In our ongoing series of chats with Fool analysts and advisors, I've been asking them about the stocks on their watchlists and the catalysts that would induce them to buy. Today, the man in charge of training our analysts provides two excellent companies that he owns and believes deserve strong consideration for a spot in your portfolio – no catalyst required.
Large caps on sale
Buck Hartzell has been investing for decades and can't recall a time when large caps have been quite as cheap. His biggest challenge now is deciding which of the companies that meet his strict criteria are the best buys now. In short, he's looking for:
- Strong and growing businesses.
- Very low multiples.
- Unparalleled balance sheets.
- A trend of buying back more of their shares.
Here are two stocks that Buck owns and likes at today's prices.
Going to the Wells
In the competition of Buck vs. The Market, I'm generally going to side with Buck, especially if he's got Warren Buffett on his side. And Buck's pretty confident that the market has misunderstood the Wells Fargo (NYSE: WFC ) purchase of Wachovia. As a rule of thumb, acquisitions are generally bad deals for the acquirer. Large acquisitions have even worse odds of being successful. However, in his mind, the Wachovia acquisition will turn out well. Wells Fargo got to essentially double its size at a low cost, even though it had to pay up a bit to grab Wachovia away from Citigroup (NYSE: C ) . Thanks in large part to the $74 billion in writedowns on the Wachovia portfolios, its tax savings alone will exceed the purchase price by billions of dollars, and Buck sees even greater opportunity ahead.
Banks make money two ways: on the spread between the rate they pay for borrowing money and the rate they receive when they loan it out, and by the fees they charge for their services. Wells Fargo boasts an enviably low cost of funds and it's the king of cross-selling, with a stated goal of selling an average of eight different products to each of its customers. Bringing Wachovia in line with those numbers -- and Buck believes the integration is progressing ahead of schedule -- could mean dramatic profits. Still, in no small part due to the general messiness of the banking industry, Wells Fargo is undervalued. Buck believes it's worth buying today. Increased capital requirements have hindered its ability to increase the dividend, but as earnings continue to pile up, look for that to come back in spades. He believes it's quite possible that you'll see Wells Fargo boost its dividend from $0.20 per share to $1.40 per share in five years.
Head for the Mountains
Buck proudly refers to his second recent buy, White Mountains Insurance Group (NYSE: WTM ) , as a Tom Gayner special. Gayner is the chief investment officer for Markel (NYSE: MKL ) , which Fools periodically -- and alliteratively -- refer to as the Baby Berkshire. Gayner's investing process, as summed up by Fool analyst Charly Travers, is to:
- Invest in profitable businesses with good returns on capital.
- Find honest and talented management with capital discipline.
- Seek out companies with attractive opportunities to reinvest their capital.
- Buy at a fair price.
White Mountains is right up Gayner's alley. The financial services holding company has its primary business interests in property and casualty insurance and reinsurance and has proven to be disciplined when it comes to its policy underwriting. Buck thinks it will soon be rewarded for that prudence -- and for its investing prowess -- even if the market is slow to appreciate it. Shares are trading below book value, and that won't be the case for too long. And it does sport a modest dividend.
But of even greater interest to Buck is its ability to start successful sidecar companies, spin them off into their own businesses, and sell them off when appropriate. It founded Montpelier Re (NYSE: MRH ) before it became a self-standing business in 2001. And today, White Mountains owns a 75% interest in OneBeacon Insurance Group (NYSE: OB ) and full ownership of Esurance, the online personal auto insurance company. The latter has become one of the top 30 insurers, and in Buck's mind, its business model has the potential to out-Geico Geico (a Berkshire company, by the way) with accessibility and innovation. Esurance doesn't have near the marketing muscle of Geico, with just a fraction of its marketing budget. But the company has cleverly positioned itself so that it can make money on potential customers whether or not they choose to go with Esurance as their provider.
Overall, White Mountains is cheap because it's caught in a down cycle for the insurance industry. Buck expects the company to keep growing in a profitable way, and ultimately, investors will be willing to pay a handsome premium to book value to own these shares. It's time to get on this train before share prices move back up the Mountain.
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