Arnold Van Den Berg is a Ben Graham followers and who is willing to share his trade secret.
Arnold Van Den Berg is the head of Austin, Texas-based Century Management since 1974. He started out as a life insurance agent based in Los Angeles for John Hancock Life Insurance Company from 1966 to 1968. He then became a stockbroker for Capital Securities in Los Angeles and worked there until 1974.
Heeding what Ben Graham preached, Van De Berg buys stocks at a 40% to 65% discount to what the he thinks is the company’s current intrinsic value. His primary equity fund, CM Value I Composite, has had an average annual return of 14.88% net of fees for 33 years, from 1974 through 2007, according to this document on the Century Management website.
Sharing his insights in value investing, Van Den Berg’s firm publishing a newsletter called “The Value Investor”. The latest issue was published on October 12, 2009 and can be found here. While you are on the Century Management website, you may want to spend a few hours and check out the CM Library.
In the October newsletter, using his framework, Van Den Berg assessed the overall market valuation level:
- First, he established the “normalized” Moody’s Baa corporate bond yield of 7.5% (40-year average)
- Then the stock market valuation level is represented by the median P/E of the 1,700 stocks found in the Value Line Investment Survey
- Since bond and stock compete for capital, the Baa Corporate Bond yield of 7.5% establishes a Buy Point P/E for stock of 13.33
- Add 25% to the Buy Point P/E, one arrive at the Fair Value P/E of 16.67
- Add 10 to 15% to the Baa equivalent fair value P.E of 17.5 one gets the potential sell point of P/E of 18.3 to 19.2
- As of March 13, 2009, the Median Value Line P/E ratio was at 10.3, making the market very attractively priced
- As of September 30, 2009, the Median P/E ratio of the Value Line 1,700 companies was 17.5, hence the market had a chance to appreciate 5% to 10% before considered fully valued.
- But it is also statistically possible that median P/E below Buy Point P/E, risking a decline of 20% to 34% depending whether you use the normalized rate (7.5%) or actually rate (6.17%).
- Hence, Van Den Berg concluded as of September 30, 2009, with each unit of upside coming with 2 to 3.5 units of risk, making the bet odds unfavorable.
However, on his own portfolio, his opinion is more constructive. As of September 30, his CM Value 1 Composite has a forward P/E ratio of 16.45. He believes that his portfolio continue to have upside potential. Over the next 12 o 18 months, he sees the possibility for a 10 to 15% return not counting the 2% dividend yield.
One unusual thing happened to Van Den Berg’s portfolio during the past year or so. Currently, more than half of his portfolio is invested in the large, blue chip quality companies; cash accounts for about a quarter of his portfolio, leaving less than 25% to the small and mid-cap stocks. Historically, over that past 35 years, roughly two thirds of his investments have been in smaller companies. Thanks to the market decline, many of the large-cap stocks reached the price level that warrants his investment.
One more point before I exit from reviewing the newsletter is Van Den Berg’s selling strategy. Once a stock passes fair value, typically he average out, or sell in stages, as price continue to appreciate to his maximum sell target. As of September 30, 2009, the average portfolio under his management has 23.46% in cash, up from 19.73% as of June 30, 2009. Market has gone up since then, one can be certain cash is taking up a larger portion of the portfolios under his management.
Remember to read the October “The Value Investor” news letter.
Here are the top holdings of Arnold Van Den Berg’s portfolio:
No. 1: Microsoft Corp. (MSFT), Weightings: 8.75% - 5,059,724 Shares
Microsoft develops, manufactures, licenses, and supports a wide range of software products for a multitude of computing devices. Microsoft software includes scalable operating systems for servers, personal computers, and intelligent devices; server applications for client/server environments; knowledge worker productivity applications; and software development tools. The Company's online efforts include the MSN network of Internet products and services and alliances with companies involved with broadband access and various forms of digital interactivity. Microsoft Corp. has a market cap of $267.04 billion; its shares were traded at around $29.91 with a P/E ratio of 18.5 and P/S ratio of 4.6. The dividend yield of Microsoft Corp. stocks is 1.7%. Microsoft Corp. had an annual average earning growth of 10% over the past 10 years. GuruFocus rated Microsoft Corp. the business predictability rank of 4-star.
No. 2: WalMart Stores Inc. (WMT), Weightings: 5.01% - 1,518,499 Shares
Wal-Mart Stores, Inc. is the world's largest retailer. They are engaged in the operation of mass merchandising stores, which serve their customers primarily through the operation of three segments, which are the Wal-Mart Stores segment, the SAM'S Club segment and the International segment. Walmart Stores Inc. has a market cap of $211.55 billion; its shares were traded at around $54.85 with a P/E ratio of 15.5 and P/S ratio of 0.5. The dividend yield of Walmart Stores Inc. stocks is 2%. Walmart Stores Inc. had an annual average earning growth of 13.3% over the past 10 years. GuruFocus rated Walmart Stores Inc. the business predictability rank of 5-star.
No. 3: The CocaCola Company (KO), Weightings: 5.01% - 1,386,350 Shares
The Coca-Cola Company is the world's largest beverage company and is the leading producer and marketer of soft drinks. Along with Coca-Cola, recognized as the world's best-known brand, The Coca-Cola Company markets four of the world's top five soft drink brands, including diet Coke, Fanta and Sprite. Through the world's largest distribution system, consumers in nearly 200 countries enjoy The Coca-Cola Company's products at a rate of more than 1 billion servings each day. The Cocacola Company has a market cap of $134.85 billion; its shares were traded at around $58.19 with a P/E ratio of 19.2 and P/S ratio of 4.2. The dividend yield of The Cocacola Company stocks is 2.8%. The Cocacola Company had an annual average earning growth of 5.3% over the past 10 years. GuruFocus rated The Cocacola Company the business predictability rank of 2-star.
No. 4: ColgatePalmolive Company (CL), Weightings: 4.76% - 928,083 Shares
Colgate-Palmolive is a leading global consumer products company, tightly focused on Oral Care, Personal Care, Household Surface Care, Fabric Care and Pet Nutrition. Colgate sells its products in countries and territories around the world under such internationally recognized brand names as Colgate, Palmolive, Mennen, Softsoap, Irish Spring, Protex, Sorriso, Kolynos, Ajax, Axion, Soupline, Suavitel and Fab, as well as Hill's Science Diet and Hill's Prescription Diet pet foods. (Company Press Release) Colgatepalmolive Company has a market cap of $42.4 billion; its shares were traded at around $85.06 with a P/E ratio of 20.5 and P/S ratio of 2.7. The dividend yield of Colgatepalmolive Company stocks is 2.1%. Colgatepalmolive Company had an annual average earning growth of 8.5% over the past 10 years. GuruFocus rated Colgatepalmolive Company the business predictability rank of 3.5-star.
No. 5: UnitedHealth Group Inc. (UNH), Weightings: 4.29% - 2,549,886 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. The company's products and services reflect a number of core capabilities, including medical information management, health benefit administration, care coordination, risk assessment and pricing, health benefit design and provider contracting. With these capabilities, it is able to provide comprehensive health care management services through organized health systems and insurance products. Unitedhealth Group Inc. has a market cap of $34.36 billion; its shares were traded at around $29.56 with a P/E ratio of 9.3 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.
No. 6: Walgreen Company (WAG), Weightings: 4.12% - 1,635,632 Shares
Walgreen Co. is a national retail pharmacy chain and considered the leader in innovative drugstore retailing. Walgreens pioneered many store features that are becoming standards in the industry. Among those concepts are: Computerized pharmacies, Point-of-sale scanning, Freestanding stores with drive-thru pharmacies, and Intercom Plus, Walgreens advanced new pharmacy computer and workflow system. Intercom Plus allows pharmacists to spend more time counseling patients by assigning administrative tasks to pharmacy technicians Walgreen Company has a market cap of $38.96 billion; its shares were traded at around $39.4 with a P/E ratio of 19.4 and P/S ratio of 0.6. The dividend yield of Walgreen Company stocks is 1.4%. Walgreen Company had an annual average earning growth of 15.1% over the past 10 years. GuruFocus rated Walgreen Company the business predictability rank of 5-star.
For a long time, Van Den Berg had to find little jewel among the small and mid-cap stocks. The market decline offered him opportunity to buy into large cap companies at discount. As of now, he is easing out these positions and accumulating cash.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Arnold Van Den Berg for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.