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Beat Warren Buffett at His Own Game

By    |   Wednesday, 01 October 2008 03:43 PM

In Salt Lake City, far from Wall Street, Ian Cummings has amassed an enviable record of investment performance.

Cummings runs Leucadia National with his partner, Joseph Steinberg. It is a diversified holding company that has significant investments in manufacturing companies, medical product suppliers, real estate, and mining. It even owns a winery. The company has been called a mini-Berkshire, after Warren Buffet’s famously profitable Berkshire Hathaway.

There are a number of similarities between Cummings and Buffett. Both are value investors with multi-billion dollar holding companies who make investments with trusted partners from the heartland of America.

However, there are some stark differences.

Buffett focuses on industry-leading companies with great management, leadership Buffett leaves in place. Cummings usually buys companies that are out of favor or, as he says, “disheveled in one way or another that makes them inexpensive.”

After investing in a company, Cummings then actively tries to improve performance until the company is among the most efficient and productive in its industry.

Another difference between Cummings and Buffett is performance. The Oracle of Omaha has done very, very well. Buffett has delivered annualized returns of 21.1 percent to his shareholders, more than doubling the performance of the S&P 500.

Cummings, meanwhile, has achieved a 33.9 percent annualized return in his company, according to its latest annual report. That’s almost four times the performance of the S&P 500.

For this week’s screen, I looked for companies that could be on the shopping list of this Forbes 400 member. The criteria I used for screening are:

  • The current price should be less than half the book value of the company. This is a way to find value companies and should allow us to buy assets for less than they are worth.

  • The current price is closer to its 52-week low than to its 52-week high. This selection criterion should spot companies from out-of-favor sectors.

  • The company must have some earnings over the past 12 months, which will help us avoid companies headed towards bankruptcy.

  • Financials were excluded. Although they are out of favor now (a positive, from Cummings point of view), there is too much uncertainty to correctly price their assets and thus have any faith in the stated book values of these companies.

    Our Ian Cummings “mini-Berkshire” screen contains these seven stocks:

    B + H Ocean Carriers (BHO) is projected to earn more than $3 per share both this year and next year, yet traded at only 7.30 a share recently. Global shipping stocks have been punished by investors fearing an economic slowdown. At a recent price of 8.15, this stock sells for a third of its book value and is likely trading for less than the resale value of the ships in its fleet.

    CBS Corporation (CBS) owns the television network, book publisher Simon & Schuster, 140 radio stations, and other media outlets. CBS offers investors a dividend yield of 7 percent at the recent price of 14.21. The dividend is likely to be well covered by earnings for the next several years, making this an income-oriented investment with possible capital gains in the long-term.

    Korea Electric Power (KEP) is the largest Korean electric power company. Buffett has made an investment in Korea through steel-maker POSCO (PKX), indicating his faith in the country’s economy. At a recent price of 12.21, KEP has a P/E ratio of 13.

    Norsk Hydro (NHYDY) is a Norwegian aluminum company trading in the over-the-counter market. At a recent price of 6.67, NHYDY yielded 3.5 percent. This is an underfollowed company with light trading volume, meaning there is great potential risk in addition to great potential reward. Use a stop order to enter or exit any positions.

    Rex Stores (RSC) competes against Best Buy and Circuit City, selling consumer electronics and appliances in more than 100 stores. Hedge fund investor James Simons owns more than 3 percent of RSC though his Renaissance Technologies. Since 1989, Simons has averaged 35 percent annual returns in his Medallion Fund. RSC recently traded at 11.36.

    Sonic Automotive (SAH) sells cars through more than 150 dealerships. Its P/E ratio of five at the recent price of 8.43 is less than half the industry average. But its dividend yield of 4.9 percent is the second highest in its sector, and is unlikely to be cut despite declining earnings. Analysts are forecasting a 60 percent gain in this stock over the next year.

    Ticketmaster (TKTM) may see earnings decline by 50 percent or more after competition heated up in the ticket sales business. However, there is probably enough space in this sector for several large companies and TKTM is likely to survive. Using the most pessimistic earnings forecast, TKTM is trading with a forward P/E ratio of only 11 at its current price of 10.75.

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    In Salt Lake City, far from Wall Street, Ian Cummings has amassed an enviable record of investment performance. Cummings runs Leucadia National with his partner, Joseph Steinberg. It is a diversified holding company that has significant investments in manufacturing...
    Wednesday, 01 October 2008 03:43 PM
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