Here is the story how he invented his formula according to the book:
In 1968, all of the studies proved that 4.5 percent was a normal interest rate and 17 was a normal PE. During 1972-74, we saw interest rate go well above 4.5 percent. They went past 7 percent during that period and rose to over 13 percent by the late 1970s. In 1973-74, we saw PEs go from 17 to 14 to 12 to 9 to 7. All the way down, Wall Street said these stocks were cheap. I said to the analysts, “You keep telling me that they are cheap, yet I keep buying them and they keep going down. What’s the company worth?” The analysts literally couldn’t tell me what a company was worth. I started quizzing some of the number crunchers at various firms to see if they could figure out what was happening. They came back and said thing like price-to-book [P/B] versus return on equity [ROE] were useful criteria to look at. The key is what return you can get versus your cost of capital. Digging further, we learned that even though P/B versus ROE is useful, you have to adjust for inflation and interest rates. In early 1974, even Ben Graham adjusted his values. If you believed his numbers in early 1974, you would have bought stocks. If you believed mine, you would have sold stocks, I thought, Who am I to argue with Ben Graham?
Buyt by December 1974, prices fell significantly. At that point, I realized I was on to something. I’ve used the same method of valuing companies, using the Graham format but adjust it for inflation and interest rates, for 27 years”.
I am curious, does anyone know what his formula might be?
Under this context, these are the top purchases of Ronald Muhlenkamp during 2Q09. He does not trade stocks frequently, so there is a high probability he still holds them:
No. 1: AFLAC Inc. (AFL), Buy: 0.85% of the portfolio - Total: 180,000 Shares
AFLAC Inc. is a general business holding company and acts as a management company overseeing the operations of its subsidiaries by providing management services and making capital available. Its primary business is supplemental health and life insurance which is marketed and administered primarily through its subsidiary American Family Life Assurance Company of Columbus. Aflac Inc. has a market cap of $19.52 billion; its shares were traded at around $41.76 with a P/E ratio of 9.4 and P/S ratio of 1.2. The dividend yield of Aflac Inc. stocks is 2.7%. Aflac Inc. had an annual average earning growth of 17.3% over the past 10 years. GuruFocus rated Aflac Inc. the business predictability rank of 5-star.
The 180,000 share position is a new holding for Muhlenkamp.
No. 2: Amedisys Inc (AMED), Buy: 2.43% of the portfolio - Total: 485,355 Shares
Amedisys Inc. is a leading multi-regional provider of home health care nursing services. They operate home care nursing offices in southern and southeastern United States. Amedisys Inc has a market cap of $1.1 billion; its shares were traded at around $39.45 with a P/E ratio of 9.6 and P/S ratio of 0.9. Amedisys Inc had an annual average earning growth of 59% over the past 5 years.
Muhlenkamp initiated a small position of 335,690 shares in 3Q07 and increased slightly over the course of the last two years. In 2Q09, he held 485,355 shares.
No. 3: China Medical Technologies Inc. ADS (CMED), Buy: 1.18% of the portfolio - Total: 390,000 Shares
China Medical Technologies Inc. is a China-based medical device company that develops manufactures and markets products using HIFU for the treatment of solid cancers and benign tumors in China. China Medical Technologies Inc. Ads has a market cap of $406.6 million; its shares were traded at around $14.86 with a P/E ratio of 7 and P/S ratio of 3.4.
Muhlenkamp initiated a 390,000 share position during 2Q09.
No. 4: Reliance Steel & Aluminum Co. (RS), Buy: 2.17% of the portfolio - Total: 372,745 Shares
Reliance Steel & Aluminum Co. is one of the largest metals service center companies in the United States. Reliance Steel & Aluminum Co. has a market cap of $3.01 billion; its shares were traded at around $40.94 with a P/E ratio of 13 and P/S ratio of 0.3. The dividend yield of Reliance Steel & Aluminum Co. stocks is 1%. Reliance Steel & Aluminum Co. had an annual average earning growth of 20.1% over the past 10 years.
Muhlenkamp initiated a 372,745 share position in 2Q09.
No. 5: The Hartford Financial Services Group In (HIG), Buy: 1.54% of the portfolio - Total: 856,855 Shares
Hartford Financial Services is one of the nation's largest investment and insurance companies offers a complete line of insurance and financial service products to customers all over the world. The Hartford Financial Services Group In has a market cap of $8.45 billion; its shares were traded at around $25.75 with and P/S ratio of 0.9. The dividend yield of The Hartford Financial Services Group In stocks is 0.8%. The Hartford Financial Services Group In had an annual average earning growth of 7.2%
Muhlenkamp initiated an 856,855 share position in 2Q09.
Muhlenkamp bought two names in insurance industry during 2Q09. None of the names are very expensive based on PE ratio. They probably warrant further research.
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