Ultimate Stock-Picker's Portfolio

Ultimate Stock Picker's Portfolio Eyeing Four Stocks

2008-11-25T21:38:39Z

After poring over the holdings of our Ultimate Stock Pickers and comparing them to Morningstar's list of five-star stocks, we've compiled an updated watch list of 15 stocks. This is the main list we use to source new ideas for the Ultimate Stock Picker's portfolio. While many of the names on the list remain the same, several new companies also popped up. Four stocks in particuliar caught our eye. To learn more, just click on the link below:

http://news.morningstar.com/articlenet/article.aspx?id=266237

Which stocks would you consider buying from our updated watch list? Which ones would you avoid? Share your thoughts with us on this thread.

Gems of Wisdom from Davis NY Venture Fund

2008-11-14T14:53:45Z

The Davis NY Venture Fund NYVTX recently released their Fall 2008 Review, which had some very interesting insights. Below is my favorite passage from the commentary:

"Our Founder and Advisor Shelby M. C. Davis offers a sailing metaphor to describe this fundamental challenge of investing: 'To sail across the ocean, you must balance making progress in fair weather with the ability to withstand the inevitable storms. Those who think only of the storms will never leave the shore. Those who think only of fair weather will never reach the other side.' Since uncertainty is the rule, not the exception, we believe the key question to ask is not whether or when to invest, but rather how we should invest in order to maximize our chances of achieving a satisfactory long-term compound return. That brings us squarely back to our investment process of seeking to buy durable businesses at value prices and hold them for the long term, and to the Portfolio of businesses we own."

The review also discusses how the Davis NY Venture Fund portfolio holds three primary categories of investments:

Market leaders with strong balance sheets (e.g., Berkshire Hathaway BRK.B and Comcast CMCSA).
"Out-of-the-spotlight" businesses (e.g., Transocean RIG)
Headline risk or contrarian investments (e.g., The Bank of New York Mellon BK).

Davis Advisors also provides the following perspective on the current market:

"In the current environment, share price declines suggest almost indiscriminate selling across the market. Such periods of dislocation can result in security prices losing their fundamental connection to underlying business values. We will seek to capitalize selectively on large disparities that form between price and value in high-quality businesses and we are actively studying situations that fit one of the three categories described above."

The fund is also concentrating on some key themes (e.g., high quality multinationals, capital spending, energy and natural resources, and demographically favored industries like health care and financial services) in search for long-term investment opportunities.

If you'd like to read the full Davis New York Venture Fund Fall 2008 Review, just click on the link below:

http://www.davisfunds.com/dnyvfcomqpr.html

If you'd like to read perspectives from other investment managers on our Ultimate Stock Picker's roster, click on the link below:

http://news.morningstar.com/articlenet/article.aspx?id=261555

We're Bullish on the Ultimate Stock Picker's Portfolio

2008-11-11T21:28:27Z

In our most recent article (see link below), we provide an update on the year-to-date performance of our Ultimate Stock Picker's Portfolio, detailing both key detractors and positive contributors to our results. We also discuss some changes we've made over the past year, in an effort to improve our future performance.

http://news.morningstar.com/articlenet/article.aspx?id=263039

Have you made any changes in your approach to investing? What lessons have you learned in this market downturn? Please feel free to share them with us on this discussion thread.

Our Ultimate Stock Pickers See Plenty of Bargains

2008-11-03T15:55:15Z

With the S&P 500 down about 40% from its high in October of last year, many of our Ultimate Stock-Pickers see tremendous long-term investment opportunities in high-quality, sound financial companies. To learn more about their views, click on the link below:

http://news.morningstar.com/articlenet/article.aspx?id=261555

As always, your feedback is very important to me, so if you have any suggestions, comments, or questions, please feel free to e-mail me at john.owens@morningstar.com. You may also provide your feedback on the Ultimate Stock-Picker's Blog:

http://socialize.morningstar.com/NewSocialize/blogs/M_Justin/default.aspx

Best regards,
John Owens, CFA and CPA
Senior Equity Analyst and Investing Specialist

Four New Ultimate Stock-Pickers

2008-10-24T14:32:17Z

After thorough consultation with senior members of our fund and stock teams, I've made some changes to our Ultimate Stock-Picker's management roster. To learn about the four new additions to our roster as well as some new insights from Warren Buffett and Longleaf Partners, just click on the link below:

http://news.morningstar.com/articlenet/article.aspx?id=259062

Also, I wanted to thank those who passed along their well wishes and feedback for improving Ultimate Stock-Pickers. Your feedback is very important to me, so if you have any suggestions, comments, or questions, please feel free to e-mail me at john.owens@morningstar.com. You may also provide your feedback as a reply to this post.

Best regards,

John Owens, CFA and CPA
Senior Equity Analyst and Investing Specialist

Update

2008-09-17T23:59:26Z

As I'm sure that you are all aware, portfolio holding AIG has been effectively nationalized by the federal government. Terms of the deal include an $85 billion loan from the Federal Reserve to AIG for 850 basis points greater than LIBOR, equity warrants in the company giving the federal government 79.9% ownership in AIG, and a new CEO in former Allstate chief Edward Liddy. Given these moves, pre-existing shareholders have been severely diluted, and the stock will likely not recover in any sort of reasonable time frame, if ever.

Clearly taking this position was a significant mistake, given the unraveling that the recent credit downgrades had on the company's deteriorating liquidity position. Despite the deteriorating market conditions, and the eroding fundamentals in the financial products business, I anchored too much on some of the stronger businesses in the firm's portfolio and failed to anticipate how fast AIG's holding company liquidity could evaporate.

The company is not insolvent, but only because the government stepped in. The firm has nearly $1 trillion in assets on its balance sheet, some of which will now be able to be liquidated in a more reasonable manner than if AIG had not gotten the bridge loan from the Fed. These proceeds will be used to repay the loan. In addition, its state regulated insurance businesses appear to be functioning somewhat normally. Despite this, the holding company ended up being over-leveraged, and with the downgrade and resultant credit actions, AIG had to post collateral that it didn't have.

As some of AIG's assets are unwound and the loan is paid back, any modest residual value in the stock will likely accrue to the Federal Reserve, and deservedly so since indirectly taxpayers are footing the bill to keep the firm from bankruptcy. AIG shareholders will likely be empty-handed. As such, there is no real reason for the portfolio to continue owning the shares, and I plan to sell them once the market calms itself a bit. While it could have been worse in that AIG could have filed for Chapter 11, it's not much consolation that the only thing keeping the firm from collapse was the government's estimation that the company was too big to fail.

Had AIG taken more dramatic steps earlier in this crisis, the firm could possibly have received bank loans, which may have sheltered existing shareholders and kept taxpayers from holding the bag. In the end the company was preserved, but shareholders lose almost all of the value of their investment. Stay tuned for additional updates from me on this front, as well as when I make a transaction in the coming days.

Is it Enough?

2008-09-11T15:09:36Z

It appears as though the government has put yet another stake into the ground with the nationalization of Fannie Mae FNM and Freddie Mac FRE, in the efforts of stabilizing the mortgage market. The early evidence seems promising, as mortgage rates declined on the expectation that this will help, and Fannie experienced strong demand for a recent debt issue. On the flip side, this is the second government-engineered rescue (Bear Stearns, being the first), and perhaps these efforts have created a moral hazard of sorts that could compel the government to have to engage in more of these rescue attempts going forward. I don't know the answer to this debate, but I wanted to get your thoughts on it. Are we now at a turning point with this historic event, or is it just evidence of another leg down in the ongoing credit crisis?

To be sure, I'm watching the portfolio's financial stocks closely, especially the credit card companies (Amex AXP and Capital One COF), as some of their funding still comes from the wholesale markets. Some of the portfolio's other stocks, like J&J JNJ, are currently benefiting from a flight to quality to an extent. If you have any questions on any of these stocks, or others in the portfolio, please don't hesitate to e-mail me at justin.fuller@morningstar.com.

New CEO for AIG - What do you think?

2008-06-18T01:47:52Z

A bunch of email subscribers have asked me about AIG, especially given that Marty Sullivan was replaced by AIG board memeber and former Citigroup executive Robert Willumstad. While Mr. Willumstad doesn't have much insurance experience, he has logged several years running a financial conglomerate, which AIG has become in recent years. The other thing that I like about Mr. Willumstad's approach to the job, is that he has already reached out to former and longtime AIG CEO and visionary Hank Greenberg. Greenberg has been critical of AIG, and likely has a lot of suggestions and knowledge to improve performance at the conglomerate.

As to this move's effect on the valuation, I think my colleague Matt Nellans said it best in his analyst note, "The decision by the board of American International Group AIG to replace CEO Martin Sullivan with former Citigroup C president Robert Willumstad will have no effect on our fair value estimate or our opinion of AIG's prospects. In our view, Willumstad's vast experience in financial services, mainly banking, suggests he has the necessary knowledge to direct AIG's diverse operations."

This essentially sums up my thinking for the time being, but I'd like to hear from you on this topic. What do you think?

Watch List Ideas - Let's Hear From You.

2008-06-19T20:10:23Z

I'm currently considering a number of stocks for a new addition to The Ultimate Stock-Picker's Portfolio from my most recent watch list. Chief among these are United Healthcare UNH or Bank of America BAC.

I'm curious as to what you think is the most attractive stock on the current watch list, as well as your rationale for recommending it. I'll be interested to hear your ideas.

Justin

Back in the Saddle

2008-08-20T17:33:40Z

Greetings--

I've just arrived back from vacation, and the market appears to be just as volatile as it was when I left. While volatility makes most people feel uneasy, it's always important to remember, that it also creates opportunity, despite the emotional difficulty of riding the ups and downs of the stock market. To be sure, patience is critical, especially during this time when investors and the public have been hit with more information from more news outlets than probably ever before. This onslaught has made it more difficult to ferret out noise from real information, and in some cases the noise eventually creates self-fulfilling prophecies. Indeed, many people and companies are now suffering from a "crisis of confidence."

While I certainly haven't been immune to the emotional gyrations of the market, I've also tried to pull back, get some perspective, and simplify things into basic supply and demand economics when thinking about stocks and the capital markets. I'm presently compiling performance information on the portfolio and should have that out to you in the next week. I'm interested to hear your thoughts about the market and how you have handled the emotional volatility of the past year. Please post your responses to this blog entry below.

Justin

Welcome!

2008-06-09T19:59:13Z

Welcome to my interactive blog. This blog is part of the Ultimate Stock-Picker’s Portfolio home page, which provides a single repository for all of the articles, videos, and investing ideas you've come to enjoy. I’ll now be able to provide you with more frequent updates about the portfolio, my thoughts on investing, as well as the opinions and stock picks of some of the portfolio managers on my watch list.

Most importantly, though, this blog will allow you to post your comments about the portfolio and your thoughts about investing. I have found your comments to be very insightful, and I encourage you to use this blog to share your ideas with me as well as other Ultimate Stock-Picker's Portfolio readers. And, as always, you can continue to ask me questions, and I'll be sure to post a response to this blog as soon as I can. To get started, simply join Morningstar Discuss (if you are not already a Discuss member) by clicking the "Join" tab above. Becoming a member is free and easy.

Sold Anheuser-Busch (BUD)!!

2008-06-16T15:54:51Z

With InBev's takeout offer for Anheuser Busch now on the table, and with the stock having moved up from the low 50's to the mid-60's over the last few months, the upside in Anheuser has seemed to play out. Thus, it seems reasonable to take profits at this point.

Even though I think the InBev deal is a good one, with reports that Anheuser management is potentially speaking with another firm (Groupo Modelo) about a merger of equals, clearly the InBev offer is not a done deal. Thus, its a good time to take advantage of the presently higher share price, especially if management does something more in their interests than outside shareholders.

Here are the details of the trade:

Sold 172 shares for $61.3201 on 6/16/2008, for a year-to-date return of 16.65% on Anheuser for the portfolio.

With this trade, the Ultimate Stock-Picker's Portfolio's largest position is now in cash. That said, as you saw on my most recent watch list, there are a lot of opportunities in today's market to recycle this cash into a higher expected return opportunity. Stay tuned for more on this front in the coming days...

Anheuser Busch (BUD)!!

2008-06-12T14:47:32Z

Patience is rewarded!!!!

As you know, the Ultimate Stock-Picker's portfolio has had a position in St. Louis beer maker Anheuser-Busch for some time now. Some have said the stock has looked like a value trap, but with InBev's rumored $65 bid for the company coming to fruition yesterday, Anheuser's now in play, and it stock has shot up. As my colleague Ann Gilpin has stated, it will be very hard for the board to reject the offer as it will likely be difficult for current management to create $65 of value for shareholders in the near term. I expect some type of deal to go through, and I'll likely recycle the capital presently in Anheuser into a higher expected return idea sometime next week. Be sure to check out my most recent watch list for my list of new ideas, and stay tuned for a transaction.

Also, I've included a copy of Ann Gilpin's analyst note below for your referenence:

American beer giant Anheuser-Busch BUD confirmed Wednesday that it had received an unsolicited takeover offer from Belgium-based InBev for $65 per share in cash. This represents a 14% premium to our previous fair value estimate and would change the global beer industry forever. We are placing A-B under review while we weigh the possible outcomes of this offer.

The board of directors will be under a tremendous amount of pressure to accept the offer. First of all, it will be very difficult for the board to convince shareholders it can create $65 per share of value on its own. A-B's share price has been flat for years, reaching an all-time high of just $54.97 in October 2002. From shareholders' point of view, A-B has had plenty of time to improve performance and lift the stock price, and management hasn't delivered. Second, we doubt A-B will be able to generate a competing bid. A $46 billion deal is a large pill to swallow, and Diageo DEO and SABMiller SBMRY are the only alcohol companies in the world that could do it. In our opinion, A-B doesn't fit Diageo's growth or premium profile, and a merger of A-B and SABMiller wouldn't get past U.S. regulators.

However, given that Busch family members sit on the board and have a vested interest in maintaining the legacy of the company, it is quite possible that A-B could take action to fend off InBev. For example, A-B could take on additional debt and pay out a special dividend to appease the disgruntled shareholder base, meanwhile making the company more expensive to purchase. Or A-B could purchase the remaining equity of Grupo Modelo.

That being said, InBev has its own negotiation tactics. It could take the offer directly to shareholders, who we think would happily take the $65 and wipe their hands clean of the company. Also, it is widely believed that InBev has a plan B that it could leverage against the A-B board: merging with SABMiller. Such a merger would effectively shut A-B out of the international market and put more heat on competition at home, which A-B wouldn't want to see happen. Conversely, SABMiller has a vested interest in blocking a merger of A-B and InBev, as the new company would control 25% of the world's beer market and be an unstoppable global powerhouse. It is widely believed that SABMiller has quietly offered itself for GBX 1,500 per share.

It is highly uncertain at this point whether the board will accept InBev's offer or try to make A-B more expensive to purchase, or whether there will be a hostile takeover involving the shareholders or even a merger between InBev and SABMiller. We will assess these possibilities and provide an updated fair value estimate as soon as possible.