Stock Gumshoe

“Bite the bullet now and buy this 100-year-old company cheap if you can” … that’s how Philip Durell introduces us to a favorite investment that’s owned by Warren Buffett and has been clobbered this year (for good reason, some would argue).

This is in an ad for his Inside Value newsletter at the Motley Fool, a letter that has had a rough year (down 17%). Probably not surprising for a newsletter that focuses on value stocks and thus probably held a lot of stocks in the financial sector (I don’t know what’s in their portfolio … though I do know the stock being teased here, as youi’ll soon see).

And, as with most value investors, Philip Durell is tempted these days … you might even say that he seems to be licking his chops at the values appearing in the market right now.

The ad also trots out the age old “you might not be man enough” teaser, too, with this introduction that makes us feel like we’ll be able to strap on a pair of six-shooters and face down the banditos if we have the courage to stand by him ….

“When you accept the three conditions I’m about to propose, you’ll be asked to do things that will scare the wits out of you.

“Things you WILL NOT want to do.

“Your friends will say you’ve lost your marbles. Your father-in-law will laugh behind your back — if he catches wind of what you’re up to.

“There might even come a day when you feel physically ill.

“That will be the most important day of your financial life!

“And if you do exactly what I ask… in as little as three to six months… and almost certainly within a few short years… YOU WILL HAVE THE LAST LAUGH.”

To shorten our discourse today, I’ll just tell you that this is all about buying value stocks when there’s blood in the streets. That comes from the famous quote attributed to Baron Rothschild, who’s said to have recommended that we “buy when there’s blood in the streets, even if the blood is your own.”

That is the touchstone of every contrarian value investor who ever reached out from the comfort of the crowd to grab the hilt of a falling knife. And to some extent, I am as tempted by this as anyone — I love buying stocks of companies that are cheap, and usually if you want to find something dirt cheap, it’s going to be pretty dirty. It’s true that it can also lead to disaster, since oftentimes buying into companies like this that have been bloodied by the street means taking a leap of faith that the problems are finally on the verge of correcting. But if you’re right and patient, the returns can be magnificent.

Philip Durell is another one of the many value investors who consider Warren Buffett a deity, though I think we’d probably find that Buffett is not much of a “falling knife catcher” most of the time — he rarely takes chances with really beat up companies, he has been much more likely to invest in really solid companies that are just underappreciated — he’d probably tell you to buy a great company at a reasonable price, not to buy a struggling company at a dirt-cheap price.

But the stock that we’re looking at today is, in fact, a major Berkshire Hathaway holding — though I don’t know that Buffett has bought or sold any shares in the past couple years. Berkshire owns just under 20% of the company … what other clues does Durell provide?

“In 2007, this “little” business earned a whopping $702 million on revenues of $2.26 billion — a figure that’s grown an average 17.2% each of the last five years.

“Profit margins are generous — consistently hovering around 30%, while the company’s ultra-lean business model requires minimal capital to grow. Yet the balance sheet is stocked with $426 million cash.

“Which is fantastic news for investors like us — given the company’s long history of returning its free cash to shareholders via massive share repurchases and dividends…

“Ordinarily, you’d pay through the nose for a company of this quality.

“After all, we’re talking about a 100-year-old company that provides a unique service the global financial markets can hardly function without.

“A company whose customers read like a “who’s-who” of top corporations and governments, as well as investors, depositors, creditors, investment banks, commercial banks, and other financial intermediaries.

“And here’s another big plus. Nearly 40% of the company’s trailing 12 months’ revenues were earned outside the United States, up from a healthy 30% in 2001.”

Durell goes on to tell us that we can buy these shares at a 50% discount to their “recent” highs because the company “slipped up” …

“It was one of a handful of top-notch specialty finance companies blindsided by the collapse of what is known as the structured finance market.

“The misstep was real, and management owned up to it… but Wall Street’s knee-jerk response was an overreaction. If you ask me, the so-called experts and regulators needed a convenient scapegoat!

“I’ve been over and over the books. I’m 100% convinced that this company’s management has earned its sterling reputation and has proven itself to be totally independent, accurate, reliable, and trustworthy.”

OK, so that’s a pretty strong endorsement … what is this company?

Longtime Gumshoe readers might recognize this as one that we’ve seen before, in a somewhat similar ad for this service … it is …

Moody’s (MCO)

If you’d like to see what I wrote about this company back in March, when I last saw a similar ad, that article on Warren Buffett and the Subprime Slime is here.

Moody’s has recovered somewhat since it was last mentioned in this space — it’s up about 20% from those lows in March, trading now at about $41. And it’s not particular cheap based on earnings, but that’s probably because (if you believe Philip Durell is right) the analysts are lowballing the forward earnings estimates because they’ve been burned several times — they’d always prefer to underestimate, even if just a little bit, and how much is a company worth if it clearly misused the trust placed in them by their customers. Especially when trust is really their only asset. In some ways, this is really a bet that “all will be forgiven” and the rating agencies will regain their catbird seat as generators of prodigious buckets of free money for themselves.

Durell’s promise is that this should look much better 3-6 months from now, but especially that the company will return to “normal” and be a world-beater again within a few years.

Is that true? Maybe … if ratings agencies continue to be important, and there are no more skeletons discovered in Moody’s closet, they might restore their reputation and their gravy train of business. Their business, if you’re not familiar with them, is primarily rating bond issuers — they give companies and other borrowers a rating that’s sort of analagous to your personal credit rating, and that bond investors use as a shorthand to assess the risk. If you didn’t happen to pay attention to all the mumbo jumbo about CDOs and the like and the hair tearing about the fact that lots of these securities that were rated “investment grade” by the agencies like Moody’s before they were written down to 20 cents on the dollar, it is probably important to mention that Moody’s has been tarred both by association with the collapse of the debt markets, and with some real mistakes/scandals of their own. There’s a good summary of Moody’s situation here from one of the Conde Nast Portfolio blogs, should you wish to do some learnin’ on the matter.

The business model is under some question, too, since they are paid by the people they rate and therefore work with a clear but heretofore mostly ignored gigantic conflict of interest, but no one appears to have a really strong and viable alternative at the moment. I don’t own shares in Moody’s or their competitors, though if I were to look into the business it’s quite possible that I’d be more tempted by Mcgraw Hill (MHP) because of their more diverse lineup of businesses … just in case (they own S&P, a major competitor for Moody’s, but also have a strong and growing educational publishing business). They’re also a little bit cheaper by most measures, though their profit margin is much smaller and I’m sure there’s plenty of bad stuff I don’t know about them, too.

Anyway — what do you think? Feel like catching a knife that might be bouncing a bit after a serious fall?

This ad came in from Philip Durell’s Inside Value newsletter from the Motley Fool, which they’re currently offering for $149. This is the “deep value” newsletter from the Fool, so it probably shouldn’t be any surprise that it’s one of the worst Fool performers recently — it’s beating the S&P by just a point or two, perhaps because value stock portfolios tend to be quite heavily weighted in low-PE stocks like financials. And we all know the kind of year the financials have had.

This is sort of another financial company, and the ad says that “Wall Street overreacted when it smeared this financial with the subprime slime!”

Perhaps more importantly, for our sleuthing purposes, is that they note that Warren Buffett’s Berkshire Hathaway owns 18.6% of Read the rest of this entry »

Here we are again — folks start thinking about Warren Buffett again, now that he seems to be on CNBC every day and Berkshire Hathaway has had a remarkable year (up about 50%, not bad for one of the biggest companies in the country).

And so the “next Warren Buffett” teasers start circulating again. I’m republishing this note that I first put out back in March, when the Gumshoe was in its infancy and many of you were not yet on board (nice to have you here with us, by the way). Even back in March, this teaser was fa from new (I saw it several times in 2006, and perhaps it was around before that).

The other reason I’m putting this note back out? I actually like and own shares of this company, and they and their ilk have gotten a lot of attention in the last few weeks as we have closed out another hurricane season without any severely damaging storms. That means property and casualty insurers (of which this is one, as is Berkshire) should have made money hand over fist (they charged high rates because of the raised risk awareness and improved pricing environment following hurricanes Katrina and Rita, but have had, we assume, to pay out less of the raised rates to settle claims). That’s not to say that this is a great investment now, but it is one that has languished throughout the year and is currently cheaper than it was the last time I bought shares.

So … the original writeup follows:

And here we are with yet another “next Warren Buffett” investment … Finding the next “Warren Buffett Stock Market Miracle.”

this time, from Philip Durell at the Motley Fool’s Inside Value newsletter.

In exchange for a free trial subscription, you can download the free report, “The ONE Remarkable Stock to Own Now”

Now I must confess — I’ve known what this stock is for a long time, and I actually own it (you can see my writeups on it over at One Guy’s Investments if you’re interested). That’s because this has been Durell’s “one remarkable stock” for quite a while, he’s been recommending it and updating this report for probably a year or so (not sure when I first saw this one, but it was a long time ago).

But since they’re still using this report to sell the subscription, I thought I should get the word out here.

Here are the clues provided:

“Philip just discovered a company that’s one step ahead of where Berkshire was in the ’70s!”

“As recently as five years ago, you could’ve gotten into this little company for around half as much as you can now.”

And a nice tease: “as profitable as this stock has been for investors, Philip expects it to DOUBLE AGAIN WITHIN JUST A FEW YEARS.”

Insurance float allocation and investment, the Buffett strategy, is also what drives this company.

This company is “following the Berkshire model to a ‘T.’”

And another tease: “In other words, if you missed out on the Warren Buffett stock market miracle, you have a second chance, with the potential for serious wealth-building results.”

Market cap just under $5 billion.

More than $330 million in cash.

The shares have doubled “in the last few years.”

So this next Warren Buffett (which is not the same as the other “next Warren Buffett” stocks I’ve written up here — Brookfield Asset Management and White Mountains Insurance) is …

Markel Corporation (MKL)

As I noted above, I actually own shares in this company — you can see all my Markel writeups over at http://oneguysinvestments.com/labels/MKL.html — so as you can imagine, I agree that it’s a good investment … and I’m a bit biased.

But it has certainly climbed a lot lately — I’m guessing Durell started recommending it in the low $300s or so, which is at least when I started noticing this ad.

And as noted in the teasers above, it has doubled since roughly this same time in 2003, though much of that gain came over the past year.

It is indeed just under $5 billion in market cap still, around 4.8 as I type this, though the cash figure is a bit misleading since earnings reports since then haven’t been reflected in the teasers (and it’s always a mess to figure cash for an insurance company, anyway) — currently, as I read it they also carry some debt so strictly speaking there’s no net cash on the books. And as befits a “next Berkshire Hathaway”, the bargain hunters at Markel have started picking up some non-public operating businesses (a local bank near their Virginia headquarters, and a bakery supply company) in addition to their impressive value-oriented stock market holdings.

While book value has climbed significantly over the years, as management aims for, it’s still at the upper end of price/book ratios that it has traded at in recent years, so some would call this somewhat expensive. You might get a better bargain on Markel if you wait for a bad hurricane year, but I consider this one of my core holdings so I’m not interested in trying to time sales and purchases based on natural disasters.

But anyway — who wants to time their trades for next Berkshire Hathaway? If you believe Philip Durell, this will be a great long term investment almost no matter what you pay for it now

(Just a little side note: unlike most other stock market newsletters, I actually think the Fool newsletters are pretty good if you want to check them out, and I have in the past cancelled subscriptions to their products and really gotten my money back, though I’m not currently a paid subscriber to any newsletter I mention here — that would be cheating! — so I consider the Fool folks quite ethical and easy to deal with, even though they do send the LOOOONGEST advertising emails I’ve ever seen).

However — if you don’t want no stinkin’ newsletter, if you just want some stock ideas and to figure out the teasers they dangle in our faces in order to garner your hard earned cash and spam up your email box, then you can always come to your friendly Stock Gumshoe.

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