Davy Bui's  Instablog

Unlike some of the managers I reviewed yesterday, Bruce Berkowitz and his cohorts at the Fairholme Capital have been buying. A scan of their Q3 2009 holdings spreadsheet suggests they favor healthcare companies and Berkshire Hathaway (BRK-A, BRK-B).

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A reader asks if there is a way to monitor non-equity positions for Seth Klarman's Baupost Group. The short answer is no, I know of no way to track non-equity holdings for any money manager unless they disclose that information voluntarily via a report or letter. As mentioned on this blog last week, Klarman doesn't think stocks are cheap and is holding roughly 30% cash, according to notes coming out of his annual meeting (premium subscribers got a more in-depth breakdown of Klarman's comments).

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View the spreadsheet containing all disclosures for my complete equity portfolio, including initial entry points, YTD returns, total returns, etc. through October 31, 2009.

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With Marc Faber making the rounds and predicting that the US$ will go to zero, this week's screen for foreign stocks seems particularly timely. Unfortunately, investors looking to make a move now must contend with a very weak dollar, which makes overseas stocks more expensive. The specific criteria I used are listed below:

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Investors imbue analysts with high levels of credibility at their own risk. Wall Street analysts communicate in their own cryptic language that may impersonate English but rarely means what it says. When is a buy a buy and a hold a sell? In his book, Full of Bull, former Wall Street analyst, Stephen McClellan, divulges many of the open secrets about analyst-speak that gets retail investors in trouble.

This analyst double-speak is the basis for this week's screen. Analysts are often stuck upgrading or downgrading a stock after the big move in the stock has already happened. Here was the criteria for the screen:

• Current Avg Broker Recommendation>= 4.0;
• Number of Brokers in Rating >= 2;
• Optionable = "YES";
• Current Dividend Yield >= 3%;
• Price-to-cash-flow <= 10;

View the full results of the screen in spreadsheet format here.

Analyst ratings of 4.0 or higher indicate a strong sell call. I added in the optionable requirement as well as a yield so that we are paid to wait in case the stock takes a long time to realize its true value.

Interestingly enough, this screen yields nine names, five of which are REITs. The high dividend requirement probably factored in finding so many REITs and it seems analysts are still very skeptical of that sector. The non-REIT names ranged from auto insurer, Mercury General Corporation (MCY), to Christopher & Banks Corp (CBK), the retailer.

Please note that prices listed are as of 10/10/2009, when I ran the screen. Of course, premium members get instant access to the screen as well as detailed valuation data not available on the public site. Get more information about the premium service here.

Disclosure: none

This was the theme behind my latest stock screen. After the massive run-up, investors need to be careful that laggards were not left behind for good reason. So I screened for cheap stocks relative to their expected growth rates while requiring high return on assets (ROA) and return on equity (ROE).  I added an additional requirement that the stock be within 50% of its 52-week lows to make sure I don't buy in at the top. The specific criteria are listed below:

• PEG < 1;
• ROA > 10%;
• ROE > 15%;
• Positive revenue growth in current and next fiscal year;
• Positive EPS growth in current and next fiscal year;
• Within 50% of 52-week low;

As of October 2nd, the screen turned up nine names. You can view the list here, complete with valuation figures and business summaries.

Again, it is important to recognize possible weaknesses in the screens we use. For instance, revenue can be fudged and accounting earnings are not necessarily accurate in representing a business’ true operating status. Unfortunately, the software did not allow screening for cash flow growth. Also, many of the criteria are dependent on analyst estimates, which are notoriously unreliable. Nevertheless, we use screens to generate possible leads for further research, not as a definitive guide for our investments, so any discrepancies should be caught as we dig into a given company.

The results were diverse, ranging from Allegiant Travel Company (ALGT) to home health services provider, Almost Family, Inc. (AFAM). As is the case with many of my screens, small caps dominated the list with only two companies, First Solar (FLSR) and Myriad Genetics (MYGN), topping $1B in market capitalization.  Two stocks, Arbitron (ARB) and the Ensign Group (ENSG), paid dividends to supplement their expected growth. High levels of insider ownership and short interest seemed to run through most of the names on this list. Caveat emptor.

See the full results of the cheap, quality growth screen.


Disclosures: No positions