by Will Ashworth | April 11, 2012 8:40 am
Are you familiar with the “coffee-can portfolio”?
In short, it was a simple way to invest for the long term developed by Bob Kirby, the late chairman of the Capital Group. Investors would buy the stocks of excellent companies, putting the stock certificates of those companies in a coffee can, never to be touched again — eliminating transaction costs and taxes.
In other words, it was buy-and-hold taken to the extreme.
Well, Morningstar took that concept in June 2005 and created its own coffee-can portfolio of 10 stocks[1] chosen based on the discount to estimated fair value. As of April 5, 2012 the coffee-can portfolio was up 39% versus 33% for the SPDR S&P 500 (NYSE:SPY[2]). While it’s not a huge difference, it’s enough to demonstrate that buy-and-hold investing, when done properly, still is a good idea.
However, a few of the coffee-can stocks seem a little stale. Of the original 10 stocks, three seem questionable: Federated Investors (NYSE:FII[3]), Fifth Third Bancorp (NASDAQ:FITB[4]) and IAC/Interactive (NASDAQ:IACI[5]). I suggest replacing them with three new stocks, creating a modified version of Morningstar’s coffee-can portfolio. And from time to time, we’ll keep up on both the modified portfolio’s performance and the original, using April 9 as the start date.
Let the games begin.
Franklin Resources
Barron’s published a favorable article[6] March 31 extolling the virtues of Franklin Resources‘ (NYSE:BEN[7]) asset diversity. With a good mix of equity (40%), fixed income (44%) and hybrid investments (15%) comprising the $670 billion in assets under management, clients are given asset allocation flexibility very few managers can match.
This flexibility has enabled it to attract clients from outside the U.S. About one-third of the $670 billion is held elsewhere, providing its business with geographic diversification as well.
With one of the strongest global retail-distribution networks anywhere, Goldman Sachs analyst Marc Irizarry believes BEN deserves more of a premium. Most importantly, its funds have a long-term track record second to none, finishing first in Barron’s most recent ranking of fund families. Considered smart allocators of capital, it paid a special dividend of $2 per share last December. While exchange-traded funds present a potential threat, it’s as solid an asset manager as there is, and long-term investors will be rewarded.
Morningstar currently gives Franklin Resources a fair value estimate of $145 — a 16% premium to its April 9 share price of $124.81. Its fair value estimate for Federated Investors, on the other hand, is $19 — a 15% discount to its April 9 stock price of $22.42.
Berkshire Hathaway (NYSE:BRK.B[8], BRK.A[9]) owns 78 million shares (4.1% of the outstanding) in U.S. Bancorp (NYSE:USB[10]), the fifth-largest commercial bank in the U.S. It’s not Buffett’s biggest financial services investment — that distinction goes to Wells Fargo (NYSE:WFC[11]) — but it does make a list of 14 stocks that Berkshire Hathaway owns with market values greater than $1 billion. That says a lot about the quality of U.S. Bancorp, in my opinion.
Buffett first acquired 23.3 million shares of the Minneapolis bank in the fourth quarter of 2006, adding 44.3 million shares the very next year and then small amounts thereafter. The fact that its book value investment at the end of 2011 was $300 million more than the market value tells me Buffett believes its intrinsic value is much higher than the average purchase price of $30.77 a share.
Up until November, Liberty Media was comprised of three tracking stocks: Liberty Capital, Liberty Starz and Liberty Interactive. Liberty Capital and Liberty Starz were combined into Liberty Media (NASDAQ:LMCA[12]) and it, along with Liberty Interactive (NASDAQ:LINTA[13]), operate as two separate public companies, backed by their own assets. As a result, the tracking stocks no longer exist.
However, it seems Liberty founder John Malone couldn’t stay away from them, announcing in February that it would split Liberty Interactive into two tracking stocks; one for its interests in QVC and HSN Inc. (NASDAQ:HSNI[14]) and the other, Liberty Ventures, for its interests in Expedia (NASDAQ:EXPE[15]), Time Warner (NYSE:TWX[16]) and Time Warner Cable (NYSE:TWC[17]).
At first, you have to question the wisdom of doing this after making such a big deal about getting rid of tracking stocks in the first place. However, if you consider that QVC represents a significant portion of Liberty Interactive’s revenues and profits, the separation should help investors value both pieces of the puzzle. In the end, I think QVCs international expansion will continue to drive Liberty Interactive upward, with Liberty Ventures providing some extra juice.
It might be complicated, but it seems to work.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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