Morningstar Investment Conference – 3
In the second morning breakout session, I attended “Let’s Talk Bargains” with Bruce Berkowitz of Fairholme Capital Management and Susan Byrne of Westwood Holdings Group Ltd. This was the breakout session I was most looking forward to and I was able to get a seat near a power outlet, so this post should be a bit more in depth than so far (I’m actually writing as they talk).
They opened with a small discussion on energy companies and the effect of energy demand on the values of the companies. It seems that the speakers both believe that even if the US cuts back on demand – which seems to be happening at least slightly – it may not affect the the energy companies because world demand will likely pick up the slack. They also believe that even when they cut the earnings of the companies in half, they still seem to be undervalued.  However, Mr. Berkowitz believes that it may be a little bit of a bubble and compared it to the tech bubble, predicting a decline in the future.
Next, the discussion moved to the financials. Ms. Byrne said that once we are at the bottom, it is important to find the companies that have the ability to borrow short and lend long, but it is unlikely we will see the types of equity returns in the industry of the last 10-15 years. Mr. Berkowitz said it is similar to the saying “if you don’t know jewelry, know the jeweler. But now we’re finding out that the jeweler wasn’t so good either.” He said one of the problems was that the same person who was making the deal (speaking about derivatives) was the same person pricing the deal which may have led to an inaccurate price. We must be able to determine what the free cash flow or owner earnings are in order to value the company, and that is impossible in the current environment.
Mr. Berkowitz then spoke about Berkshire Hathaway, and mentioned that he believes the company’s superior performance is coming to an end. His reasons are that Warren Buffett is 77 and has had a great run, but now the company must make huge investments just to “move the needle a little bit.”
Ms. Byrne said that they look for companies that have something special going for them and that the role of a public company is three things: 1 – earn a higher return than the investor can on their own. 2 – be able to buy in shares with free cash flow or increase the dividend, giving the investor a higher return. 3 – you can only rely on cash, not on EBITDA and other things – as she put it “if you cash the dividend check and it clears, you’ve made some money.” Mr. Berkowitz agreed and said that “in the days of Graham and Dodd, the dividend was key.”
The topic drifted to the use of free cash flow. Mr. Berkowitz said that it is important to see the FCF yield, then what the company does with the cash – increase dividend, buy back shares, or grow the company – finally, they look at the strength of the balance sheet.
According to Mr. Berkowitz, “these are the times when the seeds of great performance are planted” out of some of the companies with their knees down.
That’s it for this post. Stay tuned for more.
