From Whitney Tilson's July 18th letter to the investors in his fund, T2 Partners LLC:
...with our fund down in line with the S&P 500 this month (about 2.5%), our feeling today on the attractiveness of our portfolio is similar to the one we had in March 2003. While we can’t promise the same surge in performance that occurred shortly thereafter, we would be shocked if our current portfolio doesn’t generate very satisfactory gains for all of us over the next 2-3 years...
Here is a quick update on our five oversized positions:
1) Berkshire Hathaway (BRKA): This juggernaut is firing on all cylinders yet the stock has been flat for more than two and a half years, so the gap between its intrinsic value and share price is the largest we’ve ever seen. See the slide presentation attached to last month’s letter for a more detailed presentation on this company.
2) McDonald’s (MCD): Like Berkshire, the company is firing on all cylinders (yesterday the company reported another spectacular quarter), yet it’s only trading at 14x this year’s estimates (net of its stake in Chipotle and excess depreciation). That’s very cheap, and we think there are some catalysts that will close the valuation gap.
3) Microsoft (MSFT): Its stock is within a dollar of its 52-week low, a price it first hit in 1998 and hasn’t hit since October 2002. It trades at less than 14x June 2007 estimates (net of cash), its lowest multiple ever. Revenue growth has accelerated in the past three quarters without the introduction of any major new products and we think the launch early next year of the first new operating system and upgrade to Office in many years will drive a huge increase in profits.
4) Wal-Mart (WMT): Like Microsoft, Wal-Mart’s stock is within a dollar of its 52-week low, a price it first hit in 1999 and hasn’t hit since late 2001. We’re of course aware of all negativity around the company and stock (it reminds us of McDonald’s in early 2003, when it was below $13), but as Bill Miller once said, “If it’s in the headlines, it’s in the stock.” It’s trading at less than 15x this year’s estimates, which is much too cheap for a company of this quality, with such robust growth prospects.
5) Wendy’s (WEN): At 26.6x this year’s estimates, Wendy’s doesn’t appear cheap, but that’s because it still owns 80% of Tim Hortons, which had a very successful IPO and which, deservedly, trades at a premium multiple. We own the stock because the core Wendy’s business – both franchising and owned restaurants – is extremely cheap, with the catalyst of having activist Nelson Peltz on the board. Peltz has a proven track record of unleashing extraordinary value at restaurant companies and we think he can do the same at Wendy’s – there’s lots of low-hanging fruit. Wendy’s has committed to spinning off the rest of Tim Hortons within three months, which we expect will reveal how cheap Wendy’s is.