Sunday, August 26, 2007

Value vs Growth

We are looking at this again after a short gap. Given the disaster in the financial sector and the dominance of financials in the value fund, the value fund hasnt done too badly.

The chart below shows how value, blend (sp500) and growth compare in the large cap arena. The chart below shows the iShares ETFs - IVE, IVV and IVW.
The top stocks in IVE (value etf) are:
JP Morgan Chase,
Conoco Phillips

The top five stocks in IVW ( growth ETF) are:
Exxon Mobil,
Proctor and Gamble,
Cisco Systems,
Johnson and Johnson and

The difference between value and growth is not wide with iShares ETFs.

The second chart compares the vanguard funds in the same category. The vanguard funds of interest are VTV, VV and VUG respectively. The mix of stocks in vanguard funds is different than the iShares funds - so the difference in performance is also different. As an example, Berkshire is in vanguard growth fund but not in the value fund. Comparing to iShares ETFs, the stocks and their weights are also different.

The top holdings in VUG are:

Proctor and Gamble
Johnson and Johnson

The top holdings in VTV are:

Exxon Mobil,
Citigroup and
Bank of America

While the companies in both the lists are good, citigroup and BAC may have to take some charges on the buy out transactions still pending for which commitments are made. While this is a good time to buy - it may be in the doldrums for some time.

The differentiation of stocks to value and growth is quite arbitrary and one should do ones due diligence before selecting one sector over the other. It also depends on which funds one selects and what cost advantages an ETF or a bunch of ETFs provide over the other.

Saturday, August 18, 2007

Jos A. Bank Clothiers (JOSB) revisited

Now that all the retailers are in a funk thanks to the subprime mess as well as the Walmart warning, let us look at this section again.

We have looked at JOSB before in this blog and noted that P/E contraction was a major risk to both JOSB and Chico FAS. True enough, even though the sales have done well, people have been dumping JOSB as well as other retailers enmasse creating an opportunity.

Let us look at JOSB business and macro factors first. Jos. A. Bank Clothiers, Inc. is a nationwide retailer of classic men’s clothing through conventional retail stores and catalog and Internet direct marketing. What are the factors that can go right and what are the factors that can go wrong for JOSB?

Things going right:
1. Good job market - always a plus for JOSB. It is unlikely this will falter given the strong growth in emerging markets, europe and Japan. The U.S export growth continues to grow and the dollar will probably decline further if there is a rate cut. This bodes well for JOSB.

This not going well:
1. The housing market. A bunch of ARMs are scheduled to be reset next year - this can cause problems to JOSB and other retails if it impacts the US consumer abnormally.

If the job growth continues and the ARM resets occur in an orderly way - the consumer mix for JOSB is going to determine how well it will do.

For this, let us look at the financial statements.

First cash flows - JOSB has a price to cash flow ratio 0f 7. What this means is that the business can pay out the entire capital back in seven years if nothing is reinvested in the business. However, a part of the capital will have to be reinvested to keep the business going. Another part to look at is the sustainability of the cash flow. Let us look at the balance sheets to gain further insight into these factors.

First let us look at the free cash flow growth. It has been far for uniform - in fiscal 2002 and 2004, the company had negative cash flows. The company is excpected to have free cash flows of ~40 million this fiscal year. So the cash flows are not even meaning some dependency on the economic cycles are present.

Let us look at the latest 10-Q for more details. The company is planning to add more stores this year to expand the number of stores from 366 to close to 500. The company would put the store expansion plans on hold if there is a chance to lose money on the investment or if it is very risky. As noted by other retailers, the sales havent fallen off the cliff yet but people are expecting catastrophe to hit when the ARMs reset.

JOSB looks attractive at this price, with book value of approximately $12/share - it is definitely selling below its intrinsic value and can offer some good upside if the ARM reset doesnt hobble the economy badly. Note: please see the disclaimer part of this blog.

Saturday, August 04, 2007

Berkshire Hathaway FY07 2nd quarter results

Berkshire Hathaway, the holding company run by Warren Buffett, reported its 2nd quarter earnings yesterday. In this blog, we will go through the earning report and look at the earnings and the company.

The company had 1,088,878 class A shares and 13,753,590 class B shares for a market cap of approximately 169 billion dollars. Total shareholder equity was 115.27 billion dollars. So the price to equity ratio is less than 1.5. This is a low number for a company that grew the operating earnings and total earnings in the low 20s and 30 percentage respectively showing that the stock is quite undervalued.

There are a few things of note to observe in the consolidated statement of earnings. Let us look each segment and compare it to the perception of analysts and market commentators.

In the insurance and other segment, sales and service revenues increased as well as investment gains. Geico increased its market share managing to increase profits in an environment of falling insurance premiums. General Re and BRK Reinsurance did particularly well. General Re is doing well overall and should continue to do well for the rest of the year. BRK Reinsurance is doing well in the multiline business segment but megacat insurance premiums will decline in the next year. This should be offset to a certain extent by investment gains on the equitas portfolio.

Utility and Energy section saw revenue and earning growth. This section is doing well as expected.

In the finance and financial products section, interest income slightly increased, investment gains declined compared to the year ago period, derivative gains increased and the other section was flat.

The important thing to point out here is that the interest income from treasuries is not significantly higher than last year as many analysts were expecting. In the first six months of the year, 3.3 billion of fixed maturity securities were bought and another 11.5 billion of equity securities were bought. The important thing to note here is that the securities delivered as part of the equitas deal is listed separately in the cash flow statement. The cash and cash equivalents stood around 39.9 billion. This figure is different in the cash flow statement as some of the money is borrowed for mid american subsidiary.

Interestingly enough, the break down of fixed maturity securities showed 3.7 billion of mortgage backed securities. This number should increase in the coming months as the market remains illiquid and the yield spread widens.

As an intelligent investor may recognize, this is Buffett and Munger time. Irrational fear and illiquid markets plays perfectly into the hands of worlds great investors. In addition, many of Berkshires core holdings like P&G, Walmart, HD etc. dont have liquidity problem and are buying back stock. This should help increase the book value and networth of Berkshire in the coming years.

My breakdown of intrinsic value is around 142 - 145 K per A share after Q2. In fact, the stock deserves a premium for the opportunities available at the moment. One should have part of ones portfolio in this stock as it allows for capital preservation and appreciation at the same time.