Monday, April 25, 2011

Strategist Saut: Accumulate Stocks With Favorable Risk/Reward

Raymond James market strategist Jeff Saut is out with his latest weekly missive and it's quite clear he's bullish in the intermediate term. However, he does think a consolidation could still happen in the near-term.

In particular, Saut points to oil:

"Indeed, over the past few weeks oil has become almost as extended above its 200 day moving average as it was in July 2008, and we all know how that ended. Not that I am predicting a similar collapse in the price of Texas Tea, but rather that a consolidation/pullback period is likely, which could provide the backdrop for another 'leg up' in stocks (even the energy stocks)."

Overall, Saut thinks any pullback in the S&P 500 will be around the 1315-1320 area. Saut was buying stocks during the February/March decline and it seems he has a 'buy the dips' mentality.

So what stocks does he like? Saut prefers favorable risk/reward setups and offers up Hospira (HSP) as a name with a lowered risk profile. He also continues to like Williams Companies (WMB). We just noted that Dan Loeb's hedge fund Third Point LLC likes WMB as well. You can read an in-depth analysis of Williams Companies in the most recent issue of our newsletter.

In other energy names, the market strategist also likes EV Energy Partners (EVEP), LINN Energy (LINE), and Clayton Williams Energy (CWEI).

Embedded below is Jeff Saut's latest market commentary:


You can download a .pdf copy here.

For more insight from market strategists, head to our recent coverage of Don Coxe, who says the risk of a stagflationary bond bear has arrived.

Notes From Warren Buffett's Meeting With MBA Students

Today we're pleased to present a guest post courtesy of Professor David Kass of the Robert H. Smith School of Business at the University of Maryland. He runs a blog and recently posted up notes from his meeting with Warren Buffett:

"Do you believe that Africa will be the major driver of world growth in the years ahead?

WB: China will be a bigger driver of growth in the next 10-20 years. They are growing from a smaller base than that of the U.S. The U.S. and the rest of the world will be growing rapidly as well. The U.S. can’t grow as fast as China on a per capita basis. People are becoming more productive, so output per capita will increase. The question is how will this output get distributed.

In the past you have said your investment philosophy was 85% Graham and 15% Fisher. Has that changed?

WB: Started out looking for cigar butts with one puff left. There were lots available in the 1950’s. That approach does not work well with large amounts of money to invest. His philosophy has shifted slightly more toward Fisher. Berkshire currently has $150 billion in cash and investments. He met Charlie Munger in 1959 who argued for investing in wonderful businesses and sit with them as they get better over time. In 1951 WB picked up the Moody’s Manual for that year and found Western Insurance selling at ½ times earnings. A few years ago someone sent him a book entitled “Korean Stock Market”. He found 15 – 20 stocks selling for 2X earnings. It was like the old days. He has also made mistakes such as his 1968 purchase of Blue Chip Trading Stamps whose sales have dropped from $120 million at its peak to $18,000. Dexter Shoe was another bad business that he bought. You need to get on an 80 mph train that is speeding up.

Question about WB’s ability to evaluate management in place of companies he acquires.

WB: In terms of evaluating management, it is very hard to do for public companies. You can look at the record (like baseball). When we buy a business it is for keeps. When someone comes to me and wants to sell a business and I hand him $1 billion, I have to decide if he’s going to have the same energy when he’s working for us as he had when building the business. We do not have any contracts with our managers. In the Fall of 2006 I received a 1 ½ page letter from a guy in Israel. I had not heard of the guy or his company before. He offered to come meet with me. After we met, I handed him $4 billion (Iscar) and was counting on him to run the business the same as before we gave him the money. Want managers to be passionate about their business. You cannot put passion into someone. It’s worked out most of the time. Every now and then we make a mistake. We want people who are in love with their business, not the money. (People who would say: “I’d rather go to work than anything else in the world”.) Our batting average is good and has probably gotten better over time. We are looking for the guy who is still in love with his business and for one reason or another, needs to monetize it. With respect to stocks, we are not interested in meeting with management. We do not want to see their projections. We look into their products and “moats” around the business.

When you have made a mistake, what steps did you take to determine what went wrong?

WB: His circle of competence is growing over time. When investing in stocks, there are no called strikes. He waits for the pitch he wants. The mistakes he has made resulted from thinking he understood a business when he did not. He prefers to learn from other people’s mistakes (not from his own). On Dexter Shoe, he issued shares in Berkshire that are today worth $3 billion. Dexter Shoe went to zero. He is wrong from time to time, but overall has a good batting average. One should focus on the future. Don’t dwell on mistakes. Do not make a mistake with respect to the person you marry."

To read the rest of the notes from Buffett's meeting, head to Professor Kass' blog.

And for all things Warren Buffett, head to some of the resources we've posted up, including:

- Warren Buffett's recommended reading list
- Top 25 Buffett quotes
- Why Berkshire Hathaway bought Lubrizol: pricing power

Andreas Halvorsen's Viking Global Adds to Universal Health Services (UHS)

Andreas Halvorsen's Viking Global recently filed a 13G with the SEC regarding shares of Universal Health Services (UHS). Due to portfolio activity on March 30th, Viking Global has disclosed a 5.9% ownership stake in UHS with 5,343,992 shares.

This marks a 71% increase in their position size as the hedge fund firm owned 3,110,994 shares of Universal Health at the end of 2010. In other portfolio activity, we've also recently highlighted that Viking increased its H&R Block (HRB) stake as well.

Per Google Finance, Universal Health Services "owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers."