Jeremy Grantham is the Chairman of the Board of Grantham Mayo Van Otterloo, a Boston based asset management firm. He is regarded as a highly knowledgeable investor in various stock, bond, and commodity markets. Grantham started one of the world's first index funds in the early 1970s. As of early 2009, GMO reported on its web site that it managed more than US $85 billion.
Grantham has built much of his investing reputation over his long career by correctly identifying speculative market "bubbles" as they were happening and steering clients' assets clear of impending crashes. Grantham avoided investing in Japanese equities and real estate in the late eighties, as well as technology stocks during the internet bubble in the late nineties.
See our staff writer’s article on Jeremy Grantham’s Top holdings. Gurufocus consider Jeremy Grantham to have a macro-investing style and perception.
In 3Q Letter, Jeremy Grantham commented on economic problems and its propensities: poor leadership, misguided mortgage borrowers, reckless homebuilders, misconception of “banks are too big to fail”, overpaid & greedy CEOs, and excessive government bailouts. Grantham does not believe the rally is over. He compared the current market to pre-depression rally. “After the sharp decline in the fall of 1929, the S&P 500 rallied 46% from its low in November to the rally high of April 12, 1930. It then, of course, fell by over 80%. But on April 12 it was once again overpriced.” (p3) He wrote, “Today there has been more varied encouragement…history’s greatest stimulus program, moral hazard and easy money has done [its job and drives] equity markets & speculation higher.” He believes the next seven years performance will be lean. “The good news is that we have not fallen off into another Great Depression. We have consistently expected a global economic recovery by late this year or next year.”
He wrote that the October 19th 2009 market was overpriced by 25%. He still thinks it’s a bit early to invest in the emerging equities. “Before the next year is out, the market will drop painfully from current levels…arbitrarily to start at -15%...U.S. market will drop below fair value, which is 22% decline from S&P500 level of 1098 on Oct 19. Bonds have low 7-year forecasts…We score international developed stocks as close to fair value, and emerging equities as expensive, although just within range of normal…give them a 7-year bonus of 2% a year.” His approach has been to “pull back” small bit at a time, utilizing the “hurrahs”. He concluded, “The irony may well be that just as nine months of weak economic data this year has been accompanied by a very strong market, so the strong economic data next year is likely to be accompanied by a weak stock market.” (p6).
“On a longer horizon of 2 to 10 years, [he] believes that resource limitations will have a negative effect.” (p5). He says, “We like owning high-quality blue chips if we are indeed going into a more difficult seven years than any we have faced since the 1970s.” By high quality, he means mostly no debt. He spoke again about the quality stocks he missed from not being flexible on his investments. “Greater flexibility might well have suggested that emerging equity and small cap international were close enough to U.S. quality stocks in expected return to justify some greater risk diversification.” On page 9 of his 3Q Letter, Grantham listed and compared his previous 7-year predictions against the actual return. He has promised another set of prediction study in the next letter.
|Seven Year Comparison||From June 2002 to June 2009|
|Asset Class||GMO Prediction||Actual Return||Accurate?|
|Emerging Mkt Equities||10.0%||14.3%||Somewhat|
|International Small Cap||8.9%||7.7%||Somewhat|
|Emerging Country Debt||6.9%||9.2%||Somewhat|
|U.S. Large Value||1.1%||0.9%||Somewhat|
|U.S. Large Growth||-0.2%||1.2%||OFF|
Arch Capital Group Ltd. (ACGL)Arch Capital Group Ltd. is a diversified financial services holding company, with an emphasis on the insurance sector. Arch Capital Group Ltd. has a market cap of $4.04 billion; its shares were traded at around $71.87 with a P/E ratio of 7.8 and P/S ratio of 1.4. Arch Capital Group Ltd. had an annual average earning growth of 48.9% over the past 10 years.
Jeremy Grantham bought more shares of Arch Capital in the third quarter. His investment company now owns 57,100 shares of AGCL.
The company plans to buy back another $1 billion of its common stock. Arch Capital plans to approve another $350 million for buy backs. 3Q profits came from high premiums for the quarter. Arch Cap earned $274.4 million or $4.39 per share, compared to $26.4 million or $0.42 per share in the prior year.
Southern Copper Corp. (PCU)Base-miner Southern Copper Corp. has a market cap of $27.99 billion; its shares were traded at around $32.93 with a P/E ratio of 62.1 and P/S ratio of 5.7. The dividend yield of Southern Copper Corp. stocks is 2.2%. Southern Copper Corp. had an annual average earning growth of 46.7% over the past 10 years.
Grantham bought over 650,000 shares of Southern Copper at $30.69 per share in 3Q. He now owns 720,700 shares of the company stock.
According to WSJ, copper prices rose last week to $3.105 per pound, and more than doubled in the past year. Southern Peru Copper Corp. objective is to increase stockholder value through earnings and cash flow growth in varied market conditions. The company intends to further realize the potential of there existing operations by expanding our production capacity and reserves, as well as exploring and developing promising mineral deposits. The company believe that there existing operations have significant growth potential that can be financed mainly through internally generated cash flows. They also intend to supplement internal growth by selectively pursuing value-enhancing acquisition opportunities.
Cognizant Technology Solutions Corp. (CTSH)Software developer Cognizant Technology Solutions Corp. has a market cap of $13.36 billion; its shares were traded at around $45.57 with a P/E ratio of 27.1 and P/S ratio of 4.7. Cognizant Technology Solutions Corp. had an annual average earning growth of 43.3% over the past 10 years.
Jeremy Grantham increased his holdings in Cognizant Tech Solutions to 707,841 shares in 3Q.
The consulting company released news that they have made a 5-year “multi-million dollar” contract with Invensys Rail. 3Q earnings increased 21% on cost cutting measures. The company made $136, or 45 cents per share, up from $112.8 million, or 38 cents per share, in 3Q of 2008. Revenue rose 16 percent to $853.5 million from $734.7 million last year.
Coventry Health Care Inc. (CVH)Coventry Health Care, Inc. has a market cap of $3.69 billion; its shares were traded at around $24.92 with a P/E ratio of 12 and P/S ratio of 0.3. Coventry Health Care Inc. had an annual average earning growth of 43.3% over the past 10 years.
Grantham reduced his shares in Coventry Health to 213,500 shares in 3Q.
Health insurer recently appointed Matthew D. Eyles as VP of Public Affairs & Policy. Coventry Health is trying to close a deal by next year to buy Preferred Health Systems (PHS). CEO says the company will honor all PHS contracts once acquisition is complete.
Teva Pharmaceutical Industries Ltd. (TEVA)Israel based company, TEVA Pharmaceuticals, has a market cap of $51 billion; its shares were traded at around $55.5 with a P/E ratio of 17.4 and P/S ratio of 4.6. The dividend yield of Teva Pharmaceutical Industries Ltd. stocks is 0.9%. Teva Pharmaceutical Industries Ltd. had an annual average earning growth of 42.6% over the past 10 years.
Jeremy Grantham reduced his holdings in TEVA from 2,534,468 shares to 475,578 shares (2Q to 3Q).
The company plans to purchase 2/3rds stake of Japanese drug maker Taisho Pharma. Taisho makes revenue of around $130 million every year. TEVA made $11.09 billion in 2008 sales. The company caters to North America, Japan, and Europe. Teva USA’s main business is to develop, manufacture, and market generic pharmaceuticals.
3Q Letter(2009): Contains commentary outlook and Grantham’s “Lessons Not Learned”