The Tweedy, Browne Q2 letter has been released. Chris Browne if you remember is the author of the fine book “The Little Book of Value Investing”
From the Letter:
“In our funds, it has been financial and media stocks that have accounted for a large part of our poor performance year to date. Even more recession-resistant companies such as our food and beverage holdings have performed poorly, as traders rotate in and out of groups of stocks in response to headline news and Wall Street research reports, which we consider extremely short-term oriented in their perspective. With the exception of a few oil companies in our high dividend fund, we have found precious little value in the high flying energy and basic material stocks which have been the darlings of the market. Strong core holdings such as Nestle (NESN) and Kone (KNEBV), where underlying fundamentals remain very strong and near-term corporate performance has been solid, have also been impacted by investor preference for all things energy and commodity-related. Following this update is a more complete statistical attribution analysis and performance history for each of our funds.
It should come as no surprise that pricing opportunities are surfacing and the discount between market value and intrinsic value is growing in the bulk of our portfolio. Our portfolio, in our view, has rarely been cheaper than it is today. In some instances the valuations seem somewhat anomalistic. For example, over the last several months we have established a position in Swiss Re (SWCEY), the world’s largest reinsurance company. The company at initial purchase was trading at 5 times earnings, 77% of book value, 70% of imbedded value and a 6% dividend yield. Earlier this year, Berkshire Hathaway’s Warren Buffett (BRK.A) purchased a 3% position in the company, and has agreed to take on 20% of Swiss Re’s property & casualty business over the next 5 years freeing up reserves for a stock buyback. We have also been buying Telecinco, Spain’s largest television production company. At initial purchase, it was trading at 4 times pretax income (EBIT), and had a 17% dividend yield with net cash on its balance sheet.
Another deeply undervalued current holding is Medikit, a Japanese medical device company, which is currently trading at 1.6 times pre-tax income (EBIT), and has a 2.5% dividend yield, once again with net cash on the balance sheet. While all of our
stocks are not trading at these extreme valuations, they are indicative of some of the incredible bargains we are seeing in equity markets. Unfortunately, great opportunity is invariably accompanied by bad macroeconomics and near-term uncertainty. If the picture were clear, the pricing opportunity would not exist. In times like this, investors must try to steel their nerves and ignore the ever present market pundits who predict stock market collapses at the end of an era. These voices seem to always drown out more reasoned thought in times such as the
present.
As you know, in recent years, we have been less than sanguine about the high valuation levels of public equities which afforded investors very little in the way of a “margin of safety”. We always promised our clients that when we felt it was time to add to their accounts, we would let them know. Well, the time has come, in our estimation, if your measure is buying businesses cheap. While no one can call the tipping point and stocks could indeed have further to fall, at current price levels, we feel we are being presented with unusual opportunities. Carpe diem.
Disclosure (“none” means no position):None
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