When Berkshire Hathaway (NYSE: BRK-A ) was buying railroad company Burlington Northern last December, Warren Buffett told Matt Rose: "I've seen what's been done here [in the U.S.]. I think I know how the country is going to develop. I think the West is going to do well. I'd rather be in the West than the East. So I really don't have much of a worry about that."
The statement slipped the financial press's scrutiny -- rare for anything said by "the Oracle of Omaha". But the power and simplicity of the idea deserves more attention.
Think about it: Every financial expert will tell you that U.S. trade with Asia will grow by leaps and bounds. Yet how many people mention the great boon this will be for California? As trade between the U.S. and Asia increases, a large amount of that will pass through the state, just as it always has. No wonder Buffett chose Burlington Northern, its dominant position on the west coast ensuring it a future with the shipping of more and more goods.
Yet the implications behind the theory go well beyond that. California is in a unique position to benefit from this vast amount of trade flowing through it. Jobs, businesses, and markets will all increase to serve that demand, and the general prosperity of California should closely follow. Think of California as a gateway on the new Silk Road, and you may start to see why California's future looks so bright. Now, other value investors are starting to take notice.
California Love
You don't often get a chance to buy into one of the world's best markets at rock-bottom prices. Yet real estate prices in California have retrenched significantly since the start of the recession, and they are now back at their 2004 levels. And when you couple that with its brighter economic prospects, prices today may represent a once-in-a-lifetime opportunity. So it is no surprise that two highly successful investment companies are making their move.
Fairfax Financial and PICO Holdings (Nasdaq: PICO ) both swear to their value investing principles, and they are pretty darn good at it, too. Each has handily beaten the market over the long term.
| Company |
Performance |
|
Fairfax Financial
|
9.9% simple average return on investments, over 25 years.
|
|
PICO Holdings
|
Approximate 67% portfolio return in the 9 years to 2010, versus an S&P500 down nearly 14%.
|
Data up to year ending Dec. 31, 2009.
Recently, the two companies have been busy making property investments in the Golden State. Fairfax has teamed up and invested over $350 million with Kennedy-Wilson (NYSE: KW ) , a real estate investment and services company centered in California. Commenting on the transaction, Fairfax CEO Prem Watsa said: "With our long-term focus and value investing philosophy, we believe that this is the right time for Fairfax to begin selectively participating in commercial real estate opportunities, particularly in California ..."
Meanwhile, PICO has chosen to dive into the market on its own. Armed with a targeted methodology for investment, the company set out to find sub-markets in California. Their largest use of capital in the last two years has gone into investments with the following specific characteristics:
- Resilient local economy & employment.
- Favorable housing affordability (% of households who can afford median house, etc.).
- Low rate of inventory on market.
- Acquired at a price significantly below replacement cost.
- Demand estimated to exceed supply within the next three years.
Who can blame them? With an economic tailwind behind it and prices well below replacement cost, California is a very attractive place for professionals to put money to work.
The Foolish bottom line
With everyone down on real estate and the economy, an opportunity has opened up to invest in an attractive long-term market. What are some ways for individual investors to capitalize? Here are just a few of the interesting possibilities.
For one, there is Kennedy-Wilson itself. The company's brokering and management businesses provide it with a steady stream of data about California, and the company has received very high praise from Fairfax for its real estate picking abilities.
Bank of America (NYSE: BAC ) and Wells Fargo (NYSE: WFC ) are two other possibilities. The duo control a combined 43% of California's deposit market, and each will benefit greatly as a booming California increases jobs and reduces foreclosures.
Finally, homebuilders like Lennar (NYSE: LEN ) and MDC Holdings (NYSE: MDC ) may each rise with California's fortunes. Both companies have well-established footprints in the state, and rising home prices will boost their sales and gross margins.
But then, there are thousands of interesting opportunities in an economy that's booming. Foolish readers know that first you have to be willing to look.
For more value investing Foolishness:
True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.
Nick Nejad own shares of Fairfax Financial and Wells Fargo Financial, but no other company mentioned above. MDC Holdings is a Motley Fool Hidden Gems recommendation. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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