|Year||Return (%)||S&P500 (%)||Excess Gain (%)|
GuruFocus considers chasing the short term gain rather meaningless. But in order to qualify as a Guru, one’s investment strategy has to produce long term average return greater than the market as a whole. Investors have not been so forgiving, Muhlenkamp Fund website shows that asset under management has been shrinking from over $3 billion to around $608 million by the end of 2008.
That is a drop of more than 80%.
YTD in 2009, Muhlenkamp Fund (MUHLX) is up about 32% vs. S&P 500’s 18.32%, so he is gaining ground, hopefully put to rest the debate whether his investment method has lost touch or not.
Muhlenkamp was an analyst of an insurance company in the early 1970s. At the time, he began to do research on company valuation. Over time, he developed a formula he still uses today to asses the fair price for a stock. Muhlenkamp’s method is a form of Grahm and Dodd analysis combined with a few tweaks of his own, adjusting for inflation and interest rate.
He is a value guru who believes that over time, stock prices do reflect the values of the underlying businesses. When picking stocks, he looks for companies with solid balance sheets, and a return on equity capital (ROE) of 15% or better. Although his methods change with inflation and interest rates, he currently looks for companies with a P/E ratio lower than the companies ROE and expected growth rates. He focuses on the long-term "Business of Investing" because he thinks that it is more profitable and more reliable.
Muhlenkamp Fund website list the following portfolio characteristics for his fund as of December 31, 2008.
|Portfolio Turnover (2008)||39.88%**|
Although Muhlenkamp is a bottom-up value investor, incorporating in his model is a macroeconomic view on inflation and interest. In the latest Quarterly Letter, he gave the following assessement:
It is now late June and we continue to see this pattern in a broad range of economic statistics, including:
• Consumer Spending;
• Home Sales;
• Capital Goods Orders;
• Freight Volume; and
• World Trade.
Our summary description is that the participants in the U.S. economy seem to be setting a new lower base on which (slower) growth can build.
At our May 7 seminar, we discussed these topics, coming to the same conclusions. We also discussed the liquidity crunch in the financial markets in late 2008. This liquidity crunch appears to be largely alleviated at this time. But most financial firms have very different structures from what they had before. Some are out of business; several have been merged; some have changed their charters; and some are directly controlled by the federal government. So there will be many aftereffects and unintended consequences. These will be ongoing and must be monitored.
We also expect sizeable changes in financial and corporate regulations, as well as corporate and individual taxes.
In all of this, there are enough moving parts that predictions of corporate profitability levels are yet to be determined. For example, with ample capacity in every industry, maybe corporate ROE (return on shareholder equity) averages 11% instead of the historic average of 13 percent. While we believe the crunch is over, we don’t yet have conviction in what the new norm will be.
If you click through the link to the letter above, you will realize that I have virtually quoting the entire letter. Still there are a few details to be desired: what the future inflation and interest rate environment will be like? Muhlenkamp wouldn’t say.
No. 1: International Business Machines Corp (IBM), Weightings: 6.51% - 412,230 Shares
IBM uses advanced information technology to provide customer solutions. International Business Machines Corp has a market cap of $155.84 billion; its shares were traded at around $118.88 with a P/E ratio of 12.7 and P/S ratio of 1.5. The dividend yield of International Business Machines Corp stocks is 1.8%. International Business Machines Corp had an annual average earning growth of 4.9% over the past 10 years.
Muhlenkamp has had this stock since 2Q1998, when he bought 9,732 shares. He may had this stock earlier given the fact he started his own firm from 1978. Over the course of the past 11 years, he has been mostly buying IBM until 1Q2008 when he held 580K shares. Since then, he has been selling stocks. In 2Q09, his holding was reduced from 438,723 shares to 412,230 shares.
No. 2: Bank of America Corp. (BAC), Weightings: 6.48% - 3,243,394 Shares
Bank of America Corp. is one of the world's leading financial services companies. Bank Of America Corp. has a market cap of $146.99 billion; its shares were traded at around $16.99 with a P/E ratio of 30.3 and P/S ratio of 2. The dividend yield of Bank Of America Corp. stocks is 0.2%. Bank Of America Corp. had an annual average earning growth of 7.5% over the past 10 years.
Muhlenkamp initiated a small position o f 4,370 shares back in 4Q04. He had been trading in and out the stock until 3Q07, typically at very light position level. In 4Q08, in the hay days of financial crisis, he increased holdings from 6,373 shares to 1.2million shares. And in 1Q09, he continued his buy spree and increased to 3.2 million shares. He increased his position slightly in 2Q09.
No. 3: Oracle Corp. (ORCL), Weightings: 5.93% - 1,828,028 Shares
Oracle Corporation is one of the world's leading suppliers of software for information management. Oracle Corp. has a market cap of $113.94 billion; its shares were traded at around $22.72 with a P/E ratio of 16.1 and P/S ratio of 4.9. The dividend yield of Oracle Corp. stocks is 0.9%. Oracle Corp. had an annual average earning growth of 18.2% over the past 10 years. GuruFocus rated Oracle Corp. the business predictability rank of 4-star.
Muhlenkamp initiated a position of 2.26 million shares in 4Q07 and has been reducing shares very slowly since then. He held 1.83 million shares at the end of 2Q09.
No. 4: Cisco Systems Inc. (CSCO), Weightings: 5.87% - 2,081,290 Shares
Cisco Systems Inc. is the worldwide leader in networking for the Internet. Cisco Systems Inc. has a market cap of $131.45 billion; its shares were traded at around $22.79 with a P/E ratio of 19.7 and P/S ratio of 3.6. Cisco Systems Inc. had an annual average earning growth of 17.1% over the past 10 years.
Muhlenkamp started a small position of 16,324 shares back in 4Q05 and did not get serious about this stock until 2007. He bought shares three quarters in a row in 2007 and built a stake of 3.1 million shares by 3Q07. Since then he has been selling shares and in 2Q09 he held 2.08 million shares.
In the Fund’s July 16 conference call (read [url=http://www.muhlenkamp.com/fund/adviser%20conference%20calls/20090716/20090716_conf_calll.pdf
]transcript[/url]), when asked, Muhlenkamp made the following comment on why he is holding CSCO specifically. The comment applies to other high-tech holdings in his portfolio too:
Eight years ago, people wanted us to own Cisco at 60 times earnings. We weren’t interested. At 10 or 12 times earnings, I am. Now, they’re not going to grow as fast as they were 10 or 12 years ago, but they’re growing fast enough and producing enough cash at 10/12 times earnings. I’m very interested. It all has to do with price.
Responding to a question on whether the competitive environment for Cisco changed appreciably in the last five or six years? Muhlenkamp answered:
Well, it’s changed. It’s tightened up, but you still have to consider them the 800-pound gorilla. They do things that no one else does in total. They’ve got something like $30 billion in cash. They raised $3 billion when a lot of companies couldn’t. This is a very good time in most industries to have cash and to be a willing buyer. They’ve historically done very well buying other firms and melding them into their platform. We expect that to continue.
No. 5: UnitedHealth Group Inc. (UNH), Weightings: 5.42% - 1,432,496 Shares
UnitedHealth Group Inc. offers health care coverage and related services to help people achieve improved health and well-being through all stages of life. Unitedhealth Group Inc. has a market cap of $33.43 billion; its shares were traded at around $28.76 with a P/E ratio of 9.4 and P/S ratio of 0.4. The dividend yield of Unitedhealth Group Inc. stocks is 0.1%. Unitedhealth Group Inc. had an annual average earning growth of 30.4% over the past 10 years. GuruFocus rated Unitedhealth Group Inc. the business predictability rank of 5-star.
Muhlenkamp initiated a small position of 224,200 shares in 1Q04 and had gradually increased his stake to 2.47 million shares by 2Q06 and since then he has been reducing shares. By 2Q09, he still held 1.43 million shares.
No. 6: PHILIP MORRIS INTERNATIONAL INC (PM), Weightings: 5.13% - 777,262 Shares
Philip Morris International is the leading international tobacco company with products sold in over 160 countries. They own 7 of the top 15 brands in the world and have a strong mix of international and local products that seek to appeal to a wide array of adult smokers. Philip Morris International Inc has a market cap of $92.2 billion; its shares were traded at around $47.66 with a P/E ratio of 14.8 and P/S ratio of 1.4. The dividend yield of Philip Morris International Inc stocks is 4.5%.
Muhlenkamp held 1.3 million shares in 1Q08 and has been selling shares since then. In 2Q09, he reduced shares from 977,812 shares to 777,262 shares.
Muhlenkamp is a very patient investor. Typically it takes a long time to establish his position to the peak holding and another long time for him to unwind his position.
Three of his top six holdings are in high-tech (IBM, ORCL, and CSCO). Muhlenkamp does not avoid high tech companies, which tend to be in fierce competition and have to invest heavily to renew their products and services.
As he said in the July 16 conference call (read transcript):
As has been true for probably a year, we own more technology than we ever have. Companies like Oracle are doing fine. IBM is doing fine. We do think that the U.S. has an edge in that industry. As you know, in many industries, China has the better edge these days in terms of basic manufacturing, but technological type of stuff, we still have a pretty good edge there. That’s done pretty well for us.
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Click to read Muhlenkamp's top purchases for the quarter.