Oak Value Comments on Top Holdings: Berkshire Hathaway Inc., AFLAC Inc., MasterCard Inc., Coach Inc., Praxair Inc., American Express Company

Chapel Hill, N.C. based Oak Value Fund confesses practicing value investing. Here is an statement on the firm investment approach according to the firm’s website:

We are value investors with an objective to prudently grow capital over time. Our approach is guided by the principles and techniques of Benjamin Graham and Warren Buffett. From a strategic perspective, we do what we suspect you would do if you were investigating an investment of your own money in a business as a partner. We want to buy small pieces of companies, via their publicly traded shares, that are selling for a sizable discount from the rational price that a knowledgeable acquirer would pay for the whole business. We focus on buying good businesses with good management at attractive prices, through independent research focused on assessing a company, its leadership, and its investment potential at different acquisition prices.


We do not believe that the stock market necessarily represents accurate values for a company in the short term. Therefore, we view the stock market as a wonderful mechanism that allows us to buy and sell shares of high quality businesses.

Such an approach should sound very familiar to the frequent GuruFocus users and visitors, as we too have an bias on value investing and don’t think there is really another way.


Oak Value Fund’s performance beats the S&P 500 Index by during the past five, ten and since inception of Jan. 18, 1993. Here are the numbers according to the company’s website through July 31, 2010:





The firm has recently entered an agreement to sell itself to San Francisco based RS Investments.


CEO Interview


Larry Coats, CEO of Oak Value Capital, talked to CNBC on June 29, 2010 about where they invest money these days.


He said his fund has some financial exposures but it has avoided financial companies that depend on the generosities of the strangers, or in another word, investment banks. He thinks these businesses are not “great businesses” before the financial regulation reform, and their fortune are not going to be improved with the reform.


Coats commented on his position in Berkshire Hathaway and some insurance companies, thinking it will benefit from the volatility in the stock market.


Coats stated that he is bullish about “great businesses” that are portable. These businesses can take their operations overseas where they can achieve better growth.





Top Holdings and Comments


The firm has published its 2Q10 letter. In it, the company commented on it top holdings. Here are the fund’s top holding, tighter with the firm’s comments:


No. 1: Berkshire Hathaway Inc. (BRK.A, Financial), Weightings: 12.57% - 181 Shares


Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities. Berkshire Hathaway Inc. has a market cap of $197.15 billion; its shares were traded at around $119704 with a P/E ratio of 22.8 and P/S ratio of 2.2. Berkshire Hathaway Inc. had an annual average earning growth of 13.2% over the past 10 years.


Oak Value commented in the quarterly letter:

Although Berkshire’s shares declined slightly, they outperformed during the period as it appears investor sentiment for the company is beginning to reflect signs of improving fundamentals. Predictably, the company’s inclusion in the S&P 500 Index earlier this year has resulted in increased coverage by Wall Street and to some extent, a greater understanding of the business structure and earnings power of the company. Rail volumes have improved at Burlington Northern and we believe this unit is well positioned to produce increased earnings as a more staid recovery takes hold in the U.S. Net Jets showed a substantial improvement during the first quarter after posting substantial losses in 2009. We expect the recovery at Net Jets to have a meaningful impact on the overall company results in 2010. Several of Berkshire’s other operating businesses are more dependent on a recovery in the U.S. housing market which will require more time. Berkshire continues to be one of the safest insurance companies in the world as it underwrites and invests with an outlook to whatever possibly could happen, not just what it would like to see happen. In our opinion, Berkshire’s advantaged business model remains intact and its management execution continues to be commendable.


The underlying businesses at Berkshire are solid and we are confident that we understand what to expect from earnings and growth in value over time. Though Berkshire is still one of the Fund’s largest holdings, we further reduced the position during the quarter as a year-to-date increase in its share price and the inevitable slowing of its future growth have resulted in a reduced, though still meaningful, margin of safety in its shares. Other opportunities to allocate shareholder capital have become increasingly attractive in the recent market confusion and we chose to take advantage of some of them.

No. 2: AFLAC Inc. (AFL, Financial), Weightings: 6% - 242,904 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. Aflac Inc. has a market cap of $23.39 billion; its shares were traded at around $49.81 with a P/E ratio of 9.6 and P/S ratio of 1.3. The dividend yield of Aflac Inc. stocks is 2.3%. Aflac Inc. had an annual average earning growth of 11.7% over the past 10 years. GuruFocus rated Aflac Inc. the business predictability rank of 3-star.


Oak Value commented in the quarterly letter:

Aflac – Aflac shares significantly underperformed the broader market and the Fund’s other financial holdings during the quarter as concern over the company’s investment exposure to European sovereign credit, banks and other borrowers took focus from the continued strength of its ongoing operating results. Aflac is distinctive in that its claims exposure and its investments held to pay those claims are both long-term in nature. Deteriorating credit profiles in various European countries where Aflac invests a portion of its capital has raised concerns among investors. In our opinion, the primary concern for investors in such companies should be whether the company will have more than sufficient capital and liquidity to pay claims when they are due.


Our analysis suggests that the risk to Aflac’s claims paying ability is manageable and that the operating results of the company are actually holding up rather well. We are most intrigued by signs of strength in the Japanese operations where the company generates more than 70% of its revenues and operating profits. Aflac continues to show signs of improving traction in Japan as it has expanded its distribution channels and product offerings. While we have maintained relatively modest expectations for the company’s growth in Japan, we are pleased with this recent progress. For years, Aflac’s advantaged business model generated significant excess capital and the company prudently returned much of that capital to its shareholders through dividends and share repurchases. Though Aflac’s capital position is not as strong as it has been historically, we do not believe the company will need to raise additional capital as the growth of its operating earnings should more than offset any near term encumbrances caused by tougher financial times in a few of the European markets. We further increased the Fund’s Aflac exposure during the quarter and, at quarter end, it was the Fund’s largest position.

No. 3: MasterCard Inc. (MA, Financial), Weightings: 5.5% - 47,608 Shares


MASTERCARD INCORPORATED advances global commerce by providing a critical economic link among financial institutions, businesses, cardholders and merchants worldwide. Mastercard Inc. has a market cap of $26.07 billion; its shares were traded at around $200.91 with a P/E ratio of 16.7 and P/S ratio of 5.2. The dividend yield of Mastercard Inc. stocks is 0.3%.


Oak Value commented in the quarterly letter:

We initiated the MasterCard position in the Fund during the fourth quarter of 2008 in what we viewed to be a very opportunistic purchase of an advantaged business. The shares advanced significantly in the twelve months that followed this initial purchase, leaving us with only a partial position for the Fund. As debate over impending regulatory reform in the financial services industry intensified in recent months, the Durbin Amendment to the Senate


Financial Reform Bill brought the interchange fees charged by credit and debit card companies into focus and the shares of MasterCard declined more than 20% during the second quarter. While we acknowledge that regulation or market forces may pressure certain components of the fees charged by such networks over time, we believe these risks are more than appropriately reflected in MasterCard’s lower share price. We significantly increased the Fund’s MasterCard position during the quarter.


Our investment thesis for this advantaged business is unchanged. MasterCard enjoys a very strong competitive position within the highly concentrated and extremely profitable payment processing industry. While MasterCard’s volumes are highly dependent upon consumer spending activity in the U.S., the company benefits from the growing trend of card usage in international markets where it generates more than half of its revenues. Additionally, we see opportunities for the company to expand beyond its core products and existing markets.

No. 4: Coach Inc. (COH, Financial), Weightings: 5.2% - 245,970 Shares


Coach Inc. is a designer, producer and marketer of high-quality, modern, American classic accessories that complement the diverse lifestyles of discerning women and men. Coach Inc. has a market cap of $11.32 billion; its shares were traded at around $37.1 with a P/E ratio of 17.6 and P/S ratio of 3.5. The dividend yield of Coach Inc. stocks is 1.7%. Coach Inc. had an annual average earning growth of 37.2% over the past 10 years.


Oak Value commented in the quarterly letter:

In speaking of his disdain for historically inferior businesses projecting future superior outcomes, Charlie Munger has often responded, “terrible past, brilliant future – we will pass.” In our opinion, Coach is a company with a brilliant past and the opportunity for an equally brilliant future. While other luxury brands were retrenching during this most recent economic downturn, Coach invested in its future. The global luxury handbag and accessories market is estimated to reach $29B by 2013. Currently, North America and Japan account for 50% of the global category sales and 90% of Coach’s sales. Opportunities in greater China appear to be significant as the company has posted double digit same store sales comparisons and has a goal to open at least 20 new stores in that market starting in July 2010.


Coach believes that its brand is emerging as the brand of choice in this and other growing markets. This belief is reinforced by the fact that Coach’s customers are repurchasing its products at even shorter intervals. The company’s international expansion in Europe began with a rollout in France in early June and will be followed by store openings in Spain, Portugal, and Ireland. The company also plans store openings in the United Kingdom. We support the company’s decision to leverage the infrastructure and knowledge of local joint venture partners to accelerate a successful deployment in these markets.

No. 5: Praxair Inc. (PX, Financial), Weightings: 5.13% - 116,664 Shares


Praxair is one of the largest industrial gases companies in North and South America. Praxair Inc. has a market cap of $26.86 billion; its shares were traded at around $87.8 with a P/E ratio of 20 and P/S ratio of 3. The dividend yield of Praxair Inc. stocks is 2%. Praxair Inc. had an annual average earning growth of 10.8% over the past 10 years. GuruFocus rated Praxair Inc. the business predictability rank of 4-star.


Oak Value commented in the quarterly letter:

Praxair shares outperformed the overall market and noticeably outperformed the materials sector during the quarter. We attribute this performance to the superiority of the company’s business model and outstanding execution by its management. Praxair is significantly more profitable than its peers in the industrial gas industry. The company’s advantaged position is a reflection of its deliberate and relentless focus on asset production and distribution density, regardless of geography. Its customers represent a broad cross section of industries including steel, autos, energy, chemicals, healthcare and food and beverage.


Praxair is the industry leader in North and South America and has significant growth opportunities in India and China. Praxair’s ever-expanding backlog of new projects provides an important window of visibility into the company’s future growth. Each of these projects represents a future stream of recurring and predictable revenues and incremental operating profits. In aggregate, nearly 90% of the company’s project backlog is in diversified opportunities in emerging markets such as China and India and also energy related projects in many of its geographic markets. Though volumes in the industrial gases business have an element of economic sensitivity, Praxair’s business has proven far less cyclical in the recent downturn as its take-or-pay contracts have provided a more stable and predictable revenue base for the company. With pricing power intact, a substantial backlog of new contracts in place, and improved operating leverage on the horizon, we believe that Praxair shareholders will be rewarded with substantially higher economic returns. We continue to view Praxair as a growing, advantaged business with outstanding management.

No. 6: American Express Company (AXP, Financial), Weightings: 5.13% - 223,292 Shares


American Express Company is primarily engaged in the business of providing travel related services, financial advisory services and international banking services throughout the world. American Express Company has a market cap of $53.58 billion; its shares were traded at around $44.6 with a P/E ratio of 24.1 and P/S ratio of 2.2. The dividend yield of American Express Company stocks is 1.6%.





Read the complete Oak Value 2Q10 letter here


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