The recent market declines have created real opportunity for investors with cash on hand that they would be comfortable locking up for at least five years. Here are three companies with extremely stable, high-quality businesses at valuations that you will rarely come across. Does that mean they can't get any cheaper? No; however, investors who pick up the shares at current prices are highly likely to earn very satisfactory long-term returns.
At yesterday's closing price, Berkshire Hathaway is trading at book value -- the theoretical liquidation value of the firm (i.e., what's left once all assets have been sold and all creditors have been paid). In other words, the market is assigning no premium for management's ability to compound shareholders' equity. To see just how exceptionally rare that is, take a look at the following table. The second column shows the percentage of days on which Berkshire's price-to-book multiple (based on the day's closing stock price) was higher than Monday's value over five-, 10-, 20-, and 30-year periods.
% of Days With a Price-to-Book Value Multiple Above the Current Value
Average Price-to-Book Value Multiple
|Last 5 Years||99.92%||1.43|
|Last 10 Years||99.96%||1.55|
|Last 20 Years||99.98%||1.71|
|Last 30 Years||96.71%||1.62|
|Price-to-Book Value Multiple as of Aug. 8||1.03|
Source: Author's calculations based on data from Capital IQ, a division of Standard & Poor's, the CRSP US Stock Database, The University of Chicago Booth School of Business, and Berkshire Hathaway financial reports.
Let's imagine that Buffett is no longer a part of Berkshire. A valuation at book value ignores even the possibility that the managers at the individual businesses will create shareholder value. We are talking here of a stable of world-class managers who have already proved they can create substantial wealth at their businesses over extended periods of time.
The only other possibility to explain the lack of a premium is that investors expect Buffett's operational successor and/or the chief investment officer to be a disastrous capital allocator. This is possible, of course, but given that Berkshire is truly his pride and joy, we can be confident that Buffett has made careful choices with regard to his successors.
If you pay fair value for Berkshire Hathaway shares, you can expect to do a little bit better than the S&P 500. Any return above that is commensurate with the discount to fair value at which you purchase the shares. Given the evidence that Berkshire is trading at a discount, I rate the likelihood of Berkshire Hathaway shares beating the S&P 500 over the next 10 years as very high.
There are no sure things in investing, but this is probably as close as you will come. Between its fortress-like balance sheet, the amount of cash it generates, the nature of the businesses it houses, and the culture of extreme prudence Buffett has fostered, Berkshire is one of the safest equity investments in the world -- when bought at the right price. That price is here, Buffett or no Buffett.
- Add Berkshire Hathaway to My Watchlist.
Yesterday, Wells Fargo shares closed just below their book value. Excluding the first half of 2009, the stock has not traded below book since at least 1993 (my historical data stops in 1994).
If you're a Wells Fargo shareholder, you find yourself in good company. The largest shareholder is Warren Buffett's Berkshire Hathaway. Of course, you might object that the current price is many multiples of Buffett's cost basis on his position. In fact, that's not the case at all: At the end of June, Berkshire's cost basis on its Wells Fargo investment is $22.33 -- a mere $0.60 below yesterday's closing price.
There is probably no one outside the bank that knows Wells Fargo better than Warren Buffett and the stock will likely remain a core Berkshire holding for many years. Similarly, I think individual investors should feel comfortable picking up shares around this level in order to begin making Wells Fargo a core stock in their portfolio.
- Add Wells Fargo to My Watchlist.
MSCI is a stock I have highlighted twice before to Motley Fool readers as a potential core stock, first in September 2010 and then at the end of January. Alas, on both occasions, I warned readers that the stock was too rich for my taste, but that one should be on the lookout for broad market corrections that might bring the valuation down to acceptable levels.
MSCI provides indexes and portfolio analytics to fund managers; I'm not going to say much about the business, because you can read about it in the two previous articles of mine, except that its franchise is protected by very high, very sturdy walls -- this is no Maginot Line. Do not make the mistake of thinking that this business is at risk because "there's free data everywhere on the Internet nowadays." MSCI's franchise would be an absolute nightmare to try to replicate: How would you go about building a database containing 148,000 indexes, including 5,000 custom indexes, for example?
At just under 16 times forward earnings, MSCI isn't trading at distressed levels, but it is reasonably priced. For a business of this quality, that's more than cheap enough to begin opening a position.
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