Bill Nygren is the manager of Oakmark Fund and Oakmark Select Fund. The Oakmark Fund declined 10% last quarter, the Oakmark Select Fund declined 6%, compared to an 11% drop in the S&P 500. Over the past 12 months, his funds were slightly better than the market average.
These are his commentaries on some of his new positions.
Apple, Inc (AAPL – $107)
We are as skeptical as anyone about the ability of consumer electronics manufacturers to earn sustainably high margins. New products are quickly copied, and more often than not, prices fall sharply while margins get squeezed. When Apple first introduced the iPod in 2001, we expected the device to become just one of many MP3 players, meaning that Apple would soon earn low margins just like most commodity producers. Boy were we wrong! Apple’s iTunes software and related store prevented low-priced MP3 players from functioning as iPod substitutes. Such hardware and software integration exists across Apple’s product line: Superior design plus software integration prevents competing products from performing like Apple’s products. That allows Apple to sustain premium pricing for iPods, Mac computers, and now iPhones. These advantages, however, didn’t stop Apple stock from declining along with other high-end consumer discretionary stocks. Apple reached a high of $203 in 2007 when earnings were under $4. The stock troughed in January at $78, even though earnings in 2008 had nearly doubled. Apple’s balance sheet is pristine with over $27 per share in net-cash. Subtracting that cash from the share price, the market is now valuing the business at only 11x last year’s earnings. We believe that is a bargain price for a great company.
State Street Corp (STT – $31)
State Street is a leader in investment servicing and investment management. It is one of the largest institutional investment managers, provides pricing services for most mutual funds, and is the third largest global securities custodian. State Street’s record has been enviable, compounding EPS over the last decade at 13% per year. That record did not go unnoticed on Wall Street, as State Street stock reached $87 last year, 20 times earnings. But, like many other financial services companies, State Street has significant investments in asset-backed securities. While its unrealized mark-to-market losses are large, most of the underlying securities it owns are performing fine, and most continue to mature at par. Investors, however, feared that mark-to-market pricing could force State Street to raise capital, and they drove the stock price to a low of $14 in January. We believe that ultimate losses will be less than the current marks, which would allow State Street to earn their way out of capital adequacy concerns and allow investors to again focus on the company’s high quality businesses. Selling for 7 times trailing earnings, we consider State Street to be a great value.
EnCana (ECA – $41)
For the most part, we missed both the big moves up and down in oil stocks. We did not believe that $100-plus oil prices would balance supply and demand. Without considering its stock price, EnCana was a company we wanted to own. Its management acts like owners that are trying to maximize long-term per-share value. When the company’s projected returns from share repurchase exceeded returns from exploration or acquisition, management repurchased shares. When the company believed that energy prices had reached unsustainably high levels, management used hedging to reduce exposure to oil and gas prices. Finally, the company has huge reserves in Canadian tar sands, which are of minor value today, but would become very valuable at higher oil prices. When EnCana stock reached $99 last year, it was far above our buy target, which was based on oil prices falling back below $50. Last quarter, we got the chance to buy EnCana for less than $40, and we didn’t let it slip by. With a 4% yield, a single-digit P/E, and a large discount to our estimated value, EnCana makes us pleased to again be invested in the energy sector—and especially pleased to be invested with this management team.
These are his commentaries on some of his new positions.
Apple, Inc (AAPL – $107)
We are as skeptical as anyone about the ability of consumer electronics manufacturers to earn sustainably high margins. New products are quickly copied, and more often than not, prices fall sharply while margins get squeezed. When Apple first introduced the iPod in 2001, we expected the device to become just one of many MP3 players, meaning that Apple would soon earn low margins just like most commodity producers. Boy were we wrong! Apple’s iTunes software and related store prevented low-priced MP3 players from functioning as iPod substitutes. Such hardware and software integration exists across Apple’s product line: Superior design plus software integration prevents competing products from performing like Apple’s products. That allows Apple to sustain premium pricing for iPods, Mac computers, and now iPhones. These advantages, however, didn’t stop Apple stock from declining along with other high-end consumer discretionary stocks. Apple reached a high of $203 in 2007 when earnings were under $4. The stock troughed in January at $78, even though earnings in 2008 had nearly doubled. Apple’s balance sheet is pristine with over $27 per share in net-cash. Subtracting that cash from the share price, the market is now valuing the business at only 11x last year’s earnings. We believe that is a bargain price for a great company.
State Street Corp (STT – $31)
State Street is a leader in investment servicing and investment management. It is one of the largest institutional investment managers, provides pricing services for most mutual funds, and is the third largest global securities custodian. State Street’s record has been enviable, compounding EPS over the last decade at 13% per year. That record did not go unnoticed on Wall Street, as State Street stock reached $87 last year, 20 times earnings. But, like many other financial services companies, State Street has significant investments in asset-backed securities. While its unrealized mark-to-market losses are large, most of the underlying securities it owns are performing fine, and most continue to mature at par. Investors, however, feared that mark-to-market pricing could force State Street to raise capital, and they drove the stock price to a low of $14 in January. We believe that ultimate losses will be less than the current marks, which would allow State Street to earn their way out of capital adequacy concerns and allow investors to again focus on the company’s high quality businesses. Selling for 7 times trailing earnings, we consider State Street to be a great value.
EnCana (ECA – $41)
For the most part, we missed both the big moves up and down in oil stocks. We did not believe that $100-plus oil prices would balance supply and demand. Without considering its stock price, EnCana was a company we wanted to own. Its management acts like owners that are trying to maximize long-term per-share value. When the company’s projected returns from share repurchase exceeded returns from exploration or acquisition, management repurchased shares. When the company believed that energy prices had reached unsustainably high levels, management used hedging to reduce exposure to oil and gas prices. Finally, the company has huge reserves in Canadian tar sands, which are of minor value today, but would become very valuable at higher oil prices. When EnCana stock reached $99 last year, it was far above our buy target, which was based on oil prices falling back below $50. Last quarter, we got the chance to buy EnCana for less than $40, and we didn’t let it slip by. With a 4% yield, a single-digit P/E, and a large discount to our estimated value, EnCana makes us pleased to again be invested in the energy sector—and especially pleased to be invested with this management team.
