Oak Value Fund: Harley-Davidson's a Star, and We're Back in With AMBAC

In its most recent update for investors (.pdf), managers of The Oak Value Fund [OAKVX] comment on holdings:

We returned, in moderation, to the shares of AMBAC (ABK) during the quarter as the credit markets were reminded that risk does have a price. Our analysis of AMBAC’s exposure to the fallout in the subprime mortgage market suggests that, at current valuations, investors are more than adequately compensated for the losses the company is likely to experience. ... We note that AMBAC retains considerable reserve capital to protect its position as an AAA-rated insurer.

Finally, we came back to Harley-Davidson (HOG) during the quarter. Harley-Davidson has extraordinary returns on invested capital, reflecting the company’s' disciplined financial acumen, moderate capital requirements, and its strong brand. Additionally the company generates gross margins approaching 40 percent and a 24 percent operating margin (excluding its finance income), a testimony to the strength of the core business...

Moody’s (MCO) is an exceptional business. [The global provider of credit ratings] was a huge beneficiary of the credit boom, no doubt, as credit derivatives and structured finance products proliferated like mushrooms, earning Moody’s a fee for each new issuance. The benign credit environment we saw these last several years was a bonanza for the company. Those days are at least temporarily over, but we still see a bright future for the company, as it will continue to play a critical role in financial innovation, globalization, and disintermediation going forward.

We believe that Office Depot’s (ODP) multi-channel capability to serve business customers of all sizes confers upon the company a defensible competitive advantage. In short, we are particularly attracted to Office Depot’s position within the office products superstore industry. We believe the company has a good management team that focuses on the appropriate business metrics. In our opinion, office superstores are unique in their ability to address the needs of business customers of all sizes. ... Our view is that Office Depot (in the #2 market position) is poised for a very attractive opportunity for profitable growth.

The Constellation Brands (STZ) that we recently sold is a much different company than the company we originally purchased in the Fund portfolio more than five years ago. Though the company’s growth plan has benefited its shareholders during this period, we have found ourselves challenged by the evolved landscape in which it operates. ... In our opinion, the combination of increased competitive, operational and financial risks no longer justified this allocation of capital in the Fund portfolio.

IMS Health (RX) has successfully navigated an increasingly challenging environment in the years since the original Fund purchases... Though [IMS's] acquisitions that have fueled its business extension have provided complementary growth opportunities for the company, these businesses are much less profitable than its core operations. We recently sold the last remnants of this longterm holding as the valuation afforded the shares more appropriately reflected these evolved prospects.

We sold the Fund portfolio position in the shares of Praxair (PX) during the quarter as the gap closed between our estimation of intrinsic value and the company’s value in the market. ... In our opinion, the current valuation assigned by the market to the future prospects of the company assumes that this rate of growth will continue for the foreseeable future without interruption. Our margin of safety contracted, and we believe other investment opportunities are more attractive.

Comments

[jswede]

Harley Davidson is still only competitive b/c of huge tariffs imposed on imported bikes, right? This was the case some years ago - can't imagine it's changed - so I'm not sure what "Harley Davidson is a star" refers to, as the stock is ho-hum and management is, in effect, subsidized.

[Hack]

If I have to explain, you would not understand.
Ride Free!

[User 130099]

Huh? Oak Value fund is quite different from oakmark funds. URL should not point to Oakmark.

[User 130099]

Huh? Oak Value fund is quite different from oakmark funds. URL should not point to Oakmark.