As you can see above, we increased our investments significantly in March and April. Cash went down from 48% of our holdings to less than half that amount by mid-April.
BRK/B: Berkshire Hathaway Class B (1/30 class A): I will not profess to be an expert on Berkshire. The majority of the business is an insurance business. There is also a utility (Mid-American), several wholly-owned subsidiaries (such as See's Candies and NFM) and the portfolio of securities (KO, etc). I read Warren Buffet's annual letter and gained comfort from a few things: (1) it didn't seem there were toxic investments in the insurance company's portfolio (unlike its peers) yet the stock had gotten hammered along with the peer group, (2) the underwritten equity puts had a little likelihood of causing damage and even in that case, damage would be manageable. In early March, the company was trading at close to book value, with the A shares were at $72,000 (book value) when I bought B shares at the equivalent $2400. I figure paying book value for a great insurance company with no toxic investments was worthwhile enough, and to have Buffett's expertise on top of that was a nice bonus.
COT- Cott is a Canadian based private label bottler of carbonated soft drinks (csd). I think their 10k says they produce roughly 60% of the csds in the US. I became familiar with the company in 2008 when I researched the Cadbury-Schweppes demerger. At the time there were rumors that Blackstone wanted to buy Dr Pepper Snapple Group (which later IPO'd as DPS) and combine it with Cott. A few things stood out to me. First, DPS spent a few billion dollars building a bottling plant in California (where it was under-distributed). To me, this means that the PP&E at Cott must be worth something. Second, Cott stock got crushed in 08 after Walmart said they wanted to end an exclusive relationship with Cott on private label csds--this would have a direct impact on Cott volumes. However to my surprise, in reading the transcript of the YE call, management indicated that volumes were holding up well and actually clarified that the WMT relationship wasn't dead, but that Cott would just need to compete for business rather than just be guaranteed it. i thought this was somewhat comforting. The recent price collapse of aluminum also was good for COT as it is the primary input cost. The negatives are that the co is still not out of the woods and probably needs to renegotiate with lenders in the next couple of years. I actually tried to buy the COT bonds (at 51) through Fidelity but alas Fidelity did not trade that issue. So my next choice was to buy the equity. Here is the quick math I did (although i lost the piece of paper where I actually did the math): the co has gross PP&E of X. I use the gross and not the net because i am choosing to believe the facilities (10 bottling plants i think) are still worth close to what they were booked at originally. The co has debt of Y (using par for Y, not the 51 level where it was trading). I got something like (X-Y)/shr count = $2.20. The stock was at 65 cents so I started buying. Added some more later around $1. Now at $1.23.
DEI-Douglas Emmett is an office REIT. I must have been crazy to have bought this stock--after all why in the world would you want to buy offices in a recession! Here was my rationale: the entire market was on sale during the first 2 weeks of March. During this time I decided to look up my mental list of "best in class stocks I would like to own but are too pricey for my tastes at the moment" and recalled DEI. I first came across DEI during the EOP (Equity Office Properties) days. Sam Zell was selling his office REIT, and a bidding war ensued among Blackstone and Vornado. Ultimately BX won, but I remembered from researching that situation, that VNO's geographic preference was in LA office property (not Orange County, else it would be interested in MPG); in trying to learn more about the LA office market, i came across DEI, the #1 landlord in LA, specifically West LA. Since then I have always looked at the price an valuation from time to time.
Assuming 3000 apts are worth $300k each (Hawaii, Los Angeles) = $900m. 13.3m sq ft of W LA office at $400 psf (vs Manhattan close to $600)= $5.2bn. Manhattan psf rents are $50/yr, or $600 at an 8% cap rate (cap rates had been as low as 5%, so I am being conservative); using 2/3 of that value in LA I figure might be ballpark. Another way to calculate is W LA rents are about $3.25/month, or $40 per year. Using a cap rate of 8% gives a property value of $4.8b. Assume a Total value is $$5.6-6bn. Less debt of $4.1b (incl minority interest), gives an equity value of $1.5b, divided by 122m shares = $12.25 per share. We began accumulating in the $6 range and last purchase was around $8. Plus most of the debt is recourse to property owned, rather than a claim on the entire company.
MSFT-bought around $16, then trading at a sub 10x p/e and ~6x ev/ebitda. This compares to the SPX trading at around 680 (during early March), assuming SPX eps of $60, or an 11 p/e. We liked the prospect of owning MSFT better than buying SPX--after all it has a 30%+ EBIT mgn.
Last 3 additions were UNH, RX and TBT. More on those another time.
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