Here is an excerpt from Wikipedia entry for “William J. Ruanne”:
Ruane met Warren Buffett at an investment seminar with value investing guru Benjamin Graham and he and Buffett became lifelong friends. Buffett advised associates to invest with Ruane after he had closed out his initial partnership as they both employed Graham's value investing techniques. Ruane founded his own investment firm, Ruane Cunniff, with partner Rick Cunniff in 1970, and the same year they launched their flagship Sequoia Fund. The fund has routinely outperformed the S&P 500 index and has been one of the top performing mutual funds. In the 38 years in which Sequoia has been operational, the fund has averaged a return of approximately 15% versus about 13% for the S&P 500.
Ruane's firm was renamed Ruane, Cunniff, and Goldfarb in 2004, when Robert Goldfarb became president. In 2008, the Sequoia Fund announced it would open its fund to new investors for the first time since 1982.
The performance for the Sequoia Fund is listed as follows, as compared to S&P 500. It had a disastrous 1999, fabulous earlier 2000s, and so-so years since 2003, hit and miss the benchmark for a couple of years. In 2009, it returned -27%, beating the market by 10%. YTD the Fund is up about 16%, lagging the 23% of S&P 500.
Performance of Sequoia Fund
|Year||Return (%)||S&P500 (%)||Excess Gain (%)|
William Ruane died in 2005, and Rick Cunniff is advanced in years. Whether the next generation of managers can live up to the superb historical performance remains to be seen.
The top holdings of Sequoia Fund are listed as follows. On May 15, 2009, the Ruane, Cunniff & Goldfarb Investor Day, fund managers commented on some of the top holdings during the investors conference. Whenever applicable, I have dug out there comments and present them together with the stock. Complete transcript for the conference can be found here
No. 1: Berkshire Hathaway Inc. (BRK-A), Weightings: 24.42% - 18,628 SharesBerkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities. The most important of these are insurance businesses conducted nationwide on a primary basis and worldwide on a reinsurance basis. Berkshire also owns and operates a number of other businesses engaged in a variety of activities, as identified herein. Berkshire Hathaway Inc. shares were traded at around $102008 with a P/E ratio of 31 and P/S ratio of 1. Berkshire Hathaway Inc. had an annual average earning growth of 27.1% over the past 10 years. GuruFocus rated Berkshire Hathaway Inc. the business predictability rank of 3.5-star.
[Fund Manager Commented the stock during May 15 Investors Conference
Question: Given the dominance of Berkshire in the portfolios, would you please give your assessment?
The interesting thing about Berkshire Hathaway is that for most of the time we've owned it, it's had a lot of cash. There's always been a lot of dry powder since Berkshire acquired Gen Re in 1998. I don't know if rooting is the verb I want to use, but Berkshire was always very well positioned for a certain amount of distress, blood in the streets, credit being tight, stocks being down, and businesses getting cheaper.
Now, Buffett has basically put all his money to work, which is good. We have new sources of earnings from the preferred stock in GE, the preferred stock in Goldman Sachs and the loan to Wrigley, which also has a double digit yield. There is also a recent convertible debenture or, I should say, contingently convertible debenture in Swiss Re. He lent a lot of money to a lot of pretty good corporate credits from Vulcan, which we own, to Tiffany, Sealed Air, and Harley-Davidson. He's getting 10-12 percent yields on all these instruments.
Going into this crisis, there were some exposures to high yield bonds and the credit default swaps that Buffett wrote about last year. I'm not as worried about the S&P puts. I think there's enough time for corporate America over the next 15 years to increase its earnings to levels and valuations such that Berkshire would not have to pay anything.
But like many businesses in America, Berkshire's earnings have been suffering from the crisis and the recession. A number of its businesses have been affected. These include the lending businesses in which Berkshire is an investor such as American Express, Wells Fargo, and some other banks. Furthermore, many of the wholly-owned businesses such as the building products companies, the retailers and apparel businesses, Clayton Homes, Iscar, and NetJets have been severely affected by the economic contraction. As Bob was talking about earlier, it's very hard these days to know what the new normal is. Shaw earned ... I want to say $594 million pre-tax at the peak. The building products companies — Manville, Acme, Benjamin Moore and MiTek — I think earned almost $900 million at the peak. Whether that $900 million is going to be $500 or $600 million or $400 million in what we now think could be a normal environment going forward is a subject to debate. But the earnings will rebound. How much higher, it's a little hard to say. But the earnings of these businesses will recover when the economy comes back.
Berkshire is a very resilient corporation. The various insurance companies don't earn the same amount every year because their underwriting margins go up and down, but they are not really economically sensitive. And the utility business is mostly recession resistant, as is McClane. I think about half of Berkshire's peak earning power came from relatively recession resistant businesses whether they were these wholly-owned businesses or some of the stocks it owns like Wal-Mart, Coke, and Johnson & Johnson. There's a strong base of earnings that will see Berkshire through almost any kind of economic scenario. At the current valuation, I think you're paid quite well to hold on to the stock.
No. 2: IDEXX Laboratories Inc. (IDXX), Weightings: 8.37% - 12,902,987 Shares
IDEXX Laboratories, Inc. is a world leader in providing diagnostic, detection, and information products to the animal health industry as well as quality assurance products and services to the food and water industries. Idexx Laboratories Inc. has a market cap of $2.98 billion; its shares were traded at around $50.91 with a P/E ratio of 26.3 and P/S ratio of 2.9. Idexx Laboratories Inc. had an annual average earning growth of 17% over the past 5 years.
No. 3: The TJX Companies Inc. (TJX), Weightings: 8.1% - 16,804,933 Shares
TJX Companies, Inc. is an off-price retailer of apparel and home fashions in the U.S. and worldwide. The company operates T.J. Maxx stores, Marshalls stores, and Winners Apparel Ltd. stores, a Canadian off-price family apparel and home fashions chain. It also operates HomeGoods, a U.S. off-price home fashions chains, and T.K. Maxx, an off-price family apparel and home fashions chain in the United Kingdom, the Republic of Ireland and the Netherlands. In addition, it operates A.J. Wright, a new U.S. chain of off-price family apparel and home fashions stores. The TJX Companies Inc. has a market cap of $16.56 billion; its shares were traded at around $39.07 with a P/E ratio of 15.8 and P/S ratio of 0.9. The dividend yield of The Tjx Companies Inc. stocks is 1.2%. The Tjx Companies Inc. had an annual average earning growth of 11.9% over the past 10 years. GuruFocus rated The Tjx Companies Inc. the business predictability rank of 4.5-star.
Here are the managers’ comment on the stock:
How about the apparel brands? Do they represent any value to you? Are there any standout companies that you find are well managed?
What I would say is that apparel is extremely dynamic and the guy who's on top this year may not be on top next year. It's pretty rare for an apparel brand to last a generation. There are definitely apparel brands out there that do, but it's hard to handicap. Dumb analogy, but I don't like to try to handicap pharma pipelines either because it's really hard to figure out who is going to have the next great drug. It's hard to handicap who is going to be the next great brand in apparel, or who is going to be hot this year. There are people who can do it but we're not very good at it.
So let me say we've decided that we're not very good at it, as opposed to saying I don't think there's any value in apparel brands. It's a hard thing to analyze and as a dumb guy, I think that TJX is a little bit easier to analyze than an apparel brand in the same way that Walgreen is a little bit easier to analyze than a pharma company.
No. 4: Fastenal Company (FAST), Weightings: 5.9% - 11,740,695 Shares
Fastenal Company sells industrial and construction supplies grouped into eleven product lines. Fastenal Company has a market cap of $5.61 billion; its shares were traded at around $37.76 with a P/E ratio of 27.7 and P/S ratio of 2.4. The dividend yield of Fastenal Company stocks is 2%. Fastenal Company had an annual average earning growth of 17.7% over the past 10 years. GuruFocus rated Fastenal Company the business predictability rank of 4-star.
Managers’ comment on the stock
If this isn't too broad a question, can you discuss what you were personally going through and what was going through your mind work-wise through the worst days of the last year or 2009 as we hit the lows. Did you second guess value investing? Did you second guess your own competence? Did you think maybe things didn't work?
I wish we weren't on the 47th floor. I don't think that we second guessed the discipline. I guess I shouldn't speak collectively. I think there's been a lot of kicking yourself because it was pretty obvious that some of this would happen. We failed to see the magnitude. Many people saw that there would be a correction and housing would turn down and we might build a million houses for a while instead of two million houses. But I don't think people saw that we might build 400,000 houses or that large percentages of all the homes in Las Vegas, Phoenix, and Southern California would be in foreclosure.
I don't think we saw the magnitude of it; so when it hits you it's frustrating because we just underestimated how severe it would be. I think Bob in particular was anxious about what could happen. Yet when it did happen, we weren't as well aligned as I think we could have been.
I was just shocked by the magnitude of the decline in demand that affected much of American industry in the fourth quarter of 2008 and the first quarter of 2009. And as indicated by ITW's results, which I mentioned in my prepared remarks, it's continuing. Chase, a year ago, were Fastenal's daily sales up about 15 percent?
They were up 16% in May 2008. December was the first month in Fastenal's 42-year history when they did not have a positive year over year comparison for daily sales. That has turned into, in April, a 25 percent year over year daily sales decline. So it went from positive 12 in October to negative 25 in April. It was very severe and very quick.
We were just astonished. If you had asked us a year ago at this time what was the likelihood that Fastenal would see a period where sales would be down 25 percent, Chase, what odds would you have given?
No. 5: Martin Marietta Materials Inc. (MLM), Weightings: 5.48% - 4,587,455 Shares
Martin Marietta Materials producer of aggregates for the construction industry, including highways, infrastructure, commercial and residential. The company also manufactures and markets magnesia-based products, including heat-resistant refractory products for the steel industry, chemicals products for industrial, agricultural and environmental uses, and dolomitic lime. Martin Marietta Materials Inc. has a market cap of $3.85 billion; its shares were traded at around $86.52 with a P/E ratio of 31.5 and P/S ratio of 1.8. The dividend yield of Martin Marietta Materials Inc. stocks is 1.8%. Martin Marietta Materials Inc. had an annual average earning growth of 8.3% over the past 10 years.
Do you think the companies in your portfolio have the pricing power to protect their earnings from inflation? Or should you put on hedges to cover you from that inevitability?
I would say that pricing power varies. I think probably the strongest in terms of pricing power would be the rock companies, the quarry companies, namely Martin Marietta and Vulcan, which have continued to raise prices despite very significant declines in demand. You don't see that combination very often — maybe cigarettes or railroads.
But I'd also add that if you go back to Warren Buffett's article in Fortuneabout inflation and common stocks, I think he put more emphasis on the cash generating nature of the businesses than on their pricing power. That's not to dismiss pricing power, but as he pointed out, in an inflationary period what you want to avoid are capital intensive businesses that are forced to reinvest a fair amount of the cash that they throw off back into the business just because of increased inflation in working capital as well as plant and equipment. On that score of cash generation, we've had a strong emphasis for a long period of time and that should serve us well in a period of accelerating inflation.
No. 6: Mohawk Industries Inc. (MHK), Weightings: 5.14% - 8,302,181 Shares
Mohawk Industries, Inc. is one of the leading producers of woven and tufted broadloom carpet and rugs for principally residential applications. The company designs, manufactures and markets carpet and rugs in a broad range of colors, textures and patterns. The company is widely recognized through its premier brand names, some of which are Mohawk, Aladdin, American Rug Craftsmen, American Weavers, Bigelow, and Custom Weave. Mohawk Industries Inc. has a market cap of $2.9 billion; its shares were traded at around $42.4 with a P/E ratio of 326.1 and P/S ratio of 0.4. Mohawk Industries Inc. had an annual average earning growth of 13.5% over the past 10 years. GuruFocus rated Mohawk Industries Inc. the business predictability rank of 4.5-star.
Again, according to the conference transcript:
Could somebody tell us what is happening with Mohawk? Last year, I remember you were very gloomy. Maybe you can tell us about the fundamentals.
Mohawk sells floor covering. Its sales are driven primarily by existing home sales, commercial construction and remodeling and, to a lesser extent, new home sales. It's no news that we haven't been buying or selling a lot of houses, and we haven't been building many houses. In fact, we built way too many houses. And it's going to take a long time for that excess inventory to get sopped up.
One way to think about Mohawk today, and to put it into the context of Bob's comments, is to look at the pluses and minuses for the company as it exists now, given the way we feel about the economy. On the downside, of course, is this continuing contraction of consumers' spending and their being more thrifty — obviously, it's better if people are going to throw around a lot of money, buy vacation houses, and put flooring in — Mohawk will suffer from that.
But the structure of the company is such that it's in a pretty good position, even if people are going to be thrifty because its product line goes from goods that are very expensive to those that are very inexpensive. If the consumer moves down market, Mohawk still stands in a good position to capture a lot of that business. Carpet can be a relatively inexpensive or an expensive type of floor covering. Mohawk also makes high quality laminate, which is an economical alternative to wood flooring. So there's that. The price range for Dal-Tile's offerings like that of the carpet business goes from very affordable to very expensive. The company is well positioned for thrifty consumers, and if you want to spend a lot of money, they have expensive things to sell you as well.
On the other side, somewhat offsetting a longer-term contraction of consumer spending, is the fundamental driver of housing, which is household formation. And that is simply going to continue no matter how thrifty we are. If you just look at the demographics, the people who are alive today — college students — my son and daughter are eventually going to move out of the house — we would like them to be there forever, but they're going to move out. And they will have to form households. They will have to buy houses; and they will have to buy flooring.
If you just look at the numbers, there's a very big demographic wave coming to create demand for housing in the future. So it's very, very difficult to tell how long the recovery in demand is going to take, but the fundamental driver of housing is still there. It's alive and walking around. So I think over the long run Mohawk will be fine.
It will be difficult for it to produce the same volume of sales as in the past because there's not going to be a housing boom. But again, partially offsetting that, the business itself — the whole industry has contracted. Marginal players are strapped. They're going to be dropping out. Mohawk itself has radically downsized; management has laid off 20 percent of its workforce over the past year. And they've idled a lot of assets, the least productive assets first — which is what your common sense would tell you to do. When demand returns, Mohawk will be manufacturing with its most productive assets. So over the long run, it will be okay. When exactly that is going to happen I'm not prepared to say because I don't know.
What I would add to that is Mohawk has a terrific family ownership. It's the kind of owner-manager whom we really like. It has a very good duopoly position in the industry. Shaw is the other major flooring company. With only two large companies in that industry, you should have very rational pricing over time. They are much stronger than any of the smaller companies.
But you could ask yourself ... in a horrible macro environment, we had the common sense to sell Bed, Bath & Beyond and Lowe's, which are two companies that would be oriented similarly to Mohawk in terms of their exposure to housing, but we didn't sell Mohawk. We could be second-guessed for that, and I suppose it comes down to sometimes the macro environment is very negative, and we made the decision that this is a management team that we think will manage through it, and be in a good position in the long term because it is a duopoly industry, and housing is likely to ... we are likely to have a million or a million-two housing starts per year over the long term in the US, even if this year we build 400,000-500,000 houses. In the short term, holding Mohawk has been a really poor decision. In the long term, we're hoping and expecting that it will be a better decision.
I would also point out that sales of existing homes are much more of a driver of Mohawk's fortunes than sales of new homes. So if I were looking for an indicator or barometer of activity, that's the one I'd focus on. Terence, Mohawk has a lower share, doesn't it, in the builder market?
Yes, it does.
Yes, they have a lower share in the builder market and a higher share in the remodeling market, which is driven by the sales of existing homes, and so I think we've seen some stabilization and modest uptake in sales of existing homes in recent months. That's about the first positive harbinger that we've seen regarding Mohawk and we would expect that there will be more to come over time.
Money managers for the Sequioa Fund have positioned the fund for the economic expansion and housing recovery.
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