5 New Big Buys By Super Investor Chuck Akre

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 |  Includes: AAPL, BAC, DHIL, HIG, LPLA
by: Vatalyst

Chuck Akre is the founder of Akre Capital Management LLC, which manages in excess of $2.6 billion. He has been in the securities business since 1968. He employs a classic value approach when selecting companies to invest in, with a focus on returns on equity, management quality and cash flow oriented valuation analysis. Akre has a very low portfolio turnover and he likes to invest in those companies with strong business models, which are demonstrating consistent earnings growth and a high return on equity. Akre has a preference for companies with a return on equity of above 15%, shareholder friendly management, and a price to free cash flow ratio below 15.

Akre recently stated that one of his goals is to invest in those companies that are most likely to compound the shareholder’s capital at an above average rate. While Akre has expressed some bullish sentiment regarding US equities, he has remained cautious only choosing to invest in those companies that meet the requirements of his value oriented stock picking methodology.

In this article I will analyze five recent investments by Akre in an attempt to uncover whether they are worthwhile investments with the potential for solid stock price growth.

Bank of America Corporation (NYSE:BAC)

Bank of America has a market cap of $52.10 billion and is trading at around $5. Its 52 week trading range is $5.13 to $15.31. It reported third quarter 2011 earnings of $17.06 billion, a decrease from second quarter earnings of $19.71 billion and the third quarter net income was $5.89 billion, a substantial increase from second quarter net income of -$9.13 billion. It has quarterly revenue growth of 17.6% and a return on equity of -0.78%. It pays a dividend with a yield of 0.80%.

One of Bank of America’s competitors is Citigroup Inc (NYSE:C), which has a market cap of $68.74 billion and is trading at around $23.50. It has a price to earnings ratio of 6.27, quarterly revenue growth of 18% and a return on equity of 6.66%. It pays a dividend with a yield of 0.2%. This data indicates Citigroup is outperforming Bank of America.

Akre holds 1,100,000 shares of Bank of America, purchasing the entire holding in the third quarter 2011. The average purchase price per share was $8.28. Based upon the last trading price of $5.14, he has made a return of -37.92%.

Bank of America’s cash position has marginally declined in the last quarter. Its balance sheet showed $683.59 billion in cash for the third quarter a decrease from $685.76 billion cash in the second quarter. Bank of America’s quarterly revenue growth of 17.6%, versus an industry average of 9.7%, and a return on equity of -0.78%, versus an industry average of 0%, indicates that it has better growth prospects than many of its competitors, but is not delivering the same return on shareholder equity.

The banking industry has been considerably unloved by US investors since the GFC, primarily due to many banks having a high exposure to bad debts and large investments in toxic debt instruments, which rapidly devalued with the bursting of the debt bubble. In addition, with the current tight credit markets and low consumer demand for investment and lending products it is difficult for many of these institutions to generate the profits they were once making.

This is particularly the case for Bank of America, because of its troubled mortgage division, which has racked up billions of dollars in legal bills, paid a large settlement to mortgage investors and is facing a nationwide investigation into its foreclosure practices. On face value it appears that any investment in Bank of America is risky and uncertain.

I have rated Bank of America as a buy in previous articles. However, the stock price is still in freefall recently hitting a new low of $5.13. At this time, while it appears to be a solid value investment opportunity, I would prefer to see a consistent history of earnings growth and greater clarity regarding its bad debt position prior to re-affirming this rating. At this time I prefer to take a wait and see approach and rate Bank of America as a hold.

Hartford Financial Services Group (NYSE:HIG)

Hartford has a market cap of $6.98 billion and is currently trading at around $16, with a price to earnings ratio of 6.78. Its 52 week trading range is $14.56 to $31.08. It reported third quarter 2011 earnings of $4.52 billion, a decrease from second quarter earnings of $5.39 billion. Third quarter net income was reported at -$10 million, a decrease from second quarter net income of $13 million. It has quarterly revenue growth of -31.5%, a return on equity of 4.44% and pays a dividend with a yield of 2.4%.

One of Hartford’s competitors is MetLife Inc (NYSE:MET), which has a market cap of $29.54 billion and is trading at around $28, with a price to earnings ratio of 5.23. It has quarterly revenue growth of 55.8% and a return on equity of 11%. Based on these indicators it is outperforming Hartford.

Akre holds 300,000 shares in Hartford, with the entire holding bought in third quarter 2011 at an average price per share of $20.44. Based on the last trading price of $15.74 he has made a return of -22.99%.

Hartford’s cash position has significantly improved in the last quarter. The balance sheet showed $2.59 billion in cash for the third quarter an increase from $1.90 billion in the second quarter. Hartford’s quarterly revenue growth of -31.5%, versus an industry average of 2.7%, and a return on equity of 4.44%, versus an industry average of 7.9%, indicates that it is underperforming many of its competitors.

The earnings outlook for the property and casualty insurance industry is negative due to the poor economy, which has led many consumers and businesses to focus on reducing costs through removing what they perceive to be non-necessary expenditure. This has led to a reduction in net premiums for property casualty insurers as many businesses reduce their insurance or cancel the cover and take up the risk themselves.

It is very difficult to determine whether Hartford is a worthwhile investment opportunity as it is generating substantial earnings yet is reporting a net loss, although this can be attributed to substantial provisioning for claims and legal expenses. The company has also substantially increased its balance sheet cash and when this is considered in conjunction with the fact that it is trading only just above its 52 week low, which is a buying opportunity, I believe the company represents a long term investment opportunity. Accordingly, I rate Hartford as a buy.

Apple Inc (NASDAQ:AAPL)

Apple has a market cap of $344.64 billion and it currently trades at around $371, with a price to earnings ratio of 13.4. Its 52 week trading range is $310.50 to $426.70. Third quarter 2011 earnings of $28.27 billion was reported, a decrease from second quarter earnings of $28.57 billion. Third quarter net income was $6.62 billion, a decrease from second quarter net income of $7.31 billion. It has quarterly revenue growth of 39%, and a return on equity of 41.67%.

One of Apple’s competitors is Google Inc (NASDAQ:GOOG), which has a market cap of $185.23 billion and currently trades at around $572, with a price to earnings ratio of 19.49. It has a quarterly revenue growth of 33.4% and a return on equity of 19.52%. Based on this data it is underperforming Apple, although both companies have solid performance indicators.

Akre holds 4,100 shares in Apple, with the entire holding purchased in third quarter 2011 at an average price per share of $381.33. Based on the last trading price of $369.72 he has made a return of -3.04%.

Apple’s cash position has significantly declined, with the third quarter balance sheet showing $9.82 billion in cash, a decrease from $12.09 billion in the second quarter. Apple’s quarterly revenue growth of 39%, versus an industry average of 24.3%, and a return on equity of 41.67%, versus an industry average of 31.7%, indicates that it is underperforming many of its peers.

The outlook for the personal computer industry is quite negative with demand expected to be subdued primarily due to the economic uncertainty, high unemployment, tighter credit markets and negative consumer sentiment. In addition, the sovereign debt crisis in Europe has further heightened concerns about the overall state of the global economy and this coupled with the current negative economic outlook, has seen a worldwide reduction in demand for personal computers.

However, despite the negative industry outlook Apple has a number of advantages over its competitors including a strong global franchise in personal computer, portable music player and cellular phone technology. When this is combined with a weak dollar, that should make U.S. exports more competitive, it bodes well for Apple to continue achieving growth.

Earlier this year for these reasons I rated Apple as a buy, with a cautionary note that its share price had already climbed to $405 at the time of the recommendation and it may be difficult for that price to be sustained in the short-term. Now Apple is trading at around $371, which is substantially less than the earlier price and I believe that this has created a solid buying opportunity. For these reasons I agree with Akre’s decision to invest in Apple and rate the company as a buy.

LPL Investment Holdings Inc (NASDAQ:LPLA)

LPL Investment has a market cap of $2.95 billion and is currently trading at around $27, with a price to earnings ratio of 218.96. Its 52 week trading range is $23.04 to $37.50. It reported third quarter 2011 earnings of $882.86 million, a decrease from second quarter earnings of $893.99 million. Third quarter net income was $36.43 million, a decrease from second quarter net income of $45.51 million. It has quarterly revenue growth of 16.2% and a return on equity of 1.29%.

One of LPL Investment’s competitors is Raymond James Financial (NYSE:RJF), which has a market cap of $3.33 billion and currently trades at around $26. It has quarterly revenue growth of 11.7% and a return on equity of 9.81%. Based on these indicators both companies are roughly performing on par.

Akre holds 289,425 shares in LPL Investment, purchasing 190,975 shares in the third quarter 2011, adding to an existing holding of 98,450. The average price per share is $30.67. Based on the last trading price of $27.30, he has made a return of -10.99%.

LPL Investment’s cash position has improved in the last quarter. The balance sheet showed $931.03 billion in cash for the third quarter an increase from $907.36 billion in the second quarter. The net tangible assets have increased to -$584.32 million in the third quarter 2011, from -$624.27 million in the second quarter. LPL Investment’s quarterly revenue growth of 16.2%, versus an industry average of 15.3%, and a return on equity of 1.29%, versus an industry average of 6%, indicates that it is approximately performing on par with many of its competitors.

The earnings outlook for the investment brokerage industry remains poor in the short term, due to the worsening economic climate, poor investment returns and high unemployment rate. These factors have increasingly contributed to growing negative consumer sentiment, which has seen a drop in demand for investment advisory and broking services.

Despite the negative industry outlook and LPL Investment’s decrease in net income, I agree with Akre’s decision to invest in the company on the basis that it has increased its cash position and is currently trading at the bottom end of its 52 week trading range, which has created a buying opportunity. Therefore, I rate LPL Investments as a buy.

Diamond Hill Investment Group (NASDAQ:DHIL)

Diamond Hill has a market cap of $209.72 million, and is currently trading at around $70, with a price to earnings ratio of 14.15. Its 52 week trading range is $60.32 to $85.68. It reported third quarter 2011 earnings of $15.37 million, a decrease from second quarter earnings of $16.83 million. Third quarter net income was $2.54 million, a substantial decrease from the second quarter net income of $3.73 million. It has quarterly revenue growth of 9.4% and a return on equity of 96.57%.

One of Diamond Hill Investment’s competitors is Calamos Asset Management Inc (NASDAQ:CLMS), which has a market cap of $217.96 million and is trading at around $11, with a price to earnings ratio of 10.23. It has quarterly revenue growth of 10.3% and a return on equity of 37.89%. Based on these performance indicators, both companies are roughly performing on par.

Akre holds 80,000 shares in Diamond Hill, purchasing 49,790 shares in the third quarter 2011, adding to an existing holding of 30,210 shares. The average purchase price per share is $77.20. Based on the last trading price of $70 he has made a return of -9.33%.

Diamond Hill’s cash position has improved in the last quarter. The balance sheet showed $22.92 million in cash for the third quarter 2011, an increase from $14.14 million in the second quarter. Diamond Hill’s quarterly revenue growth of 9.4%, versus an industry average of 22.7%, and a return on equity of 96.57%, versus an industry average of 10.3%, indicates that its earnings growth prospects are not as strong as its competitors, but management is generating a better return on shareholders’ equity.

The earnings outlook for the Asset Management industry is currently quite positive, as represented by Moody's revising their overall industry outlook from negative to stable. This occurred as asset managers have seen their earnings capability improve, as well as obtaining clarity on the terms of the regulatory reforms, which showed they are less exposed to reform than other sectors of the financial services industry. However, the current market volatility triggered by the European sovereign debt crisis and weak US economy is affecting portfolio valuations and creating negative investor sentiment. This is having some impact on the asset management value chain and affecting profitability.

Despite the positive industry outlook I do not believe that Diamond Hill is at this time a good investment opportunity, which is contrary to Akre’s investment decision. My view is primarily being driven by the recent substantial drop in both earnings and net income, coupled with less than outstanding performance indicators. Although, I do note the company has increased its cash holdings. In addition, the company is trading at the midpoint of its 52 week trading range, and I do not believe that it its current price it represents a good investment opportunity. On this I prefer to take a wait and see approach and rate the company as a hold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.