Monthly Archive for August, 2011

Bank of America and the Power of Buffett

Posted on August 25, 2011, 8:45 am. Closed

Since the beginning of the year, Bank of America’s (BAC) stock price has declined in concurrence with multiple negative events. There have been humongous losses, large settlements, and multiple lawsuits. The public perception of BAC got so bad, that several weeks ago, Bruce Berkowitz of the Fairholme fund, held a conference call with Brian Moynihan and several other BAC execs to answer the “toughest questions” from Fairholme and BAC shareholders. The performance of Berkowitz’s fund has been horrible so far this year, and I feel like Berkowitz was forced into this conference call to qualm fears and help stanch the outflow of money from his fund. You can download the transcript of the conference call here.

Even more recently, some financial analysts have journalists (namely Blodget, who I think made some utterly ridiculous claims) have suggested the need for BAC to raise more capital. Some have pointed out that another capital raise was imminent just by looking at the stock price.

Throughout this mess, I held no strong opinion about BAC. I felt that was and still is the weakest and most poorly run of the remaining big banks, but I have not felt that it needs another capital raise. I also felt that this pessimism was reaching an apex, and somehow there would be some event that make the shortsellers and naysayers reverse course.

And lo and behold, we have news today of Warren Buffett’s $5 billion investment in newly-issued BAC preferred shares. BAC stock is up about 18% as I write.

This brings me to the power of Buffett. It never ceases to amaze me the power Buffett can have over the stock price of a single company just by making an investment. There is little doubt this investment will work out great for Buffett. The terms of the investment are not as great as the Goldman Sachs and GE investments, but that is understandable. Those investments were made during a time of real financial crisis and when an investment from Buffett probably helped save those companies. The situation at BAC is not as dire, and thus the terms for Buffett’s investment are somewhat relaxed. Kudos to Buffett for another opportunistic investment.

Now is the Time to Buy, Not to Bail

Posted on August 8, 2011, 9:50 pm. 1 Comment

It’s somewhat mystifying to me that the market had such a broad sell-off today after the announcement by S&P on Friday of their downgrade of U.S. debt. If you’re an investment professional who pays attention, S&P has broadcasted the possibility of a downgrade for several months. So I ask myself, “Why is now  a great time to sell stocks?” I have trouble coming up with a good reason.

Currently, there are lots of companies out there selling at bargain prices. I’ve written about Berkshire Hathaway (BRK-A) several months ago. I thought it was a good bargain then and now its an even better bargain. The stock is trading at a mere 4% above book value. It’s trading at a mere 7.7 times free cash flow (I annualized the past 6 months of FCF)—that’s a FCF yield 13%!

Or you can look at Markel (MKL), which is also trading at a mere 4% above book value. This is a company that has grown book value at an annualized rate of 10.93% over the past 11.5 years.

You could look at Ensco, a deep sea drilling company, which is trading below book value and which now has a dividend yield of 3.46%.

I could go on and on with a long list of companies trading at a large discount to intrinsic value. Though it feels awful to see your current holdings down over 10% these past several weeks, now is the time to buy, NOT the time to bail out.