Tuesday, May 29, 2007
Thursday, May 24, 2007
Friday, May 18, 2007
- US big cap stocks are about 8-10% undervalued.
- Europe is pushing close to fair values in a number of countries.
- There are lots of formerly dead cats bouncing all over the world. This is not a bad thing, it is in recognition of the growing global economy and the consolidation in many industries.
- The most overvalued sectors worldwide are the Utilities, REITs and Basic Materials.
- The most undervalued are the consumer staples, and to a lessor extent the health-care stocks.
- The banks are still cheap in almost every country I looked at, especially in the US.
- Telecommunications, except in rare cases, are running on something other than value. They are the new Tech stocks. The old Tech stocks are, well, old.
- The Industrials are the most surprising sector in the US and abroad. These stocks have had good moves, but are as much as 15-20% undervalued in our models. Their gains and those to come, again, are the result of the explosive growth in the developing nations.
- Energy stocks are high and going higher. The global economy is showing no signs of slowing and ethanol's limitations are coming into view.
- The keys to a continuation in the bull market are the staples and banks. They represent 35% of the market cap of the S&P 500 and are underperforming. I believe they will catch their wind as we move through the summer and the slowing economy causes the boo birds to start chanting recession.
- When US retail stocks begin to participate, this phase of the bull run will enter a period of consolidation.
Monday, May 14, 2007
Having said this, for many years we have held Berkshire Hathaway in our Capital Builder style of management because we have found that BRK's price is highly correlated to changes in its book value and interest rates. Periodically, we update our valuation model on BRK using a multiple regression of its book value and interest rates relative to its stock price. Below is a chart of our valuation model going back 15 years. You will see that the fit is very tight and, based on the just-released data, BRK class A is selling just about at fair value of $109,500.
Using our internal estimates of the growth of BRK's book value and the changes in 10-year Treasury bond rates, we arrive at a year-end value for BRK class A of $119,800.
We think that is as good a guess as we can make, and in light of the slowing economy, we still believe BRK class A is a good hold for the year ahead.
BRK class B is 1/30 of class A, therefore its current projected year-end value is near $4,000 per share.
Thursday, May 10, 2007
Monday, May 07, 2007
Saturday, May 05, 2007
In our October 27, 2006, blog we wrote that while the economy would likely continue to slow, US and international blue chip stocks would likely continue to rally. The following is a quote from that piece:
"Markets seldom feel right because we human beings have a habit of projecting today's headlines onto tomorrows stock performance. Remember, the stock market is not a democracy. Prices move in the direction that big money pushes it. Fortunately, big money is normally rational and understands economic cycles and the power of the Fed to slow and speed up the economy.
Big money has a problem. The places where it has been treated well over the past few years are all rolling over. Treasury bonds yield are under 5% in most of the major industrialized nations of the world. Bonds simply are not competition to stocks. Real Estate and commodities are no longer competing effectively for investors against stocks because they are now in downtrends.
Blue Chip stocks, alone, stand out as a value now that bonds, real estate, and commodities have become over owned and over valued. Finally, blue chip stocks are in an uptrend. This positive momentum is a rarity in today's world's financial markets. As long as earnings growth holds near 10%, stocks will continue their strong advance."
Since we wrote that piece, stocks, as measured by the Dow Jones Industrials, have risen nearly 12%, including dividends, (an annualized return of over 20%) while the US economy has slowed to under 2% real growth.
And here's the answer to the question we are asked most often: Yes, stocks have room to go higher and the path of least resistance is up for the same reasons we explained in our October 2006 piece -- stocks are still cheap and they have no competition from other forms of investment. In addition, with economic growth having slowed and inflation cooling, the Fed is poised to begin lowering rates sometime in 2007.
The chart below shows our most recent update of our proprietary Dow Jones 30 Dividend Valuation Model.
As you recall, the Dividend Valuation Model is a single formula that is constructed from the associations between dividends, interest rates and prices. You might think of the green bars as the values predicted by the normalized relationship among the data points. The actual prices are shown as a blue line.
It is important to keep in mind that every green bar on the chart, which goes back 25 years, is produced by the same formula. By comparing the green bars, which we call "value steps," and the actual prices, it is clear to see that the fit is very tight.
The key areas to note on the chart are the late 1990s, when the value steps clearly showed that prices were overvalued, and the DJ 30's turn in 2002, which occurred almost precisely on the predicted "value step."
Since 2002, the chart shows that, even though actual stock prices have risen sharply, they have remained consistently in undervalued territory. The model currently predicts that fair value is near 14,100. That would be our best guess of where the market runs out of value, and where we would become less bullish about blue chip stocks.
Finally, the recent run up in stocks has been met with fear and not greed, as is the usual case in run ups. Everyone is now talking about pullbacks and the old adage of,"sell in May and go away." We have found that when USA Today or your local newspaper starts telling you to "sell in May and go away," that it might not be a bad idea to "buy in May have a nice payday by Labor Day." Granted its not as catchy as the original adage, but we suspect it will be more profitable approach this year.