Business Day had an article featuring Martin Whitman entitled It will take more than a 45% loss to subdue this 85-year-old man. The article disclosed the rule-of-thumb valuation method that Whitman uses:
Recently, We updated Whitman’s Quarter-end portfolio as of January 31, 2010. Applying his ruleof thumb, perhaps we can understand why he bought the stocks or how strictly he apply the rule in his purchasing.
- Financial services: book value.
- Small banks: 80% of book value.
- Insurance: adjusted book value.
- Real estate: independent appraisal value.
- Operating companies: 10 times peak earnings or less than net asset value.
- Tech companies: twice book value, less than 10 times peak earnings, twice revenue and more cash than liabilities.
Here are Martin Whitman’s Top Purchases for the quarter ended on January 31, 2010:
No. 1: BANK OF NY MELLON CP (BK), Add: 0.3% of the portfolio - Total: 6,000,000 SharesBank of New York is a bank holding company and one of the world's larger financial institutions. Bank Of Ny Mellon Cp has a market cap of $38.61 billion; its shares were traded at around $31.95 with a P/E ratio of 14.7 and P/S ratio of 2.8. The dividend yield of Bank Of Ny Mellon Cp stocks is 1.1%. Bank Of Ny Mellon Cp had an annual average earning growth of 2.7% over the past 10 years.
BK should be considered as a Financial Services company. As of December 31, 2009, BK’s book value was $24 per share. Between November, 2009 and January 2010, the stock traded between $26 and $31. It was unlikely Whitman was able to add to his positions at prices that are less than book value. It was possible for him to add share at prices close to book value.
No. 2: CIT Group Inc. (CIT), Buy: 0.16% of the portfolio - Total: 234,609 SharesCIT Group Inc. is a bank holding company that provides financing and leasing capital for commercial companies throughout the world. Cit Group Inc. has a market cap of $16.08 billion; its shares were traded at around $39.74 with and P/S ratio of 4.
The company resumed trading after emerge from a pre-packaged bankruptcy in early December. Knowing Whitman’s expertise in the distressed debt area, I am surprised that this is how much he ended up owning the company. Book value of the company is at $42 per Yahoo! Finance, so it is possible for one to acquire shares under Whitman’s guidance.
No. 3: Covanta Holding Corp. (CVA), Buy: 3.22% of the portfolio - Total: 8,816,889 SharesCovanta Holding Corporation is an internationally recognized owner and operator of large-scale Energy-from-Waste and renewable energy projects and a recipient of the Energy Innovator Award from the U. Covanta Holding Corp. has a market cap of $2.6 billion; its shares were traded at around $16.78 with a P/E ratio of 25.5 and P/S ratio of 1.7.
It is perhaps not appropriate to apply any of the Whitman’s rules on this oil company. The closest one I can come up with is that for the Operating Companies. Whitman wants to pay no more than 10 times peak earning or than net asset value. In the year of 2008, CVA made peak earning of $0.90 per share. 10X that is $9. Whitman bought quite a bit of this stock during the quarter ended on January 31, 2010 in violation of his own rule of thumb, I am sure he had good reason for it.
No. 4: Cenovus Energy Inc (CVE), Buy: 0.37% of the portfolio - Total: 776,800 SharesCenovus Energy is an integrated oil company headquartered in Calgary, Alberta. Cenovus Energy Inc has a market cap of $21.71 billion; its shares were traded at around $28.89 with and P/S ratio of 2.1. The dividend yield of Cenovus Energy Inc stocks is 2.7%.
This is company that went to public in December of 2009. Whitman got some hot IPO shares? In 2009, it made $0.86 per share. It is far more than 10x earning so he must be using a different method to valuate oil and gas companies.
No. 5: KeyCorp (KEY), Buy: 1.5% of the portfolio - Total: 10,000,000 SharesKeyCorp is an integrated multi-line financial services company. Keycorp has a market cap of $7.38 billion; its shares were traded at around $8.35 with and P/S ratio of 1.2. The dividend yield of Keycorp stocks is 0.5%.
Finally! A small bank. As of December 31, 2009, the bank’s book value per share was around $9.00. The stock traded between $5 to $7.50. Whitman could easily buy at less than 80% of book value per share during the season.
Just that I particularly like this bank, I couldn’t help noticing the number of insider buying into the company recently:
- Buy:: Director Elizabeth R. Gile bought 1,300 shares of KEY stock on 03/19/2010 at the average price of 7.59, the price of the stock has increased by 10.01% since.
- Buy:: Director Edward W Stack bought 10,000 shares of KEY stock on 03/12/2010 at the average price of 7.63, the price of the stock has increased by 9.44% since.
- Buy:: Director Ruth Ann M Gillis bought 2,500 shares of KEY stock on 01/26/2010 at the average price of 7.1, the price of the stock has increased by 17.61% since.
Whitman likes banks, financials and energy companies lately.
Applying Whitman’s rule of thumb on Whitman’s top purchases during the quarter that ended on January 31, 2010, I found he stood by his rule for the financial services companies and banks. The oil and gas companies are well off the mark, but that is probably the rule of operating company does not really apply to the commodity companies.
KeyCorp. represents an interesting company that one could dig further.
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