13F Fun

So, for fun, I wrote a script that grabs manager holdings and compares the portfolio since the last time a 13F was filed. This is available at places like dataroma.com but I wanted to be able to check out my own institutions that may not be superinvestors.

When I wanted to diff the 13F files, I used to download them to a spreadsheet and do it manually.  It was a pain because for companies like BRK who may have the same stock listed across subsidiaries, you had to aggregate the holdings. Many of you know what a pain that is.

Computer Stuff (uh, yes, it's a tangent)
Anyway, to make matters more interesting (OK, for most of you this part is irrelevant and not very interesting) I wrote this whole program on a Linux laptop (Ubuntu 14.04 at the time; I have since upgraded to Ubuntu 16.04) using the VIM editor (I used to use vi in a Unix environment a long time ago in my hedge fund days). Programmers know how much of a pain VI/VIM is until you get used to it. I had to refresh my memory but thought it was so cool to use vi again so I stuck it out and used it to write the whole program.  (Now I use mostly Geany on my Linux machine, Notepad++ on Windows machines, and Idle or Spyder (depending on project) for Python).

The program itself is written in PHP, and I used the XAMPP/Apache web server as my local host.  Anyway, something like this would have been much easier for me to write in Python, but I think I wanted some stuff on the web so wrote it directly in PHP.  I haven't worked with Flask/Django so wouldn't know how to put Python-generated content on a website (well, there are other ways; I do use Python to update google sheets and then use PHP to grab google sheet data etc. for some non-financial stuff I do).

All of this happened a few months ago, actually.

Linux/Open Source
...and here's another thing (another tangent off a tangent).  After turning my old, dead (or so I thought) Dell laptop (XPS M1710 that used to run Windows XP) into a Linux machine, I have really been loving the experience.

And what I noticed is that if you go to Barnes & Noble and look for computer-related magazines, you will see a bunch of them about Ubuntu, Linux and others.  I love those Linux magazines but they are expensive.  Why are they expensive?  Because they are all published in Britain!  Linux Voice, Linux Format etc... they are all published in the UK.  Even the website design/programming related magazines are all UK magazines.

If you have kids, the other cool thing these days (other than Pokemon Go) is the Raspberry Pi, which is basically just a cheap computer on a motherboard  (google it to see what it's about).  And that's a UK invention, so of course, all of the Raspberry Pi related magazines are published in the UK.

Maybe there is something about the publishing industry in the UK that make these magazines possible.  Or maybe there is too much commercialism in the U.S. for there to be support for anything open source (and therefore anything threatening Microsoft). I don't know. If it's open source, nobody is going to make money, and if nobody is going to make money, who is going to buy ad pages?  Maybe that's it.

But it makes me wonder.  As a geek into this sort of thing, it seems like the UK is a much more exciting place. Also, it seems like they are more committed to teaching coding in the schools.

This sort of makes me wonder where the next wave of great innovations will come from. But, OK, who am I kidding? I'm sure the U.S. will keep leading the way.

Anyway, that's straying too far from what this blog is supposed to be about.

Back to 13F's
Let's browse through some 13F's.  Most of this stuff has been seen and discussed already.  Many websites track 13F's closely and write about it, so I won't mention most of the big investors.

Having said that, let's look at BRK.


BERKSHIRE HATHAWAY INC

Name	dollar amt	%port	#shares	change	%chg
KRAFT HEINZ CO	28,812,169	22.21%	325,634,818
WELLS FARGO & CO NEW	22,704,405	17.50%	479,704,270
COCA COLA CO	18,132,000	13.98%	400,000,000
INTERNATIONAL BUSINESS MACHS	12,329,439	9.51%	81,232,303
AMERICAN EXPRESS CO	9,211,866	7.10%	151,610,700
PHILLIPS 66	6,250,563	4.82%	78,782,000	3,231,255	4%
US BANCORP DEL	3,430,598	2.64%	85,063,167
DAVITA HEALTHCARE PARTNERS I	2,981,889	2.30%	38,565,570
WAL MART STORES INC	2,937,332	2.26%	40,226,402	-15,009,461	-27%
MOODYS CORP	2,311,805	1.78%	24,669,778
CHARTER COMMUNICATIONS INC N	2,134,924	1.65%	9,337,491	9,337,491	new
DEERE & CO	1,779,577	1.37%	21,959,246	-1,321,748	-6%
GOLDMAN SACHS GROUP INC	1,628,365	1.26%	10,959,519
APPLE INC	1,455,768	1.12%	15,227,702	5,415,955	55%
GENERAL MTRS CO	1,415,000	1.09%	50,000,000
VERISIGN INC	1,119,894	0.86%	12,952,745	-32,255	-0%
LIBERTY MEDIA CORP DELAWARE	1,073,699	0.83%	37,499,996	7,499,996	25%
U S G CORP	1,051,494	0.81%	39,002,016
LIBERTY GLOBAL PLC	902,592	0.70%	30,712,739	6,903,848	29%
VERIZON COMMUNICATIONS INC	837,652	0.65%	15,000,928
BANK OF NEW YORK MELLON CORP	809,137	0.62%	20,827,212
VISA INC	759,438	0.59%	10,239,160
COSTCO WHSL CORP NEW	680,511	0.52%	4,333,363
M & T BK CORP	636,319	0.49%	5,382,040
AXALTA COATING SYS LTD	618,786	0.48%	23,324,000
SUNCOR ENERGY INC NEW	617,696	0.48%	22,275,381	-7,724,619	-26%
KINDER MORGAN INC DEL	496,708	0.38%	26,533,525
MASTERCARD INC	434,555	0.34%	4,934,756
TORCHMARK CORP	392,788	0.30%	6,353,727
RESTAURANT BRANDS INTL INC	351,030	0.27%	8,438,225
GENERAL ELECTRIC CO	333,233	0.26%	10,585,502
WABCO HLDGS INC	296,420	0.23%	3,237,094
TWENTY FIRST CENTY FOX INC	242,148	0.19%	8,951,869
SANOFI	163,461	0.13%	3,905,875
VERISK ANALYTICS INC	126,763	0.10%	1,563,434
MEDIA GEN INC NEW	59,672	0.05%	3,471,309
GRAHAM HLDGS CO	52,663	0.04%	107,575
JOHNSON & JOHNSON	39,677	0.03%	327,100
NOW INC	33,116	0.03%	1,825,569
PROCTER & GAMBLE CO	26,705	0.02%	315,400
MONDELEZ INTL INC	26,305	0.02%	578,000
UNITED PARCEL SERVICE INC	6,399	0.00%	59,400
LEE ENTERPRISES INC	170	0.00%	88,863
CHARTER COMMUNICATIONS INC D	0	0.00%	10,326,803	-10,326,803	-100%
Total Sum	129,704,731

(sorry, but my tables show adding and dumping Charter Communication, but that's due to change in the class of stock, I suppose, from the merger.  Name changes also show up like this in my tables so look at the whole table before assuming a position was dumped).

Buffett has really been accumulating PSX. It's been on my to-do list for a while, to make a post about it.  It is interesting because it is reasonably valued and doesn't seem to be impacted too much by crude oil prices.  They haven't been growing much, but their earnings have been pretty stable throughout a period when crude oil prices just tanked.  Their refining margins seem pretty stable too so it doesn't look like they are over-earning on excessive refinery margins either.  

You know that Buffett likes management as he has owned COP in the past. Maybe this is the good side.  

Buffett has been reticent, in recent years, about making comments about individual investments.  I remember he shied away from answering someone's question about why he bought DE, and didn't answer a question about PSX either.  He just said it's not a crude oil play. He used to talk up a lot of his holdings much more liberally.  I think the change came after IBM. He did explain why he liked IBM and it hasn't turned out too well. Maybe he didn't like the attention of talking up a name and having so many people focus on it as a big mistake (my view is that it's still too early to tell!). 

But we know that he likes managements that explain very clearly what they are going to do, and especially when they accomplish it. He is most interested in what management has in mind in terms of capital allocation; how much capex will be done, how much will be returned to shareholders in dividends and share repurchases.  And you will notice that PSX is very clear on those issues in their reports and presentations. 

Anyway, looking at the BRK 13-F, I was curious what it would look like if we exclude Buffett's big picks and looked only at Todd and Ted's excellent adventure. I just cut and pasted the above into a spreasheet and deleted what I thought were obvious Buffett picks.  Of course, that includes the big ones, and some other smaller ones.  This list may still include some Buffett stocks, but that's OK. 

Here's a look-see: 

Name	dollar amt	%port
DAVITA HEALTHCARE PARTNERS I	2,981,889	16.74%
CHARTER COMMUNICATIONS INC N	2,134,924	11.99%
APPLE INC	1,455,768	8.17%
GENERAL MTRS CO	1,415,000	7.95%
VERISIGN INC	1,119,894	6.29%
LIBERTY MEDIA CORP DELAWARE	1,073,699	6.03%
LIBERTY GLOBAL PLC	902,592	5.07%
VERIZON COMMUNICATIONS INC	837,652	4.70%
BANK OF NEW YORK MELLON CORP	809,137	4.54%
VISA INC	759,438	4.26%
AXALTA COATING SYS LTD	618,786	3.47%
SUNCOR ENERGY INC NEW	617,696	3.47%
KINDER MORGAN INC DEL	496,708	2.79%
MASTERCARD INC	434,555	2.44%
TORCHMARK CORP	392,788	2.21%
RESTAURANT BRANDS INTL INC	351,030	1.97%
GENERAL ELECTRIC CO	333,233	1.87%
WABCO HLDGS INC	296,420	1.66%
TWENTY FIRST CENTY FOX INC	242,148	1.36%
SANOFI	163,461	0.92%
VERISK ANALYTICS INC	126,763	0.71%
MEDIA GEN INC NEW	59,672	0.34%
GRAHAM HLDGS CO	52,663	0.30%
JOHNSON & JOHNSON	39,677	0.22%
NOW INC	33,116	0.19%
PROCTER & GAMBLE CO	26,705	0.15%
MONDELEZ INTL INC	26,305	0.15%
UNITED PARCEL SERVICE INC	6,399	0.04%
LEE ENTERPRISES INC	170	0.00%
CHARTER COMMUNICATIONS INC D	0	0.00%
Total Sum	17,808,288

Anyway, the concentration in DVA, CHTR and AAPL etc. is very interesting. I am still not a big fan of AAPL, by the way.  But this is a long term thing, not a short term thing.  I know AAPL is evolving from a hardware, gadget company to a services company, but I am still not convinced this market cap can be maintained.

Plus, I saw a video about AAPL recently and the thing that struck me was how old all the senior managers are.  Now, age discrimination is not cool at all, and I love how companies are hiring older people; we need to keep older folks working, and many do want to work.  I love that sort of thing. Not to mention Buffett/Munger.  

But when you have a company in a quickly evolving industry, especially in tech, my impression is that youth is pretty important.  The AAPL senior management seems older than the IBM senior management back in the 80's and 90's when they were sort of stuck.  Those aren't the kind of guys that are going to be the leaders in innovation. 

Anyway, that's just my impression.  I felt like, holy cow, no wonder why they make some mind-boggling and strange decisions; they are a generation apart from a lot of their users. I think this will be an issue at some point. 

But then again, what do I know. I am not a tech guy, really. 

Moving on... 

SQ Advisors

Let's see what Lou Simpson has been up to.  He obviously still likes his main holdings, but look!  There's a new name!  Allison Transmission Holdings (ALSN).  This is an old Carlyle name, and ValueAct has a position. Carlyle is completely out, I think. 

ALSN seems like a good post idea here too; I may do that after taking a closer look.  Revenues haven't grown much, but the story is in the free cash flows from increasing margins.  They are generating tons of cash and are repurchasing shares etc.  A formula that we like.  This leads to another digression.  

Name	dollar amt	%port	#shares	change	%chg
BROOKFIELD ASSET MGMT INC	395,284	16.73%	11,961,690	-979,557	-8%
BERKSHIRE HATHAWAY INC DEL	356,730	15.10%	2,432,332	-222,699	-8%
AMETEK INC NEW	344,723	14.59%	7,456,694	-484,585	-6%
SCHWAB CHARLES CORP NEW	292,606	12.39%	11,560,900	-719,054	-6%
WELLS FARGO & CO NEW	275,483	11.66%	5,820,464	-381,628	-6%
LIBERTY GLOBAL PLC	249,859	10.58%	8,685,850	-505,729	-6%
ALLISON TRANSMISSION HLDGS I	129,536	5.48%	4,588,604	4,588,604	new
WABCO HLDGS INC	128,135	5.42%	1,399,310	-102,928	-7%
CROWN HOLDINGS INC	74,230	3.14%	1,464,961	-1,496,522	-51%
US BANCORP DEL	62,431	2.64%	1,548,005	-413,603	-21%
VALEANT PHARMACEUTICALS INTL	48,868	2.07%	2,427,903	-163,496	-6%
BROOKFIELD BUSINESS PARTNERS	4,632	0.20%	243,059	243,059	new
Total Sum	2,362,517

Share Repurchases

There was an article the other day in the New York Times about how bad share repurchases are. I was scratching my head throughout the whole article because we sort of like share repurchases. This is a typical problem with the press.  Something is either good or bad. Corporations are good or bad. All banks are good or bad.  Moslems are good or bad. Cops are good or bad. 

Anyway, I don't want to spend much time getting too much into this, but I think most of us here agree that there are good share repurchases and bad ones.  If you buy shares under intrinsic value with excess cash flow, it's probably good.  If you overpay with debt-funded cash, then it might be bad.  Even still, it depends. 

The examples sited in the article were typical errors in thinking too.  Oftentimes, companies repurchase shares because there is no better alternative.  For example, companies that have very little growth potential will start to repurchase shares more. So you can mistake cause and effect. Someone may argue that they aren't growing because they are using their capital to repurchase shares. Managements will tell you that they are repurchasing shares because the growth opportunities are not that exciting. 

We can bash companies for repurchasing shares, but let's not forget that there was popular word in the old days called di-worsification.  I think that was a Peter Lynch word.  What about M&A? People keep reminding us that M&A's usually end badly. What about excess capacity? Building more factories with not much demand growth won't help anybody. As for retailers, do we really need more stores?

Share repurchases recycle capital back into the economy. It is not automatically good or bad. Look at Japan and their low returns on capital; largely because they don't want to return capital to shareholders. They would rather hoard the cash, make stupid acquisitions overseas, speculate, buy expensive real estate, diworsify into an industry they have no knowledge of, build unnecessary facilities for unnecessary employees etc...  

So maybe unbelievable to some, there are things far worse than share repurchases. 

Anyway, I am preaching to the choir here, so let's move on... 

Alleghany

This is a company many of us follow and like.  The equity portfolio manager, though, is relatively new and doesn't have much to do with Y's long term performance so there may not be much interest in picking apart this portfolio. 

But we are curious so we will take a look.  Who knows where the next great idea comes from? Anyway, it is kind of interesting to look at this as the characteristic of the portfolio seems to have changed from before. 

Notice GOOG at the top with an 11% position.  This is not what you would really imagine as a Y stock. But I like GOOG so it's fine with me. Not that I would second guess anyone. It is a relatively concentrated portfolio and I usually consider that a good thing. 

Name	dollar amt	%port	#shares	change	%chg
ALPHABET INC	288,446	11.06%	410,000
CVS HEALTH CORP	205,841	7.89%	2,150,000
MICROSOFT CORP	153,510	5.89%	3,000,000
BLACKROCK INC	136,984	5.25%	400,000	175,000	78%
ROPER INDS INC NEW	136,429	5.23%	800,000	-25,000	-3%
CSX CORP	130,400	5.00%	5,000,000
ALLERGAN PLC	115,517	4.43%	500,000	500,000	new
VISA INC	111,255	4.27%	1,500,000	-1,500,000	-50%
JPMORGAN CHASE & CO	108,383	4.16%	1,744,178
BARRICK GOLD CORP	106,750	4.09%	5,000,000	5,000,000	new
PPG INDS INC	104,149	3.99%	1,000,000	-525,000	-34%
WALT DISNEY CO	102,711	3.94%	1,050,000
DENTSPLY INTL INC NEW	99,264	3.81%	1,600,000
EXXON MOBIL CORP	93,740	3.60%	1,000,000	700,000	233%
VERIZON COMMUNICATIONS INC	92,417	3.54%	1,655,000	-375,000	-18%
DISNEY WALT CO	83,148	3.19%	850,000
EOG RES INC	56,995	2.19%	683,406	-316,594	-32%
AIR PRODS & CHEMS INC	54,685	2.10%	385,000
COMCAST CORP NEW	51,817	1.99%	795,000	795,000	new
OLD REP INTL CORP	48,225	1.85%	2,500,000	-331,467	-12%
ARAMARK	46,628	1.79%	1,395,000
BERKSHIRE HATHAWAY INC DEL	41,986	1.61%	290,000
HOME DEPOT INC	32,561	1.25%	255,000
DEVON ENERGY CORP NEW	31,890	1.22%	880,000
NEWELL BRANDS INC	30,985	1.19%	637,877	637,877	new
KIMBERLY CLARK CORP	27,493	1.05%	200,000
PEPSICO INC	27,016	1.04%	255,000
HESS CORP	24,338	0.93%	405,000
L BRANDS INC	23,163	0.89%	345,000
OCCIDENTAL PETE CORP DEL	21,535	0.83%	285,000
POLARIS INDS INC	14,309	0.55%	175,000	175,000	new
ARES CAP CORP	2,674	0.10%	188,326	4,660	3%
ARES COML REAL ESTATE CORP	1,538	0.06%	125,115
CONSOLIDATED TOMOKA LD CO	578	0.02%	12,166	12,166	new
ARES DYNAMIC CR ALLOCATION F	131	0.01%	9,550	224	2%
SABRE CORP	0	0.00%	1,890,000	-1,890,000	-100%
SMUCKER J M CO	0	0.00%	205,000	-205,000	-100%
PERRIGO CO PLC	0	0.00%	750,000	-750,000	-100%
JARDEN CORP	0	0.00%	740,000	-740,000	-100%
CHURCH & DWIGHT INC	0	0.00%	365,000	-365,000	-100%
ISHARES TR	0	0.00%	181,000	-181,000	-100%
Total Sum	2,607,491

OK, this post is getting a little long so I will break it up. More to follow... 

AMETEK, Inc (AME)

Seriously, I am not stalking Lou Simpson at all (or at least any more than any other 'great' investor).  But this sort of jumped out at me.  It's sort of old news as the 13-F's came out in November.

Sometimes, some investors just buy or own stuff that just resonates with me, like that time Nehal Chopra of Ratan Capital was on CNBC talking about Post Holdings and Charter Communcations.  I owned (and still own) both of them.  Apparently, Chopra dumped POST when it tanked but bought back recently.  I rode it all the way down without selling anything and am nicely in-the-money on it now.

At the time, I had no idea who Chopra was.

This is sometimes why I post about certain investors.  If they do something that interests me, I will make a post about it.  And if it happens three times in a row, well, so be it.  Surely, other investors have made more interesting buys recently.  This is just what jumps out at me.  By the way, I don't own BAM, SCHW or AME.

Anyway, AMETEK (AME) has been mentioned here in the past (by readers) as an outsider-CEO-type company; growing through acquisitions etc.  Maybe you can call it a DHR-like company.  I guess "outsider-CEO-like company" might not sound so great now after VRX, but whatever.

And by the way, I know it's been a while since I posted.  I never make a post and then say, OK, I'm going to take a break for a month or two from blogging.  It's just that time passes and then it's like, wow, I haven't posted in more than a month!  Well, all sorts of things happen, some travelling, obsession with other things etc.  But my main thing is still investing; it's just that sometimes time flies without me having made a post even when some ideas pop up (and I never bother to make the post for one reason or another).

Simpson Buys Big
So check this out.  Simpson had no AME shares earlier this year (and never showed up in any 13-F for SQ Advisors recently).

Number of shares of AME in SQ Advisors' 13-F:

3/31/2015:   0
6/31/2015:  1.8 million
9/31/2015:  8.1 million

So that's kind of huge.   The 13-F as of September-end showed $3.0 billion in U.S. stocks, and more than 14% of the portfolio in AME (this excludes cash and other assets that are not U.S. listed stocks).

Lou Simpson Portfolio

My last couple of posts related to Simpson were about BAM and SCHW, and AME is even bigger than those.  It's also interesting that Simpson added to VRX in September, but this was before the real crash in the stock.  I wonder what he did after that. It is interesting how Munger can really despise this company and Simpson can like it enough to make it such a large holding (he has owned it since (at least) 2011 and actually owns more shares now than in 2011; 2 million shares as of September 2015 versus 1.2 million back in 2011).


AME
AME has been run by Frank Hermance (now aged 66 or so) since 1999.  He became President and CEO in September 1999 and Chairman and CEO in January 2001.   AME aims to double the size and profitability of the company every five years.  1/2 to 2/3 of their growth is to come from acquisitions.

From their 10-K, this is what they do:

Products and Services     AMETEK’s products are marketed and sold worldwide through two operating groups: Electronic Instruments (“EIG”) and Electromechanical (“EMG”). Electronic Instruments is a leader in the design and manufacture of advanced instruments for the process, aerospace, power and industrial markets. Electromechanical is a differentiated supplier of electrical interconnects, precision motion control solutions, specialty metals, thermal management systems, and floor care and specialty motors. Its end markets include aerospace and defense, medical, factory automation, mass transit, petrochemical and other industrial markets.

Competitive Strengths 

Management believes AMETEK has significant competitive advantages that help strengthen and sustain its market positions. Those advantages include: 

Significant Market Share.    AMETEK maintains significant market shares in a number of targeted niche markets through its ability to produce and deliver high-quality products at competitive prices. EIG has significant market positions in niche segments of the process, aerospace, power and industrial instrument markets. EMG holds significant positions in niche segments of the aerospace and defense, precision motion control, factory automation, robotics, medical and mass transit markets. 

Technological and Development Capabilities.    AMETEK believes it has certain technological advantages over its competitors that allow it to maintain its leading market positions. Historically, it has demonstrated an ability to develop innovative new products that anticipate customer needs and to bring them to market successfully. It has consistently added to its investment in research, development and engineering and improved its new product development efforts with the adoption of Design for Six Sigma and Value Analysis/Value Engineering methodologies. These have improved the pace and quality of product innovation and resulted in the introduction of a steady stream of new products across all of AMETEK’s lines of business. 

Efficient and Low-Cost Manufacturing Operations.    Through its Operational Excellence initiatives, AMETEK has established a lean manufacturing platform for its businesses. In its effort to achieve best-cost manufacturing, AMETEK has relocated manufacturing and expanded plants in Brazil, China, the Czech Republic, Malaysia, Mexico, and Serbia. These plants offer proximity to customers and provide opportunities for increasing international sales. Acquisitions also have allowed AMETEK to reduce costs and achieve operating synergies by consolidating operations, product lines and distribution channels, benefitting both of AMETEK’s operating groups. 

Experienced Management Team.    Another component of AMETEK’s success is the strength of its management team and that team’s commitment to improving Company performance. AMETEK senior management has extensive industry experience and an average of approximately 23 years of AMETEK service. The management team is focused on achieving results, building stockholder value and continually growing AMETEK. Individual performance is tied to financial results through Company-established stock ownership guidelines and equity incentive programs.

Business Strategy 

AMETEK is committed to achieving earnings growth through the successful implementation of a Corporate Growth Plan. The goal of that plan is double-digit annual percentage growth in earnings per share over the business cycle and a superior return on total capital. In addition, other financial initiatives have or may be undertaken, including public and private debt or equity issuance, bank debt refinancing, local financing in certain foreign countries and share repurchases. 

AMETEK’s Corporate Growth Plan consists of four key strategies: 

Operational Excellence.    Operational Excellence is AMETEK’s cornerstone strategy for improving profit margins and strengthening its competitive position across its businesses. Operational Excellence focuses on cost reductions, improvements in operating efficiencies and sustainable practices. It emphasizes team building and a participative management culture. AMETEK’s Operational Excellence strategies include lean manufacturing, global sourcing, Design for Six Sigma and Value Engineering/Value Analysis. Each plays an important role in improving efficiency, enhancing the pace and quality of innovation and cost reduction. Operational Excellence initiatives have yielded lower operating and administrative costs, shortened manufacturing cycle times, higher cash flow from operations and increased customer satisfaction. It also has played a key role in achieving synergies from newly acquired companies. 

Strategic Acquisitions.    Acquisitions are a key to achieving the goals of AMETEK’s Corporate Growth Plan. Since the beginning of 2010 through December 31, 2014, AMETEK has completed 26 acquisitions with annualized sales totaling approximately $1.4 billion, including five acquisitions in 2014 (see “Recent Acquisitions”). AMETEK targets companies that offer the right strategic, technical and cultural fit. It seeks to acquire businesses in adjacent markets with complementary products and technologies. It also looks for businesses that provide attractive growth opportunities, often in new and emerging markets. Through these and prior acquisitions, AMETEK’s management team has developed considerable skill in identifying, acquiring and integrating new businesses. As it has executed its acquisition strategy, AMETEK’s mix of businesses has shifted toward those that are more highly differentiated and, therefore, offer better opportunities for growth and profitability. 

Global & Market Expansion.    AMETEK has experienced dramatic growth outside the United States, reflecting an expanding international customer base and the attractive growth potential of its businesses in overseas markets. Its largest presence outside the United States is in Europe, where it has operations in the United Kingdom, Germany, France, Denmark, Italy, the Czech Republic, Serbia, Romania, Austria, Switzerland and the Netherlands. While Europe remains its largest overseas market, AMETEK has pursued growth opportunities worldwide, especially in key emerging markets. It has grown sales in Latin America and Asia by building, acquiring and expanding manufacturing facilities in Reynosa, Mexico; Sao Paulo, Brazil; Shanghai, China; and Penang, Malaysia. AMETEK also has expanded its sales and service capabilities in China and enhanced its sales presence and engineering capabilities in India. Elsewhere in Asia and in the Middle East, it has expanded sales, service and technical support. Recently acquired businesses have further added to AMETEK’s international presence. In recent years, AMETEK has acquired businesses with plants in Germany, Switzerland, the United Kingdom, Serbia and China as well as acquired domestically located businesses that derive a substantial portion of their revenues from global markets. 

New Products.    New products are essential to AMETEK’s long-term growth. As a result, AMETEK has maintained a consistent investment in new product development and engineering. In 2014, AMETEK added to its highly differentiated product portfolio with a range of new products across each of its businesses. 

And from the annual report, a snapshot:

It looks pretty impressive. Nice growth, and new highs after the 2008/2009 recession pretty quickly.  I dug up some figures going back to 1999 when Hermance became CEO to see how he has done, and it is pretty impressive:

Financial Summary of AME since 1999

Net sales grew 10%/year since 1999 while operating income grew around 15%/year, and EPS around 16%/year.

As with DHR, free cash flow has been higher than net income throughout the period by around 1.2x.

The interesting thing about AME is that these figures are not "adjusted" or anything like that.  Unlike, say, VLX, AME's EPS is plain EPS.

As of the third quarter, guidance for the full year 2015 was $2.55/share, up 5% over 2014.  With the stock at around $54/share, it's trading at a P/E of around 21x.

Conclusion
AME does seem to be facing some macro headwinds.  Oil and gas hasn't been too much of an issue as they don't have that much exposure to upstream, but slowing growth in Asia and emerging markets are holding back their growth this year and probably into next year.  So there is some risk there.

The stock is certainly not for cheapskates at 21x P/E, but they do have good free cash flow conversion and growth potential.  Their operating margins are higher than say, DHR or CFX too (with similar business models).   AME isn't leveraged at all, either, with long term debt of $1.6 billion against 2014 EBITDA of $1 billion.  With the junk bond market tanking and rates going up, this may be a good thing.

There are plenty of 20+ P/E stocks with very little growth prospects (and the whole market at close to 22x P/E), maybe this is not a bad idea.  Historically, AME has traded at around 20x P/E.

Brookfield Asset Management (BAM)

This name has been mentioned on this blog a few times in the comments section, but I never wrote about it.  It is well known in the value investing community and I said I'll make a post about it in the near future so here it is.

First of all, BAM is sort of an outsider/owner-proprietor business as it has been run for a long time by a single CEO, and the great track record is attributed to him.

Story Fits Too Much
The only thing that I am not so excited about in recent years is that the story sort of fits the environment a little but too much; pension funds and others need to increase returns to be able to make obligations, with interest rates low and stock market scary people need alternative investments.  With the perception of higher risk (or high cost, low return) of hedge funds and private equity funds, fear of future inflation due to global perpetual pump-priming (global PPP?), hard or real assets and real asset managers look really, really interesting.

Oftentimes, when everything is just too perfect, the investment doesn't pan out.  So that's what I've sort of been worried about.  Plus, honestly, I've never really been a big fan of commercial real estate.  There have been some great wealth created in real estate for sure, and it's a solid investment if you have good people investing.  But it's just never been something that excited me.  Don't tell Ackman I said that, though...

Lou Simpson's Concentrated Bet
What's really interesting is that Lou Simpson bumped up his bet on BAM this year.  Lou Simpson probably needs no introduction here, but just in case, he's a portfolio manager that managed GEICO's investments for many years with great results (I think beating Buffett).  He now runs SQ Advisors, after retiring from GEICO.

Just as a reminder, here is Simpson's investment performance at GEICO from BRK's 2004 annual report:

And then when he retired at the end of 2010, this is what Buffett wrote in the annual report:

Here is the history of Simpson's BAM holdings in the past year:

                    shares owned
6/30/2014:   3.8 million
9/30/2014:   4.0 million
12/31/2014: 4.5 million
3/31/2015:   6.8 million

This looks like the effect of a 3/2 split, but that didn't happen until May, so Simpson really bumped up his investment in BAM.

BAM now accounts for a whopping 12.5% of Simpson's portfolio, second only to his Valeant (VRX) position.  BAM is also bigger than his positions in BRK and WFC each of which constitute 11.5% of his portfolio. (It is interesting how Munger absolutely deplores VRX (he said it's worse than ITT in the 60's) while it's Simpson's top holding. This is why when people disagree with me, I don't care too much.  Even the best and the brightest don't agree on things.  Who am I to expect people to agree with me?!)

Anyway, this might have gotten some of your attention.   This also makes this post timely.

And by the way, this is Simpson's current portfolio (as of March 2015):

NAME OF ISSUER	TITLE OF CLASS	(x$1000)	PRN AMT	PRN
BERKSHIRE HATHAWAY INC DEL	CL A	4,568	21	SH
BERKSHIRE HATHAWAY INC DEL	CL B NEW	333,927	2,313,799	SH
BROOKFIELD ASSET MGMT INC	CL A LTD VT SH	364,970	6,810,878	SH
CROWN HOLDINGS INC	COM	226,804	4,198,521	SH
LIBERTY GLOBAL PLC	SHS CL C	246,015	4,939,071	SH
ORACLE CORP	COM	91,216	2,113,921	SH
PRECISION CASTPARTS CORP	COM	283,949	1,352,140	SH
SCHWAB CHARLES CORP NEW	COM	247,566	8,132,923	SH
UNITED PARCEL SERVICE INC	CL B	154,544	1,594,226	SH
US BANCORP DEL	COM NEW	249,124	5,704,686	SH
VALEANT PHARMACEUTICALS INTL	COM	376,646	1,898,540	SH
WELLS FARGO & CO NEW	COM	334,057	6,140,747	SH

Back to BAM
Here is the long term performance for BAM from their 2014 annual report:

Pretty good, I think.

Presentation
There was an investor day back in September, 2014, so let's take a look at some slides from that presentation.  (Check out their website for their annual reports, presentations etc: BAM Investor relations)

There was a 3/2 split in May of this year, so the above share price targets is actually $100 - 130, which corresponds to 12-15% annualized growth from the current price of around $36/share.

They have really diversified on many fronts; geographically, investment vehicles, asset classes etc.

And the fact that they are in so many areas serves as a big advantage for them:

This is a section from their first quarter 2015 report that talks about their culture and why they think they can continue to do well going forward.  By the way, critics complain about the lack of disclosure at BAM, but I find their reports to be very informative.  How many companies write their quarterly reports almost like annual reports?  (in fact, BAM's quarterly reports are better and more thoroughly written and more informative than most annual reports!):

Culture as a Competitive Advantage 

We are often asked whether Brookfield can continue to increase the amount of capital we have invested in global opportunities, on a profitable basis. The short answer is that we believe we can. 

While acknowledging the normal challenges, we believe we have three distinct competitive advantages which will help us accomplish our goals:

• Team Approach – The first advantage is that over the years, we have invested significant capital and human resources to build out the backbone and support structure of our operations, creating a first-in-class global company. Operating decisions are a culmination of the views of approximately 40 members of the management partnership, our 18 senior managing partners, our 700 investment executives and our more than 28,000 employees. We try to mix entrepreneurship, institutional stewardship, best-in-class professionalism, global scale and localized expertise; all with a focus on generating long-term capital appreciation. Our team approach to our business, the pursuit of excellence and commitment to our colleagues and investment partners drives this success.  

• Our Global Reach – Brookfield’s second advantage is the scale and global reach of our operations, enabling us to invest in and manage assets and opportunities across many investment products and jurisdictions, efficiently and effectively. The flexibility to opportunistically invest capital in this manner is rarely possible with smaller firms. We have built a global company operating today in the major cities of the world including London, New York, Sydney, São Paulo, Toronto, Shanghai, Dubai and Mumbai and many other locations. We are diversified: culturally, financially and geographically. As an investor in our company you acquire exposure to global economic and business diversification which few other investments offer.

• A Distinct Culture – The third advantage and possibly our most important is our distinct corporate culture. We have written extensively over the years on our first two advantages, but seldom have we attempted to explain “how” we operate and “why” we believe our culture provides us with an important competitive advantage. 

While admittedly it is difficult to define culture precisely (the Oxford Dictionary defines it as “the attitudes and behaviour characteristic of a particular group”), ours is based on the following key principles. 

• Principles of Business – Our core fundamental business principles are set out in our annual report and were formed by our early founders, and refined over the years. These principles include: building our business and all our relationships based on integrity, value investing in how we allocate and invest capital, fair-sharing in our relationships and measuring success based on total return on capital over the long term. We are required to report quarterly, but regardless of short-term reported results, our investment focus is always on creating long-term sustainable appreciation on invested capital. 

• Personal Financial Commitment – We promote long-term ownership stability and orderly management succession and encourage our senior executives to devote most of their financial resources to investing in Brookfield. As a result, collectively our management partnership owns approximately 20% of Brookfield, which is consistent with our efforts to align our interests with investors and clients throughout the organization. 

• Operating as a Partnership – We operate internally as a “true partnership” with long-term investment horizons. Our management partners are highly specialized, but all recognize that by working collaboratively together as a team, we can achieve far more than if we were structured on a more traditional basis. 

Our global platform enables us to finance and invest in a wide variety of opportunities, and few asset management firms offer as diverse a platform of specialized investment products. As we look forward to future decades, we believe that we are well positioned to build on our successes.  

Asset Management
One of the big drivers in the value of BAM is their asset management business.  They have high quality assets on the balance sheet, and at the same time they raise more funds from outside investors and earn management / incentive fees and carried interest and this is really growing.  This is the key to the BAM investment.

Importantly, they have performed very well so far:

One chart in the presentation is not so exciting.  They talk about the improving environment and then show this chart, but this is not so exciting for people who want to invest in a private equity manager; valuations are high now (so forward returns will be lower).  But then again, BAM is not doing conventional LBO's.

Their AUM continues to grow:

...and a big factor in this investment:

At the 2013 investor day, they said they plan to grow fee bearing assets at a 10%/year rate between 2013-2018.  Fee-related earnings was projected to grow +25%/year, target carried interest +18%/year and GP value (value of the asset management business) +20%/year from 2013-2018.

Their value of the asset management business (GP value) grew +28% last year.   With 983 million share outstanding at the end of March, 2015, this business is worth around $9.40/share.  This value is not reflected on the balance sheet, so adding this to the common equity per share of $19.70/share gets us to a full value of BAM of $29.10/share.   Common equity per share may be different from the LP value that BAM uses in presentations, but I used common equity per share as the LP value didn't seem to deduct some corporate things that I wasn't sure about.  Common equity per share, in that sense, might be a conservative look.

Big private equity firms seem to be trading these days at something closer to 10x earnings, so using that, BAM's GP value would be more like $6.00/share instead of $9.40/share.  Traditional asset managers used to typically trade at 20x P/E, but using 15x P/E would give a GP value of around $8.90/share.

These figures are pretax, though.  Many of the listed private equity funds do similar analysis with mostly pretax figures.  Since those are partnership units, taxes are paid by the LP unit-holders.  You can argue that the conventional asset managers who are valued at 15-20x earnings are valued on after-tax, net income, but the private equity folks will argue back that if those earnings are paid out to shareholders, shareholders would pay taxes on that too, so it is effectively pretax income if you compare it to owning LP units.   This is an interesting point.  If a corporation doesn't pay a lot of dividends, though, those reinvested earnings wouldn't be taxed at the personal shareholder level (until paid out later, or until capital gains are realized).

Anyway, BAM was trading between $34-38/share when Simpson added to his holdings in the first quarter.

BAM marks their assets to fair value in accordance with IFRS, and this value may differ from the publicly traded prices of the listed entities.  A reconciliation of this is shown in the quarterly report so you can make adjustments there.

Here it is:



Maybe BAM is worth a little bit more using market prices rather than IFRS fair value.

BAM expects to grow fee bearing capital 10%/year through 2019.

Using BAM's valuation, the asset management business could be worth more than $21/share by 2019.  At 10x earnings, it would be worth $13/share or so, and at 15x, $19.50/share.

If BAM does better than the base case, it can be worth a lot more. The above per share figures are before the split, so after the split, the above per share values would be $67, $77, $87, and $97, versus the current $36/share.

IFRS Fair Market Valuation
There was some criticism of BAM because they switched to fair market accounting saying that a lot of the gains in recent years have been due to BAM just marking their positions up.  Also, there was a time that some listed entities were trading below where it is marked on the balance sheet; critics said that these positions had to be marked down.

But this isn't really a big issue.  BAM, before going to fair market value, used to show what they thought everything was worth in their reports and many investors looked at them.  Yes, there is some management judgement involved here.  But traditional book value has problems too.

What's good about BAM is that they show you how they derive their fair market valuations.

Just to make sure they aren't marking things up with 2% cap rates, look at the assumptions used.  You can find this in their reports.

You really can't tell if these discount and cap rates are fair without really knowing the properties, but you can see that they aren't all that low given 2.5% bond yields.  These look pretty, 'normal'.

Real estate

Renewable Energy

Infrastructure

Interest Rates
Pretty much everyone expects higher interest rates to come.  This will (if accompanied by a stronger economy) help banks and other financials, but it might hurt BAM.

I see BAM (the funds) as sort of more fixed income substitute than a substitute for equity.  People who have large fixed income portfolios tend to get into real estate, infrastructure, utility stocks and things like that; low volatility, steady-income-stream type investments.  I don't think people go, "gee, the stock market looks dear, I'm buying commercial real estate!".  It's more like, "gee, interest rates are too low... let's get into an infrastructure fund as stocks and hedge funds are too volatile for us...".

So in that sense, BAM is prone to a double-whammy.  Rising interest rates may push up cap rates (reducing values), and may slow the flow of funds into their funds (or even outflows).

This is true for stocks, too, to a certain extent, but I have shown in an earlier post that even if interest rates went back up to 6%, the stock market now wouldn't be out of line valuation-wise going back 30+ years.

I don't have that sort of confidence in this asset class.  Well, BAM is pretty diversified so it's not in any single asset class, but it is sort of the 'real asset' type stuff.

But even for real assets, as you can see from the above discount and cap rates that BAM uses, there is probably a big cushion against rising interest rates.

At the 2013 investor day, they showed a chart of cap rates against interest rates and showed that there is a substantial cushion between the two, just like I showed in stocks.

Check out this chart:

From 2013 investor day presentation

But that doesn't mean there won't be some upward pressure on cap rates when rates really start rising in a serious way.

The Good Part
On the other hand, Bruce Flatt has proven himself to be a very competent manager, and Lou Simpson seems to be buying into this in a big way (Murray Stahl has been a fan for a while too).  BAM is on the right side of all sorts of trends, whether it be capital moving to alternatives (CALPERS notwithstanding!), potential (or inevitable) inflation coming down the line due to Global PPP (so real assets == good), potential growth in emerging markets, pent up need for infrastructure invesments etc...

And this management seems to adjust to changing circumstances, so if you own BAM, you don't have to worry about this being a shoot-and-forget, static investment.  Even if your position in BAM doesn't change, you can be sure that BAM management will adjust to the ever-changing world; they are not inflexible, unadjusting automatons (like so many large companies seem to be)...