- MasterCard and Visa – As a group, up 34.4% and makes up 43% of the total equities gain for the year. Individually, MasterCard is up 32.1% while Visa is up 47.3% and comprises 34.3% and 8.7% of our total equities gain for 2012.
- Berkshire Hathaway – Up 17.7% and comprises 19.3% of total gain.
- UOB – Up 31.4% and makes up 13.1% of total gain.
- Berkshire Hathaway: Our largest equity position comprises almost 17% of total portfolio. Berkshire is our longest holding stock. Although we adjust the position size from time to time, depending on value or alternative, we have maintained our current position size since May 2011.We bought our first share in Oct 2008 at a cost of $57. We think there's not much downside to the current price. BRK is prepared to repurchase shares at 1.2x of reported book value which is about $89 – $90 based on 3Q numbers. In fact we think the stated book value is substantially below intrinsic value. For example, Burlington Northern Santa Fe was purchased in 2010 for $34 billion. BNSF is expected to earn $3.5 billion in 2012. Using a multiple of 15x earnings (same as Union Pacific), BNSF is worth $54 billion. If accounting rules allow writing up of goodwill, then BRK book value will increase by $20 billion. Based on BNSF alone, the stated book value as of 30 Sep 2012 is at least 10% less if we include the $20 billion increase in BNSF's value.For more details on BRK valuation, we think Whitney Tilson provides a good presentation on it. You can google for it. In the past, we have made some money from Tilson's idea – Anheuser-Busch InBev, although we sold it early. He was spot-on on that, in fact, BUD went even further than what he thought will sell for – currently BUD is selling for $87 versus his target of $72 or so.
- Mastercard and Visa:
- DirecTV: 57.4% of the positions are purchased at an average of $44.22 from Dec 2011 to May 2012, and the rest were acquired in October 2012 at an average of $51.43. We recycle part of the proceeds from Mastercard and Visa in DTV during October. At $51, stock is priced at 10x 2013 earnings. We think it trades at a significant discount to intrinsic value and offers steady, leveragable cash flow, exposure to Latin American growth and sound capital discipline. DTV started the year as our smallest equity position with less than 2% of total portfolio. But it ended as our 3rd largest equity position with slightly over 10% of total portfolio.We think DTV is one of the cheapest play within the pay-tv sector, whether we use the traditional PE or EV/EBITDA valuation. Dish Network, a pure satellite pay-tv play, is the closest comparable that sells for 15x earnings, almost 50% more than DTV valuation. For others, like Time Warner Cable, sells for 14x earnings. However TWC is more than pay-tv, it provides internet and phone services as well, which provides an advantage over pure CATV play since TWC can provide so-called “triple-play” package to entice new sign-ons and also provide a leverage to reduce churn rate. But is “triple-play” advantage worth to pay 40% premium more? We are cheap so we will play it cheap and hopefully, the difference in valuation will close up in DTV's favor.
- IBM: Makes up 7.1% of total portfolio. All of the positions were initiated in 2012 between $180 to $198, at an average cost of $193.18. We think IBM has a good chance of performing well in 2013 partly because of the easy comps which reset the forward benchmark to a lower hurdle to cross, in terms of the Street expectations. We also like that about 60% of IBM profit is recurring nature due to its large software (23% of revenue) and services (58% of revenue) that have longer-term multiyear contracts. As a result, its business performance have been less volatile and more predictable than most.But one of the things we did not like is the way it reported earnings in Q3 when its reported adjusted operating earnings include a one-off gain from the sale of a line of business to Hitachi. If it is a one-time gain, why is it part of adjusted operating normal profit? We cannot understand except to the extent that the corporation try to mask the underlying performance and hope that others miss it. And none of the major news media spotted it, or at least reported it. Nonetheless, we still think IBM should perform decently for the next few years and has a reasonable chance to achieve its stated roadmap of $20 of operating earnings in 2015. But we will keep a close look on them quarter to quarter on the reporting and underlying fundamentals.
- Stocks that makes up 2 to 3% of portfolio: We hold 5 stocks which each makes up between 2 to 3% of total portfolio each. In total, these group makes up 12.1% of total portfolio. The 5 stocks are Visa, UOB, Dollar Tree, Johnson & Johnson, and IAC/Interactive.
- UOB – We bought it during Q3 of 2011. We have reduce 2/3 of our UOB holdings this year. We don't think it is expensive, especially compared to most other STI components. It has roughly played out as what we think it should have. The bank has grown its asset base as we think it can. If return on asset returns to 1.2 to 1.3%, it can earn between $1.75 to $1.9 based on $230 billion of assets, valuing the current price at 10-11x earnings.
- Dollar Tree: We acquired during Oct 2012. Up less than a percent. Stock is down quite significantly from the high. In fact, all the Dollar stores are way off from the high, and valuation are roughly the same among all the three – Dollar Tree, Dollar General and Family Dollar – valued at about 14x forward 12 months earnings. For us, we are more attracted to Dollar Tree because it is the least leveraged and has the lever to pull on that basis if needed or maybe it will appeal to certain private shop given the low leverage and strong cash flow.
- IAC/Interactive: Acquired in Q4 at an average $48.27. Down 2% so far. Usually we do not invest in technology but we think IAC provides good value for the type of growth it guides for. Sells for 13x earnings, and 11x ex-cash for 2013 earnings. We also like that Barry Diller is the head of the company. We think of Barry Diller in the same breath as John Malone – both of whom have proven to unlock value and deploy capital efficiently.
- Johnson & Johnson: JNJ is the second longest holding in our current portfolio. We have held them since 2010. Up 6.9% in 2012 and up 14.6% from acquisition.
- We own another 12 equities which in total makes up 14.9% of total portfolio. Following are the equities:
- Tesco: Acquired in January 2012 at an average cost of US$4.94 – up 13.3%. If we did not elect to take one of our dividend in script, we will up 9.8% instead.
- CSX: Acquired in Q3 2011. Up 2.6% for the year and up 9.3% from cost. We reduced over 60% of the positions during February 2012. Results has been tepid mainly due to the depressed natural gas prices which drive lower demand for coal. Although coal makes up a huge chunk of CSX business (over 30%), strong growth in automotive and intermodal has largely offset the decline in coal volume.
- Celgene: Acquired in May 2012 at a cost of $71.34. Up 10.2%. We reduced 46% of the positions in October 2012. However, we think still Celgene should provide decent return. If EMA approves Revlimid as a first-line treatment for Multiple Myeloma, it should give some tailwind to the stock. Even if it doesn't, Revlimid is already prescribed off-label as a treatment for MM in Europe. Also, Celgene has some recent success in clinical trials for the cancer drug, Abraxane, resulting in approval for extended use in metastatic non-small cell lung cancer. There are other trials in the pipeline for Abraxane for other form of cancers, for example, pancreatic. We think there's a decent chance in will sell for $90, for 16x 2013 earnings.
- Norfolk Southern: We initiated NSC in the first two months of 2012 and ended comprising over 5% of our portfolio at that time. Subsequently, we reduced 70% of our holdings in the middle of 2012, at a modest loss of 1%. The cost for the remaining shares is $71.4, down -13.4%. Inclusive of the shares sold, we are down – 4.7%. Norfolk Southern has basically the same business model as CSX in which coal is pressurizing the underlying business. We think a lot of the bad news are priced into the current price. To go much lower, we think the economy needs to stop in its track.
- Coca Cola: We sold all of our Coca Cola shares in the middle of the year and then again initiated a small stake in Dec 2012 for $36.49. The earlier stakes were sold at a gain of 12%, which were acquired in Nov 2011 and Jan 2012 at an average price of $33.38. We think the current price is a reasonable entry point to pay for a business of Coke quality at 16.7x 2013 earnings. Together with the earlier stake, Coke returned 8.9% for the year, and 11.2% from cost basis.
- American Express: Bought in Oct 2012 at $56.75. Up slightly at 1.3%. Valuation is not particularly demanding at 13x 2012 and 12x 2013 earnings.
- National Oilwell Varco: We did not pay much attention to the oil and gas sector (especially contractors that serve the exploration of oil) until August this year when Berkshire Hathaway initiated a position in the stock. The stock then was selling for over $80 a share and peaked at $89.95 in Sep 2012. Then it fell to about $80 and generally sells between $77 to 83. It took a big correction in December 2012, falling to a low of $64.82. During the time from August to December, we spent some time familiarizing with the oil and gas sector, particularly on the upstream operations including on and off-shore drillings. Fortunately, our time spent paid off somewhat when NOV fell below $70, a price we think provides a good entry. We finally took a small bite and acquire some at $66.9. NOV is the dominant equipment provider for oil and gas drillers, both onshore and offshore. Its share grew by 5-folds in the past decade largely due to its success in persuading drillers in the early 2000s to shift from custom-built rigs to rigs built around its own standardized components, according to Morningstar analyst Stephen Ellis. Today, an overwhelming majority of rigs use NOV's parts. Vendors cheekily called them: “No other vendors.” NOV is largely dependent on energy prices which drives drilling activities. If oil prices doesn't support drilling activities, NOV business will be adversely affected. However, NOV is among the safest energy plays because it serves both the oil and natural gas explorers and drillers, and also both on and off-shore drillers – they are kind of energy agnostic. At $67, it is selling for 11.4x 2012 earnings and 10x 2013 earnings.
- Singapore Telecom: Bought in Oct 2012 at US$2.58 or SG$3.15. Up 4.6% since or up 6.8% if we include the dividend that just went ex-div in December 2012. We think SG$3.15 is attractive relative to other Singapore stocks. The price was also temporarily driven down when Temasek sold part of their holdings. The selling is now over and price has recovered a little. But we are not a long term holder in Singtel. It is just a relatively safer alternative in a market that is otherwise expensive.
- OCBC: Acquired in August 2011 at a cost of US$7.56 or SG$9.11. Singapore banks staged a remarkable recovery in 2012. We sold half of it in June 2012. Our holdings is up 24% for the year, but is down 1.3% from our cost.
- M1: Bought early this year at US$1.95 or SG$2.43. Up 14.5% for 2012. We sold half of it in Dec 2012.
- Thai Beverage: We purchased the shares in November 2012 for US$0.33 or SG$0.40. We don't usually invest in stocks which have surged a lot in a year or is near to the all-time high. However, for Thai Bev, we have always like the stock since it was listed but we have never own it until now. In fact, we nearly bought last year when it was selling for SG$0.24 but we were cheap and queued to buy at SG$0.235. For half a cent difference, we miss a huge gain. The other comparable mistake of such is how we miss buying Mastercard and Visa during Dec 2010 and during part of 2011 when we were sucking our thumbs. For Thai Bev, even though the stock is close to its all-time high, we think the valuation is not demanding. It is selling for 16x earnings. What we like is their spirit business which is growing at a good clip, although other parts of the business is holding them back. Compared to other spirit businesses like Brown-Forman and Beam, they are selling well in excess of 20x earnings.
- Marvell Technology: Our biggest loser for 2012 in terms of percentage, and ranks among our all-time biggest losers. We bought at $10.05 and is down by -27.8%. If there is any consolation, it is one of our smallest equity positions. However, we will be holding on given that the price has likely priced in a lot of the bad news which we failed to factor into our analysis. What we thought initially as cheap is perhaps cheap for a reason and probably a value-trap at the time of our purchase. MRVL has about $3.5 a share in cash, so we thought at $10, is selling for 7-8x earnings ex-cash, and if demand for MRVL products recover, it is selling for 5x earnings ex-cash.But what really went wrong for us is not so much on being wrong on the earnings but because we were surprised at how much MRVL is fined when it lost its suit on patent infringement and was fined $1.17 billion for actual damages. Because the infringement is deemed willful, the fine could increase by 3x. In any case, MRVL is appealing, and could overturn the order eventually or lessen the fine tremendously. However, if it doesn't, MRVL hands will be weakened. But we think the fine is outrageous in relation to MRVL revenue and profit. It is one-third of MRVL revenue or 100% of revenue if the punitive damages is levied at 3x of actual damages awarded. We think there's a good chance the actual damages will be eventually reduced.
Stock is having a rough time and is selling close to 52-week low below $23, priced at 13x earnings. Its domination in Latin America is under pressure from government encouraging more competition, including its homes market, Mexico. We think the price is pretty attractive.
We think the business is well managed led by one of the smartest mind in the pharmaceutical industry. Valeant pursues a different path from most other large pharmaceuticals. VRX does not spend a large percentage of its revenue on research and development (low single digit versus low to mid teens for major drugs discovery firms) but instead grows through savvy acquisitions that accretes to earnings, sometimes, significantly. They have had much success in the acquisition arena. Even at $60, its all-time high, it is priced at 14.5x 2012 adjusted earnings. It is a rare pharmaceutical that is growing top line and bottom line at such a fast clip at over 20% and 30%, respectively. Although most of the most of the revenue growth came through acquisitions, organic growth is still an industry-leading one at high single to low teens level. Effectively, VRX is a master value investor within the pharmaceutical space. The reason VRX is able to do that it is led by the able Michael Pearson, who has been an extraordinary and aggressive CEO. VRX is a rare find in any industry, which is both a value investor and a savvy operator. The other comparable we can think of are Berkshire Hathaway, any of the Liberty-related companies and Barry Dillar-related companies.