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Berkshire Hathaway Inc. Message Board

  • atlas_shrugged_jjl atlas_shrugged_jjl Dec 31, 2003 9:23 AM Flag

    Atlas' Official Fearless Five

    FTS KEP MHX BER -CHN

    FOOTSTAR (FTST.PK)-- Massive Management FUBAR Drives Stock Into the Ground; Real Company Underneath

    Footstar operates shoe departments in Kmart and Rite-Aid stores, and owns Footaction and what's left of Just For Feet, for a total of over 6,000 stores. They sell 14% of all the shoes sold in the US, and recently started selling Thom McAn shoes through Walmart. The stock is down from a high of around $60 to $3.62 and just got suspended on the NYSE because of major and continuing accounting snafus and the closing of ~600 Kmart stores. They are restating financials from 1997 to now, expected to reduce net income by a total of $31 - $38 million over that period. They've missed promised dates for the restated financials at least three times in the past year. The CEO was just fired. They are operating on a credit facility waiver due to the lack of audited financials. I don't believe this is Enron/Worldcom-style fraud, just massive incompetence.

    * Shares outstanding or optioned = 22,500,000
    (From 1997 - 2001 they repurchased 11,218,000 shares)
    * Market cap. = $81.5 million
    * No long term debt.
    * Short-term debt $270 million
    * No leases on operated shoe departments; stores & headquarters leased.
    * Mgmt's est. FY 2003 revenue: $1990-2020 million
    * Mgmt's est. FY 2003 operating LOSS: $0-5 million
    (losses due to expense of extra accounting)
    * 2002 free cash flow = $22.5 million
    * 2002 free cash flow yield = 27.6% @ current price



    KOREA ELECTRIC POWER (KEP)-- Cheap Utility Stock Provides Hedge Against Falling Dollar

    KEP has a monopoly on power generation and distribution in South Korea. The stock is low due to the plan to break the monopoly into separate geographical units and due to the tensions with North Korea. They're going to sell off the power-producing subsidiaries, and they recently withdrew a sale because the price was below book value, yet the entire company sells for 0.43 times book.

    * P/E approximately 5.8
    * Interest coverage ratio ~4.7x incl. unconsol. debt
    * Parent Interest cov. ratio ~2.6x for entire co.


    MERISTAR (MHX)-- Overleveraged Hotel REIT Burned by Terrorism & SARS

    This may finally be the year MHX recovers. When they do recover, dividends may approach the levels of 1998-2001, 2.00 per share average. This would give a dividend yield of 30.5% on today's price. Lately they've been doing some deleveraging so I don't expect dividends to get quite back to that level. Gad, I hate this stock, but I've held from after 9/11, when I bought it, up to $18.50 and down to $2.14 and back to $6.56, and I'll be danged if I'm going to sell it at a loss.


    WR BERKLEY (BER)-- High ROE, Low Leverage, Low P/E, Well Managed Insurance Company Anchors the Team

    * Return on Equity: 22.8%
    * Debt to Equity: 0.54
    * P/E: 9.3
    * Price per share: $34.32
    * Investments per share: $71

    Here's the key: BER is generating massive free cash flow through new float, $1.23 billion in the past year, a 43% cash on cash yield. Combined ratio just went down to 91.7% for the last 9 months. Massive float at a negative cost of capital... Where else have we heard that one??? Asbestos risk is capped at about 1% of loss reserves.


    SHORT THE CHINA FUND (CHN)-- A Bubble on a Bubble; Missed Shorting the Internet First Time Around?

    Here's your chance to short the Internet bubble a second time. This is a closed-end fund selling at a 45.7% premium to net asset value. Only 1 closed-end fund in the US has a higher premium. Inside the fund you'll find such solid value plays as Sohu.com (SOHU, 9% of the fund) a website with a market cap of $1.1 B; and Chinadotcom (CHINA, 3.3%), a company that apparently manufactures marketing doublespeak, loses money, and sells at 12 times revenues.

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    • Atlas, nice job...

    • atlas,

      You seem to have an interesting F5 selection. I really liked your breakdown too. We need more of that. What kind of process do you have to screen possible stocks? In other words, how did you come up with KEP and BER? Off the top of my head I don't remember seeing those in Valueline. I'm interested in how you located those values.

      Thanks,

      Todd

      • 1 Reply to toddfinances
      • My key tool is the stock screener at Smartmoney.com. It's part of the premium service, so you have to pay $6.95 a month, but it's really worth it. The difference between Smartmoney.com and other stock screeners is it can screen for price to free cash flow ratio, but use it in just about every conceivable way to look for value.

        To find KEP, I ranked all stocks with a market cap over $10 million and a trailing P/E of less than 8 from lowest to highest P/E. I then went through every single one, looking for a good story, anything other than a future of certain death and destruction. In the back of my head I was also favoring any stock denominated in a currency not pegged to the dollar. KEP comes up at #13 on this list, and the first company that I can understand and that doesn't need to be scraped up with a spatula. By the way, Smartmoney has KEP with a P/E of 2.4, which I don't think is correct. It doesn't really matter, though, because once I find an interesting stock I go to the SEC website and start reading their official filings. I then develop a spreadsheet, making corrections for things like cash, stock options, and warrants.

        To find BER, I screened for:

        1) market cap over $10 million (It's too much work going through all those piddly little companies where I can only buy a few hundred shares a day without the stock skyrocketing.)

        2) Return on equity over 20%

        3) Debt to equity less than 0.5

        4) Ranked by price to free cash flow ratio.

        BER comes up at #6 on this screen. At first I rejected it because I already have so much exposure to BRKB at 40% of my portfolio, but it's just so hard to find good companies at reasonable prices right now, so I studied it more than I would have otherwise.

        Needless to say, I didn't do all this work just for the FF contest. This is my full-time job, or at least as close as I get to working. I spend four to ten hours a day studying this stuff, but I may crank that down as it's getting frustrating. Everything that I turn up is already up 100% from March.

        But let's not get ahead of ourselves. I don't have THAT much faith that these picks will be instant winners like last year. Luckily this is just a speculation contest, as Russ pointed out. My real portfolio has lots of time.

    • Any chance you are buying BER at or near its cyclically peak earnings and it isn't as cheap as it looks?

      The company's long term ROE is not nearly as impressive as it has been the last few years when a lot of PC company's have reported better underwriting results.

      I don't follow the company, but unless I had an explanation for the improved results other than the cyclical nature of the PC business, I would be slightly suspect.

      I plan on taking a closer look. Thanks for the picks.

    • Footstar is an intriguing pick. I tend to believe they're going to follow K-Mart into the firey abyss, in which case their liquidation value is essentially nothing (who wants crappy shoes?). The real contest should be when they'll file their 2002 numbers. :)

    • Another tidbit about CHN:

      In the last 1000 trading days, it's showed a .95 correlation (R^2) with CGMRX, a purely real-estate fund.

      Bubblicious!

    • Great picks, atlas. The best I've seen!

      • 1 Reply to randy_foo
      • I have to admit that KEP looks interesting. And the short of the China Fund as well. I owned a small amount of that fund when it was trading at about a 18% discount earlier this year, and sold it when it was trading at about a 15% premium thinking I hit a homerun after about a 60% run. So I sold. Then it doubled from there.

        Oh well.

    • WHY ARE YOU POSTING THIS GARBAGE ON THIS MESSAGE BOARD? Do you believe that BRK stock holders are going to take the time to read this stuff? Hey if you think that by using this site to post your stock recommendations you definitely should be looking for another job.

      Intend to complain about this practice right after I send this message.

    • Excellent writeup! (And interesting picks!)

      Nicely done!

      -Novice

 
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