Opportunity in Bank Stocks

Warren Buffett recently invested in Bank of America and this provided renewed confidence to the public about the opportunity in the bank given the recent sell off. With that I decided to take a look at some of the banks that I have been eyeing.

Bank of America (BAC)

BAC has been the stock that has suffered the most in the recent downturn in bank stocks. The biggest concern has been the significant unknowns about its mortgage exposure. BAC has set aside almost 20Bn $ to account for losses from various settlements. However, there are significant unknowns:

• Its settlements of 8.5Bn $ with a group of mortgage investor is currently being challenged in court.
• There are various lawsuits by states against the big banks. NY state attorney general has been among the most aggressive and it is likely that those lawsuits can have a big drag on the bank’s results.
• There are questions about BAC capital adequacy ratio given that BAC request to pay dividends was rejected by the regulators. This implies that regulators are not very comfortable with the capital levels.

Countering the above factors there are a few positives:

• BAC has significant franchise earnings power.  There have been various range of estimates but in general I have not seen those estimates too far below 2$/share.
• BAC is in all the key business areas – Retail, Mortgage, Investment Banking, Corporate Banking and Wealth Management. Thus as the US economy picks up bank has enough firepower to fire on various cylinders.
• Tangible book value of the stocks is above 12$/share vs it current market value below 8$/share.

The recent investment by Warren provides an interesting additional pointer. While the investment in BAC has been portrayed as a good deal for BAC, I have my reservations. BAC didn’t raise any additional capital when Warren invested in BAC. Thus BAC didn’t benefit from raising the capital as both GS and GE did when Warren provided that capital. So really the purpose was to bump the stock price in the short term. However, this will have the exact opposite consequence in the long term as I prove below.

BAC gave Warren a free 10 year call option at a strike price of 7.14$. If I look at the traded price of BAC call option, a call option maturing in Jan 2013 with a strike price of 7.50 is worth 2.35$. Hence, the value of the options is significantly more than the above 2.35$ since the option doesn’t mature in 2013 but matures in 2021. Some people have estimated that the value of the option is 5.49$ at the following link. I do think the price is even higher but Black Scholes is not a good way of measuring long dated options as Warren has said multiple times.

The above coupled with the fact that Warren has taken no risk with it – Preferred shares are higher in the capital structure than the Equity Capital and yet have all the upside (because of Warrants) is classic Buffett. Buffett got the deal despite it not being 2008 is even more commendable. This also speaks poorly of the current management.

Bottom-line: I think that the current investment by Warren is a very expensive deal for BAC current shareholder.  Management has taken the deal to preserve themselves and get endorsement on them from most one of the most savvy investor. This investment doesn't do any good to the existing shareholders.

However, given the above, can we find other investments in the banking that could potentially fit the bill of savvy investments. The 2 that I have in mind are:

• Citigroup
• Barclays

Citigroup (C)

Citigroup went through a lot of churn in 2008. The stock price that you used to be around 50$ in 2007 has now fallen to 3$ (accounting for the 1:10 reverse split in 2011). Company also wrote down a lot of the items on its balance sheet which makes it more than likely that its current book value truly reflects the value of the company. A few key factors:

• Tangible book value is upwards of 40$/share vs its market value of 30$/share.
• Yearly earnings capacity of 10Bn$ vs 87Bn$ of Market Value thus resulting in PE of 8.5.
• Extensive presence in Emerging Markets where the growth is likely to be much higher than in the more mature markets of US and Europe.

The above factors coupled with the leadership of Vikarm Pandit who has done a good job of leading the bank could provide a good opportunity to get into this bank.

Barclays (BCS)

Barclays went through a similar churn in 2008 as Citi. However unlike Citi, Barclays never required any bailout from governments. They were able to get private investors from the Middle East to enhance their capital. A few interesting factors for Barclays are:

• Barclay’s book value is only 0.36 of its market value. While book value includes some of the intangibles that are still on the Balance sheet, .36 is a very low ratio for the bank.
• Barclay’s market value of $30.5 Bn also includes the stake that bank in the following entities:

o   Blackrock – 19.99%. This accounts for $5.75 Bn.

o   Absa – 56.4%. This accounts for $7.3 Bn.

·         Thus market is only assigning value of $17.3Bn for all the remaining operations. Looking at PBT, Barclays is earning around 6Bn Pounds in 2010 of which 616Mn Pounds were from Absa (which we should exclude since we accounted for it above). Hence the PBT is 5.4Bn Pounds. Assuming 25% for Tax (this is the tax rate they have used for 2010) and 1Bn Pounds for non controlling interests, PAT is around 3Bn Pounds or $4.8Bn.

·         Thus one can buy Barclays at 4x Earnings given that the market value is only $17.3Bn for the remaining operations.

·         Finally, looking at the price at which some of the investors did the deal with Barclays in 2008, the warrants was received for 197 pence vs 155 pence that the share is now available on London FTSE market.

The above factors coupled with the leadership of Bob Diamond makes buying BCS a good deal. The risk is the pervading risk that Europe could go down the tube and that could impact Barclays. Bob Diamond has clarified that they don’t have big sovereign risk in Europe. The main risk is in Italy where they are the top 10 banks. However, since they are a retail bank, they borrow and lend there so the risk of getting impacted should be limited.

Conclusion

• BAC is not a good investment opportunity for ordinary investors at this time. Management actions have not been shareholder friendly.
• C is a good opportunity given that its Balance Sheet is clean and C has significant presence in Emerging Markets.
• BCS is cheaper than C. However, BCS has higher risk as well since there could be a contagion effect from Europe situation.

Disclosure: I own BAC and C stock currently. As prices move I will look to add C and BCS.

Disclaimer: All views expressed in this article are the author’s own views. They don’t represent the views of any company or organization that the author may be affiliated with. This is not a recommendation to buy or sell a stock. You need to do your own diligence before buying or selling a stock.

BP

Background

BP is one of the world’s leading international oil and gas companies. BP suffered mightily in 2010 due to Gulf of Mexico oil spill. At that time a few brave souls spoke about the value in BP. Whitney Tilson was one of them and his presentation can be found at the following link.

More than a year has now passed and a lot of uncertainty and unknowns have gone away. However, the price of the stock has not moved as dramatically as one would have expected (given how dramatically it moved after the incident). This brings us to today’s value idea.

Earnings

Company operates in 2 main segments:

·         Exploration and Production
·         Refining and Marketing

Other business including low carbon footprint are clubbed under Other business and Corporate. BP makes it very easy to look at their financials as they provide a s/s. The first stop is to look at the earnings over the last 5 years.

A few key highlights:

·         Exploration & Production is a very profitable business and produces on average 30Bn $ operating profit annually.
·         Refining and Marketing is more volatile business but has been solidly profitable to the tune of 3.75Bn $ operating profit annually.
·         Gulf of Mexico has a big impact on the company and they took a charge to the tune of 41Bn $.
·         Even after the big charge, company has on average over the last 5 years provided net profit of 15.75Bn $ annually. This translate to 4.77$/ADS.

The above 5 years is a great representative years for the company because it accounts for the big changes in oil prices as well as one of the worst operational disasters in BP history. So these numbers are likely to be conservative as we look into the future.

The next stop is to understand how the company has used the above earnings.

CashFlow

A few key highlights:

·         Cash Flow from Operations have been a very significant 26.5Bn $ annually. At a very high level this corresponds to 15.5 Bn $ of Net Profit (seen earlier) and approximately 11Bn $ of Depreciation charges.
·         On average, Cap Ex is 19Bn $ annually. This is funded through Depreciation charge of 11Bn $, 5Bn $ of disposals (see above and net proceeds from disposals vs investments). The remaining is coming from the other operating cash flow.
·         BP has been buying around 5Bn $ worth of shares annually and a big portion of that has been funded by taking on additional debt.
·         Between share repurchase and dividend BP has returned 12.75Bn $ of value annually. At today’s market value of 126Bn, that is annual return of around 10% which is quite significant. This period includes 2010 where the dividend was cut and the company went through significant crisis.

Overall, cash flow analysis gives us the comfort that company has been regularly paying the shareholders back. A 10% yield including share buy back is pretty impressive.

Valuation

Let us look at the valuation in a few different ways:

·         P/E
·         EV/EBITDA
·         P/FCF
·         EV/Reserves

A few interesting observations from the above:

·         Today’s valuation of BP is as cheap as it has been over the last 5 years. This includes year-end 2010 where the price of 46.1 was higher than the current price of 40.2.

·         On P/E metric, it was closest around end 2008 when it feel to 6. At that time, the world economy was seriously at risk of falling into a deep recession (which it did).

·         On EV/EBIT metric, it was cheaper in 2008. However, that was because the oil prices went close to 150. Currently, we are in the 80-90 range which seems more sustainable.

·         It is interesting to note that FCF is –ve in the first half of this year. However, this may be a reflection of the under investment in 2010 rather than a new trend.

·         EV/BOE is a very interesting metric. BP has been the cheapest on this metric that it has ever been. Here I have assumed that the reserves are the same as they were at the end of 2010.

Not only is EV/BOE the cheapest it has been for BP over the last 5.5 years, it is also the cheapest vs most of its other competitors. The reserve information has been drawn from PBR presentation that I recently went through. It is obvious that BP at 8.63 is half that of PBR. The next cheapest is CHK which has a highly natural gas oriented portfolio.

Conclusion

·         BP is a very stable and solid business that has been able to consistently earn huge amount of profits even under bad economic conditions.

·         On all the key valuation metrics, BP is extremely cheap. It is very interesting to see it trade at <6 times earnings.

·         BP has re-instated its dividend of 42cents/quarter or around 4% which allows investor to get paid while they wait for the market to unlock value.

·         BP is the cheapest of the big oil company when you compare the valuation by $/BOE. This is very interesting because BP has a significant liquid portfolio which earns a much higher return.

With the gulf coast open for business and the company available cheaply it is time to consider a slice of the petroleum pie.

Disclosure: I own BP stock and am looking to add more at the current price.

Disclaimer: All views expressed in this article are the author’s own views. They don’t represent the views of any company or organization that the author may be affiliated with. This is not a recommendation to buy or sell a stock. You need to do your own diligence before buying or selling a stock.

Generating Income - Anybody?

I last wrote about HP in the June 19 article that can be accessed here. In that I argued that HP seems to be trading at a cheap price compared to its inherent value. The big unknown of course is whether the new CEO will focus on growing the company organically or doing expensive acquisitions. At the time of the article, HP was trading around 35$. When I looked at the price again recently the price was back at 35$ after having gone through some ups and downs!

As I was thinking about ideas of investment, I realized that the market has been more volatile recently with the US Debt debate. While this will definitely have impact on various companies, its impact on some of the technology companies (including HPQ) should be quite limited. Besides, the volatility has meant that the option prices should have gone up. With that here is my new idea.

Sell Put Options

There are a few put options for HPQ that seem interesting and below I lay them out along with approximate returns.

Approach 1

Sell HPQ Put Option maturing Aug 19, 2011 with Exercise Price of 35$

Premium= 1.10 – 0.05 (Transaction Cost) = 1.05

Return  = 1.05 (Premium) *12 (# of Months) / (35 (Exercise Price) * .5 (Maturity in Months))

            = 72% Annualized

Risk      = You may be forced to buy the stock at 35$. So only use the strategy if you are comfortable owning the stock at 35$. Since the price of the stock is 35.17$ it stands to reason that the fair price judged by the market is slightly above the exercise price.

Approach 2

Sell HPQ Put Option maturing Sept 16, 2011 with Exercise Price of 34$

Premium= 1.15 – 0.05 (Transaction Cost) = 1.10

Return  = 1.10 (Premium) *12 (# of Months) / (34 (Exercise Price) * 1.5 (Maturity in Months))

            = 25.9% Annualized

Risk      = You may be forced to buy the stock at 34$. So only use the strategy if you are comfortable owning the stock at 34$. This approach provides the added comfort that HPQ price has not touched 34$ over the last 2 years.

Caution

I would recommend that the above strategy minimally requires the following:

• Cash hoard by the investor so that you can buy the stock at the above prices if the buyer of the option chooses to exercise.
• Investor's fair price of the stock is around the exercise price level so that (s)he is comfortable buying the stock at those prices.
• Investor could also potentially short the stock but I am not sure the funding cost for that and hence I am not suggesting that here.

Apart from the above, Option prices by definition are quite volatile. Hence one should only invest in them if they are comfortable with the volatility. If you are likely to be forced out of your position at the wrong time then options are not good for you.

Disclosure: I don’t have position in either of the options mentioned above.

Disclaimer: All views expressed in this article are the author’s own views. They don’t represent the views of any company or organization that the author may be affiliated with. This is not a recommendation to buy or sell. You need to do your own diligence before buying or selling.

An Interesting Net-Net Opportunity

Action Semiconductors (ACTS) has been a perennial net-net since 2009. I started looking at it during the 2008-09 crises because the company was trading at 50 cents for a dollar. Here is the link to the article when I first looked at it Getting started - ACT(S)

Since the crises the company’s price almost doubled in 2010 and the significant margin of safety went away. However, with the recent spate of fraud (or potential fraud) in Chinese stocks, there is nervousness surrounding all Chinese stocks and ACTS (though not a Chinese stock but has most of its operation in China) has also suffered as a result.

I decided to take a re-look at the stock to see if the stock is appealing at current prices.

Company Background

ACTS is fabless semiconductor company that engages primarily in the businesses of designing, developing and marketing SoCs (Systems-on-a-Chip), for portable media players. ACTS primarily designs these chips but outsources manufacturing of all its products to third party contractors - He Jian, and United Microelectronics Corporation. ACTS provide these contract manufacturers monthly targets and thus retain lot of flexibility around what needs to BE produced. This allows company to have limited capital expenditure for manufacturing but also limited need to have a lot of inventory on their books. Company also uses independent vendors to help with testing and packaging functions depending on capacity constraints. 

Company sells most of its products to value added distributors or contract manufacturers. Thus the company doesn’t have a lot of brand recognition.

Company Financials

The company was listed in November 2005 on Nasdaq through an IPO. In that respect it differs from many of the Chinese company which were created through reverse mergers. Company has also used Deloitte as its auditor for a long time which gives me added comfort. Without the above 2, I would not be looking at any Chinese company (this is actually based out of Cayman island).

I have used annual reports for the 5 full years (2006-2010) and extrapolated the numbers from the 1^st quarter of 2011 for 2011. 

Assumptions:

• I have assumed that 2011 numbers will be four times of what has been observed in the 1^st quarter so far.
• MV has been derived by looking at the dilution share count at the end of period and multiplying by the market price at the end of the period.
• EV is MV – liquid current assets (there is no debt)

A few key things stand out:

• Revenue of the firm has shrunk dramatically over the last 5 years to 25% of what it did in 2006.
• Market value of the company has followed suit as well.
• This has resulted in Enterprise Value of the company becoming negative. It has been negative over the last 3 years. I actually looked at it in Feb 2009 (Getting started - ACT(S)) when things were looking quite bleak.

It is the negative Enterprise Value or “Net-Net” aspect that got me excited then and that gets me excited now as well.

To better understand the value in the stock let us look at the Balance Sheet.

Balance Sheet

A few things stand out from looking at the balance sheet:

• Company has increasingly put Cash to work into Marketable Securities to earn interest income (Q1 2011 seems to be an aberration).
• Liquid current assets has not changed much over the last 5 years, though it has gone down significantly since end of 2008.
• If the company were to be liquidated today the owners will get a 35% jump in value. This valuation is a very conservative valuation because I have excluded all assets which are not liquid. However, I have included all liabilities when coming up with Liquidation value.

Qualitative Factor

• ACTS had a change of guard last year with Niccolo coming as CEO in place of Nan-Horng. Niccolo is much more focused on Research and is aggressively building that team. The first result of that effort will be seen later in the year when their series 27 and series 28 products hit the tablet market. 
• ACTS has been recently tied up with MIPS Technologies to bring Honeycomb (Android 3) to the MIPS architecture. It is the first positive news from ACTS in a long time.  
• ACTS has also been investing heavily in the recent past. This is reflected in the reduction in Liquidation value in the last quarter.

Conclusion

• ACTS is trading at a significant discount to its cash value. This is reflected in the fact that if the firm were to liquidated today it will provide at least 35% return to its current holders.
• ACTS recently had good trial runs of its Series 27 and 28 products. These series are now moving in production and the tangible results of those should show up in the 2^nd half of the year. It also recently tied up to support Android 3 on Tablet.
• The best part of buying ACTS is that you are not paying anything for the future. If things work out there is a significant upside. If they don’t there is still upside with the liquidation value. I prefer these type of situations J

Disclosure: I currently own ACTS.

Disclaimer: All views expressed in this article are the author’s own views. They don’t represent the views of any company or organization that the author may be affiliated with. This is not a recommendation to buy or sell a stock. You need to do your own diligence before buying or selling a stock.

HP (Hewlett Packard) – Story of Hidden Pearls?

HP is the quintessential Information Technology Company. It has presence in multiple segments and is a great barometer of the tech spending. Its stock is also down significantly over the last year and in that aspect also it is a great representative of what is happening with big IT companies.

In the recent past it has gone through multiple changes including change of CEO – Mark Hurd to Leo Apotheker, reduction in revenue/earnings guidance and leakage of confidential memos from CEO. These are the things that you wouldn’t expect from a company which is consistently making money and which has performed well during the 2008-2009 crisis. All of the above has caused the stock price of the company to come down by more than 20% over the last year. The financial statistics of the company seemed appealing enough for me to take a deeper look.

Company Structure

Company is organized into the following key business segments:

•          Services
•          Enterprise Storage and Servers (ESS)
•          HP Software
•          Personal Systems Group (PSG)
•          Imaging and Printing Group (IPG)
•          HP Financial Services (HPFS)

Some segments like Services and Printing Group are more stable. The earnings and revenues come from long term contract and hence the revenues are more stable and margins higher. On the other end of the spectrum is PSG. HP is the market leader in selling PCs, Notebooks and handheld devices to both corporate and individual customers. However, PSG is an extremely competitive segment. Hence the revenue can have variability and the margins are lower. Others fall in between.

Below table provides the breakdown of Revenue and Profit by various segments.

Another interesting factor to look at is how these business segment revenues have changed YoY. 

So overall the businesses held up quite well during the 2008-2009 crises. Infact, the services business grew as companies looked to reduce the expenses and outsource more technology work.

The above fact gives me the comfort that in adverse market situations the company should be able to ride out of the crises given its diversity of businesses. Next let us look at the valuation of the company.

Valuation

I have used annual reports for the 4 full years (2007-2010) and extrapolated the numbers from the 1^st half of 2011 for 2011. This 5 year period is quite representative of the company’s performance since it includes the 2008-9 crises.

Assumptions:

• I have assumed that 2011 numbers will be double of what has been observed in the 1^st half so far.
• Annual Growth is derived as annual compounding over the 5 year period.
• MV has been derived by looking at the dilution share count at the end of period and multiplying by the market price at the end of the period.
• EV is MV + s-t debt + l-t debt – cash – s-t investments

A few key things stand out:

•      Revenue and Profit (PAT) have grown at roughly the same pace 3.8% over the period. So HP has been able to keep the profit margin relatively constant.
•            MV has fallen -6.5% annually. A portion of this is because of the aggressive buy back that HP has embarked on over the last few years (more on this later). So while the share price wouldn’t have fallen by this %, because the share count has reduced, the MV has come down.
•             EV has not fallen as much. It has gone down by -4.9% annually which means that company has been leveraging up over this period. Lastly the BV has not moved much over the last few years again because of the share buy-back.
•        Finally, Valuation metrics looks very interesting.

o   P/E has come down to 7.8 currently from 19 at end of 2007.

o   EV/PBIT has come down to 6.8 from 15.5

HP has not been this cheap on the above metrics even during the 2008-09 crises.

We can safely surmise that HP is a cheap stock. But is it a value stock?

To understand this better let us look at the cash flow from HP over this period and how the company has used the Cash flow.

Cash Flow

When I look at Cash Flow, I am most interested in Owner’s Earnings or Owner’s Cash Flow. This is the cash flow that is available to the shareholders of the company to be used for distribution of dividends, repurchase of shares or to act as buffer during crises.

As can be seen from the above, HP has been a prodigious source of Operating Cash Flow – an average of 12.5 BN $ in a year. However, it is also a prodigious user of Cash, having spent more than 8Bn $ a year on Capital Expenditure and Acquisitions. Thus the average cash flow available in a year is only 4.5Bn $. For a company that is worth 86Bn $ of Enterprise Value, the return 4.5/86 = 5.23% is not appealing.

However, once you take away the acquisitions like year 2009 or year 2011 so far, the cash flow available to the shareholders become a lot more appealing. It generates around 10BN $ of Cash flow. Then the return is 10/86 = 11.6% is a lot more appealing.

Hence, if HP can tone down its acquisition spree that it has been on for the last 4 years, the stock can provide great return. Leo has also publicly stated that he is not looking to do any big acquisition. Whether he will be able to resist the temptation of doing acquisitions remains to be seen.

Lastly, let us look at how it has used the Cash flow that it has generated – 21BN $ over the last 5 years.

Usage of Cash Flow

HP has been a good steward of FCF that it has not spent on acquisitions. It has returned all of it in the form of stock repurchase which is an efficient medium of utilizing the cash. Here is a summary of how the Cash flow has been used.

Qualitative Factor

•           HP had a change of guard with Leo Apotheker coming in place of Mark Hurd. From the various presentations that I have seen, Leo is quite focused on generating shareholder value which is a good sign.
•      Recent management changes – reducing the hierarchy, increasing responsibility of key executives and bringing new blood should help reinvigorate the organization.

However, I don’t have enough data points to be absolutely sure on this front. So far based on everything that I have seen this area doesn’t seem to be a concern. This is also nothing to write about for the same reason. H business

ence this section is small.

Conclusion

•       HP is a very stable and solid that has been able to keep its profit margin over the last 5 years.
•            HP is currently trading at a cheap valuation compared to the historical norms as well as the valuation during the 2008-09 crises.
•          HP has spent a lot of money on acquisitions over the last 4-5 years. If HP can reign in its acquisition spree (or do acquisitions where it is getting as much in return for the price it is paying), this is a great opportunity to enter the stock.

Disclosure: I recently nibbled at HP stock. As there is more clarity regarding HP acquisition strategy or as the stock gets cheaper I will look to increase the position.

Disclaimer: All views expressed in this article are the author’s own views. They don’t represent the views of any company or organization that the author may be affiliated with. This is not a recommendation to buy or sell a stock. You need to do your own diligence before buying or selling a stock.

Berkshire Hathaway

Historical Perspective

Warren Buffett has led Berkshire Hathaway since 1965. In that period of 45 years, Warren has grown the book value of the firm by 20.2%. Market value of Berkshire has grown at close to book value. Over the last 20 years, Berkshire book value has grown by 22.25 times – an annual compounding of 16.8%. The market value has grown by 16.42 times – an annual compounding of 15%. How many companies or fund managers can match that.

Opportunity

The above also brings us to the opportunity in Berkshire. For the longest period, Berkshire was way over the book value because of Buffett premium. Over the last 20 years that premium has shrunk. This coupled with a few one-off events like Underwriting losses (expected) in 2011, Sokol-gate and market idiosyncrasies now provides us some fantastic opportunity to start a position in Berkshire. Below are 2 ways to value Berkshire.

Approach 1

Current price/share is 111,045 $. Thus the discount is 22%

Assumptions:

·         Above approach counts the $66 Bn of float as part of investments/share with the expectation that the float will remain stable over the years (ideally, it will grow).

·         I have used pre-tax earnings multiplier of 8 for Berkshire vs 10.5 for S&P 500 (PE is around 15 for S&P 500. Assuming 30% tax rate, pre-tax earnings multiplier is 10.5).

Approach 2

Current price/share is 111,045 $. Thus the discount is 18%

Assumptions:

·         Exclude the $66 Bn of float as part of investments/share.

·         Assume 10% return on the float (vs more than 20% ROI that Warren has produced during his career).

·         We are not accounting for any growth in float over time.

·         I have used pre-tax earnings multiplier of 8 for Berkshire vs 10.5 for S&P 500 (PE is around 15 for S&P 500. Assuming 30% tax rate, pre-tax earnings multiplier is 10.5).

Summary

With very conservative assumptions above for both approaches 1 and 2, we still get a discount of 20% for Berkshire. Thus we have a small margin of safety for Berkshire investment. Now let us look at the qualitative factors for Berkshire.

Qualitative Factors

Qualitative factors are a key ingredient to how the investment works out in the long term. Some of the key ones that I consider are:

·         Management: This is one of the best aspects about Berkshire. Warren has been running Berkshire for 45 years and he is the best management-owner one  can hope to get. He always considers the return on investment before making any investment. He judges himself by that yardstick and that is one of the reason Berkshire has done so well.

·         Culture: Berkshire culture is very long term oriented. This allows them to be patient when markets are not favorable. This allows them to make logical decisions without getting pressured into what the street is thinking or what their competitors are doing.

·         Unique businesses: Berkshire has collected an eclectic mix of businesses that have unique competitive advantages. This allows them to handle down markets relatively well. It also allows the businesses not to be as impacted by the market competition thus preserving profitability.

Conclusion

·         Berkshire is currently trading at 20% below the intrinsic value.

·         Berkshire has the some of the best qualitative factors. This allows the investor to be very comfortable and not have to worry about short term improvements.

·         This is a phenomenal opportunity to invest in one of the best businesses available and where the business is selling at a discount with very limited downside risk.

Disclosure: Long Berkshire. Looking to increase position on dips.