5.9million shares at a cost of $62.29 per share with a market value of $370 million. We think in the next few years, Mr. Market may give us many more opportunities like Johnson & Johnson that we can purchase at attractive prices for the long term. If we choose properly, you may be pleased with our rate of compounding of book value in the future.
Indeed, we have never seen JNJ this cheap in recent history in terms of P/E, P/S, P/B ratio. Dividend yield has never reached this high in the past 10 years.
What do you think of these three stocks -- WFC, KFT, and JNJ?
America is on sale. Today S&P closed at 753, more than 50% down from the peak. These America's crown Jewels are also on sale, even though they are investments by two of the pickiest investment Gurus.
In the next Part, I am going to review two other great Buffett and Watsa stocks: BNI and GE
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