Leucadia Portfolio

Leucadia National is a very interesting company based out of Utah. This companies diversified operations include manufacturing, real estate development activities, medical product development, health care, winery operations, residual banking and lending activities, oil and gas contract drilling, gaming entertainment, copper mining in Spain, Australian iron mining, timber/lumber, and communication.

LUK financial documents lay out its acquisition strategy: :In identifying possible acquisitions, the Company tends to seek assets and companies that are out of favor or troubled and, as a result, are selling substantially below the values the Company believes to be present." For example, the company purchased and is rebuilding 'The Hard Rock Biloxi' after is was destroyed in Hurricane Katrina.

In recent years the stock is up big on international exposure, demand for commodities, and wise investments.
If you need proof of their long-term philosophy, this is from the '06 annual: "A 15-acre unentitled air rights parcel over the train tracks behind Union Station in Washington,D.C. Entitlement is just beginning. This is one for the grandkids." How many companies openly discuss investments that won't pay for decades?

It's current portfolio of public equity includes:

Capital Southwest Corp (CSWC)
This close-ended equity fund is actually a venture capital firm in disguise.
It heavily concentrates its investments and provides business service to these
companies. From the company site: "We provide patientcapital to exceptional
businesses with significant growth potential. As a public company, we have the
flexibility to hold investments indefinitely." The companies portfolio is
diverse and they have invested in more that 160 companies in the past 50 years.
New Buy.

Georesources Inc (GEOI)
This independent oil and gas driller/explorer produces approximately 1500
barrels a day. After an April merger,GEOI has operations in the Rocky Mountains,
the Gulf Coast, and Williston Bay.
New Buy.

International Assets Holding Co (IAAC)
IAAC operates in five segments: international equities market-making,
international debt capital markets,foreign exchange trading, commodities
trading and asset management.The company offers execution in the
following products:

• 8,000 unlisted ADRs and ordinary stocks in over 20 countries

• More than 100 currencies

• Over 500 fixed income instruments in over 30 countries

• Precious and base metals offering complete physical, hedging, and investment services
  

Olympic Steel (ZEUS)
This steel processor/distributer focuses on operations in the Mid West and
the East Coast. Olympic helps its customers better manage inventory,
supply chain and increases operation efficiency. These customers include
transportation and material handling equipment, automobiles,construction
and farm machinery, storage tanks, environmental and energy generation
equipment, food service and electrical equipment, as well as general
and plate fabricators, and steel service centers.

United Western Bancorp Inc (UWBK)
A Denver based bank holding company consisting of United Western Bank,
Sterling Trust,First Matrix Investments, and Matrix Financial Services.
New Buy.

Recent Sells: ACCL, ALU, FEIC, SMMX, VECO, WINN, IMN

The annual reports make for a great read. They are as honest and informative as any Berkshire report.

Sears: A Business Plan

An easy way to determine the future of a company is to listen to the chairman, CEO, and largest investor. So why is Sear surround with speculation of liquidations, real estate sales, brand sales, or laundry lists of public takeover candidates?

Facts from Eddie Lampert:

• The company is not a real estate play.
• The company will be run as a retailer
  
• The company will not be selling its most valuable brands
• The company is pursuing lower costs of capital and improving debt levels
• The company is focused long-term and is not competing with WalMart

Combine these facts and a business plan for a quality, higher-end retail outfit begins to emerge.

Step One) Identify the best markets for Sears/KMart store locations. If Sears hopes to capitalize on its strong brands it needs to focus on higher-end customers. This means selling real estate in low end markets and keeping the proceeds on balance.

Step Two) Continue to acquire quality brand names. This winter, SHLD began its purchase of Restoration Hardware - a high quality furniture and home product retailer. Instead of building a portfolio of businesses like Berkshire, Sears can buy its own durable competitive advantages by owning strong brands. Add Restoration to Kenmore, Craftsmen, Land's End, Martha Stewart, and DieHard brands. These high-end brands support the plan of appealing to wealthier customers and command higher margins.

Step Three) Improve the cost of capital. SHLD caught a set back after the most recent quarter when S&P lowered its credit rating from B to BB. To turn this ship around management has three main tasks, continue to erase debt, hold more cash on balance, and improve cash flows (this is the most difficult task for a retailer). Lampert still believes Sears deserves an investment grade on debt.

With more cash, lower cost of capital, and improved brands Sears can afford its final and most important step.

Step Four) Nation wide overhaul of stores. In an effort to create a high quality retailer, Sears needs to drop the KMart brand name and renovate its stores to reflect the quality shopping experience that Sears hopes to create. Coupled with some good publicity and well managed renovations, Sears can return to its nationwide presence and quality reputation.

Is this the definite plan for Sears? No. But I have more evidence to support this long-term turn around than Barron's real estate play or Stockpickr's "Next Berkshire" theories. Just ask the boss.

Real Real Estate - VNO, AFP

Vornado Realty - VNO

• Office Buildings - 116 Properties - 31.7 million sq. ft. All in NYC or DC.
• Retail Buildings - 158 - 19.3 million sq. ft. In 21 states, DC, Puerto Rico.
• Merchandise Marts - 9.2 million sq. ft. Found in Chicago area.
• 47.6% ownership of 104 cold storage warehouses.
• 32.9% ownership of Toys "R" Us.
• 32.8% ownership of ALX (REIT).
• Hotel Pennsylvanian in NYC.
• Public equities - MCD, SHLD, GMH
• Lender of various construction and real estate loans.

Properties around the Madison Square project should get a boost in rental rates after completion of project. NYC real estate has not experienced any decline in prices or demand. The Toys"R"Us position allows for land bank opportunity in the struggling toy stores. The $3.60 (3.87%) dividend offers stock stability. Cherry on top: $1.6 billion in cash, short-term investments, and receivables.

United Capital Corp. - AFP

With a market cap of $210 million, AFP offers a serious steal. The balance sheets hold $116 million in net current assets including $150 million in cash. In todays tight credit markets, this is a serious advantage over the competition. So for $94 million ($210-$116= $94) you can but into AFP's real estate holdings and small manufacturer of auto components. The real estate includes 12 department stores and strip malls, 3 hotels, 54 restaurant properties, 9 NYC day cares centers, and manufacturing facilities in NJ and Mexico. 95.6% of properties leased. If that wasn't enough, the company nibbles away at shares outstanding.

Pep Boys (PBY)

Pep Boys - PBY

Forbes noted PBY as a "Buyable Buyback" with 5% of stock being repurchased but thats not all Pep Boys has going for it.

• Insane insider buying.
• P/CF x6.5
• P/S x0.27
• P/BV x1.19
• Cash + Receivables = $52.6 million
• Dividend = 2.31%

The issue is the high debt (1.04 D/E) and a low interest coverage (1.0) as well as inconsistent profitability. The stock is cheap for a very good reason but why all the insider optimism and buybacks? What do they know? Watch the quarterly results for decreasing debt and more same store consistency as managment better manages inventory. If the balance sheet improves and income stabilizes, consider buying where the insiders do: $10-12.50.

ESL Confounds the Mind

Eddie Lampert's newest buys have been disclosed in the past seven days. For the year, all six of his positions have taken losses. Good thing he a five year tie-up for his hedge fund.

New Positions: HD, C

• Both have massive market caps
• Both are in terrible and still failing sectors
• Both have strong dividends but they are at risk
• ESL is nowhere near controlling stakes
  

SHLD

• Since peaking at $190; it has lower lows and lower highs.
• Established a 14% position in Restoration Hardware (RSTO)
  
• Buybacks continue

AZO, AN

• Both stocks are suffering from sector pressures (retail)
  
• Both continue buybacks
• Auto part providers can act as a recession resistant sector

Look for terrible news in the retail sector and buy AZO, AN, or SHLD. Wait and see what ESL is doing with its newer positions. They may have bit off more that they can chew.

Market Notes

SBUX - Starbucks

• Commodity prices squeeze margins
• Increased competition from MCD
• Stock price dropped all year. Now selling at Aug. 2005 levels
• Received several analyst downgrades
• Plans for first ever TV ad campaign revealed
• Fast Money warns of Value Trap
• What effect does a weak dollar have?
• Look for buying in the mid to late teens

KMX - CarMax

• This is Buffett's only new pick
• Is this a defensive pick? What is oil's effect?
• Markel has been a long-term holder
• Buffett buys at price close to $20.50
• Study released shows that individuals can beat market by copying Buffett

HD - Home Depot

• Eddie Lampert initiates 16.6 million share position
• These sectors (housing, retail) are in a tail spin
• 3% Yield $0.90 Rate
• Halting massive $22 billion buyback ($56 billion market cap)
• Compare that to Lampert's biggest success - SHLD $17.2 billion market cap (post-KMart)

ROK - Rockwell Automation (aerospace)

• Cleared to buyback $2 billion worth of stock
• Market cap - $10.2 billion
• ROE = 31.1; ROE above 15 for the past 5 years
• Profit margins increasing for the past 7 years
• What are the characteristics of an aerospace cycle?

The Year of Altria (MO)

If you had purchased Altria at the beginning of 2007, you could have experienced an interesting journey of value creation beginning with the spin-off of Kraft.

MO

• Spins-off KFT
• Announces split of Philip Morris Domestic and International
• Sells NYC headquarters for $400+ Million Profit
• Jan dividend - $0.65
  
• April dividend - $0.68
  
• July dividend - $0.69
  
• October dividend - $0.75
• DJIA Component
  
• Return: $74.00 - $66.70 = $7.30 Gain
  

KFT

• Sells Post brands - Ralcorp spun-off shares to be awarded soon
• Investors: Buffett, Peltz, Carlos Slim, Yale Endowment
• Plans to sell more slow-growth brands
  
• March Dividend - $0.25
  
• June Dividend - $0.25
  
• September Dividend - $0.27
• Return: $32.30 - $35.00 =$2.70 Loss
  

Portfolio Policy for the Enterprising Investor

In Benjamin Graham's tomb to value investing, Chapter 7 presents three strategies that can offer low risk and strong returns.

Strategy One: The Unpopular Large Company

The idea is simple; companies that are experiencing short term troubles tend to fall out of favor. Using the safety of large cap stocks, an investor can pick-up these temporarily troubled companies at a discount. Today this strategy can be observed in Dog of the Dow and Dog of the S&P portfolios. The S&P strategy can leave an investor concentrated in specific sectors. At the moment, these sectors include regional banks, and real estate/construction related businesses. The Dow Dogs can offer safer companies, larger yields, and a level of diversification. Here is the current portfolio:

Citi (C)- 5.07%
Pfizer (PFE)- 4.77%
Altria (MO)- 4.11%
Verizon (VZ)- 3.77%
AT&T (T)- 3.43%

Strategy Two: Buying Bargain Issues

To Graham, a true bargain was a stock selling at a +50% discount to it's value. This strategy was easier to employ in the post-Depression markets which Graham invested but opportunities still exist. His criteria for bargain issues was finding prices below a companies net working capitol. This means an investor can buy a company and pay nothing for fixed assets. An excellent resource for this strategy can be found at this blog.

Net Working Capital = Current Assets - Total Liabilities

Strategy Three: Special Situations

This strategy covers a broad range of possible investments. One is merger arbitrage; Company A offers to buy Company B for $20 a share but B trades a discount of $18. That's a 10% return and depending on the closing date that could happen in a matter of months. This is a simplified example that can be furthered studied in The Warren Buffet Way or at Fat Pitch Financial.

Following the Big Guys

The Other Lampert Play: Auto Zone
If uncertainty has no place in your portfolio, the Sears Holding Group won’t fit your selective tastes. SHLD is the popular way to play off the genius of Eddie Lampert. His hedge fund consists of 72% SHLD. That’s a huge bet on Sears but the company isn’t anywhere near “Best of Breed”. The truth is Sears consists of a failing big-box retailer (K-Mart) with thin margins and another retailer tied heavily to housing (Sears).

The other option is investing with a different position that ESL Investments holds. AZO is the firms second largest position (19.5%) and the company has better profit margins than Sears (9.7% vs. 2.9%). These margins mean there is more relative cash to do what ESL does best: regular and huge buybacks. These buybacks are Lampert’s biggest tool in creating shareholder value. AZO has reduced its shares outstanding by 43% over the past 10 years. ESL Investments controls a 33% stake of Auto Zone and that should give an individual investor the faith to follow Lampert on another great long term buy.


In the Media
If you’re a fan of buybacks, Jim Cramer recently brought up Cracker Barrel (CBRL). Over the past ten years, shares out has reduce 61%. More importantly, it has reduced by 51% over the past two years.

On the subject of famous investors; Marty Whitman is interviewed in the most recent issue of Fortune. His Third Avenue Value Fund (TAVFX) has returned 22.5% over the past five year annualized. The most interesting thing is his turnover rate: 10%. That means he hold a stock on average for 10 years! That’s long term investing.

His three picks: BAM, RDN, FCE.A

Brookfield Asset Management is a great buy and forget stock that we want to look at more deeply. They hold global, illiquid assets including real estate, timber, power plants, and infrastructure; all great long term places to be.

Book Reports Due at End of Month.

Read these over the weekend and turn in you reports on November 1st.

Look at this info on crowded herd trading that can't go on forever. The chart is frightening.

Here are some small cap stocks with attractive P/BV Ratios.

If you're looking a simple value "Magic Formula", try this screen and the books a decent read too. He basically guarantees to beat the market over the long haul.

PowerShares offers an interesting portfolio of intelligent ETF's. These are a good way to skip high mutual fund expenses or cherry pick ideas. We like the Deep Value Portfolio and the Buyback Achievers Portfolio.

Kiplinger has 15 low risk stock ideas in this months issue.

I know its dry but, here are some ways to fight inflation with bonds, which seems to be inevitable.

Another fundamental explanation for rising oil prices is the lack of meaningful production increases. Add that to a weak dollar and huge global demand and you have a bull market.

If you like the explosive moves in Biotech but don't fully understand the industry just copy Insiders Buying patterns in this portfolio.

Ever wish you could drive an ATV across your long term investment?

MSN Money's Harry Doshman screens for stocks to buy and forget. This article is old so see if his picks hold up so far.

Finally, check out the only book recommended by Warren Buffett about Warren Buffett.

Happy reading. Don't forget to double space and no Cliff Notes.

Owner's Earnings

Warren Buffett popularized a calculation called Owner’s Earnings. This calculation is used to determine how much actual cash a company can produce for a true owner. It accounts for non-cash entries like goodwill, depreciation, or huge pension returns. These discounts should be considered buy signals for companies with consistent growth. The discounts means very little for inconsistent growers and heavily cyclical companies. Here are some example calculations 9using Oct 8 prices):


Company Ticker: DEO
1) Operating Profit - 1,556
2) +Depreciation - 210
3) +Amortization of Goodwill - 0
4) -Average Federal Income Tax - 678
5) -Cost of Stock Options - 0
6) -Essential Capitol Expenditures - 300
7) -Extra Income from High Pension Returns - 0
= OE
8) x Discount Rate (8-10%)
63.04 Million = Est. Market Cap
58.53 Million = Actual Market Cap
7.15% = Discount (Premium)


Company Ticker: PCL
1) Operating Profit - 317
2) + Depreciation - 128
3) + Amortization of Goodwill - 0
4) - Average Federal Income Tax - 13
5) - Cost of Stock Options 0
6) - Essential Capitol Expenditures - 87
7) - Extra Income from High Pension Returns - 0
345 = OE
8) x Discount Rate (8-10%)
27.6 Billion = Est. Market Cap
7.52 Billion = Actual Market Cap
72.75% = Discount (Premium)


Company Ticker: FII
1) Operating Profit - 197.73
2) + Depreciation - 24.11
3) + Amortization of Goodwill - 0
4) - Average Federal Income Tax - 113.72
5) - Cost of Stock Options - 0
6) - Essential Capitol Expenditures - 4.75
7) - Extra Income from High Pension Returns - 0
103.37 = OE
8) x Discount Rate (8-10%)
8.27 Billion = Est. Market Cap
4.17 Billion = Actual Market Cap
49.57% = Discount (Premium)


Company Ticker: JOE
1) Operating Profit - 51.02
2) + Depreciation - 40.36
3) + Amortization of Goodwill - 0
4) - Average Federal Income Tax - 25.16
5) - Cost of Stock Options - 0
6) - Essential Capitol Expenditures - 14
7) - Extra Income from High Pension Returns - 0
52.22 = OE
8) x Discount Rate (8-10%)
4.17 Billion= Est. Market Cap
2.53 Billion = Actual Market Cap
39.32% = Discount (Premium)

Why Trading Rarely Works

The simple reason short-term trading rarely works? You have a brain.

But wait, you say, isn’t that an advantage? No, because your brain isn’t designed for trading, it’s designed for survival. You aren’t built to be a rational, calculator of outcomes; that’s why we invented computers. Emotions are controlled by hope, greed, fear, love, confusion; and emotions tend to control actions.

The study of financial psychology basically exists to create a long list of reasons that human brain fails at investing and trading. Every investor should know and understand these hard-wired quirks that keep us alive in the wild but returns down in the market.

Loss Aversion: A loss is twice as painful as a gain. A 5% gain doesn’t create an equal emotional reaction as a 5% loss. Rationally and mathematically this shouldn’t make sense but humans are made to avoid losses. This is not a bad trait but it doesn’t apply well to trading.

Sunk Cost Effect: People tend to treat spent money as more valuable than money in reserve. Poker players know this effect well. After pushing so many chips to see an unhelpful flop, a player finds it difficult to fold because capitol is already committed. We find it hard to let go of an investment even when the odds are stacked against us.

Disposition Effect: Traders tend to takes gains and let losses run. A quick 20% return makes most people sell and realize the quick gain even if the long-term prospects are just as good. A slow decline in price can suck a trader in and trick them into hoping for a turn around when the evidence isn’t there. We fear realizing a loss, making it permanent. We hope it turns around.

Outcome Bias: Improperly judging a decision based on gain or loss and not the QUALITY OF DECISION. The future is unknowable. The outcome is decided by the unknowable future, therefore judging the outcome is based on judging unknowable events. The only constant that can be judged is YOUR decision making process.

Recency Bias: The tendency to weigh recent data/outcomes more heavily than past data/outcomes. Losses this week effect actions more than gains from last month.

Anchoring: Relying to heavily on readily available information. This causes people to hold on too long or stay out too long.

Bandwagoning: Believing in things that the crowd hold as truths. The cause of bubbles.

Fear The Write-Off

In 2000, the bubble was burst. Chip makers, along with the entire tech world, were suffering from a dramatic down turn. Micron Technology was surprised and suffering from the down turn; inventory was up and useless.

Like many other companies, the write-offs were massive: $261 million in the second quarter. To boot, this write down was considered a non-reoccurring event by investors. How wrong they were. The next six quarters held more write-offs in store.

Fast forward to this week. Citi, Merrill Lynch, UBS, WaMu, and Deutsche Bank all take huge write-offs and profit dips from holding sub-prime portfolios. Alarms should be going off in the Long Term Investor's skull. These write-offs warn of many potential issues.

We fear that companies like WaMu, Countrywide, and other highly-leveraged banks will continue to write-off their portfolio which is a sign of management's admition of acting with the short-term in mind. Banks this highly leveraged look great when on the way up but the drops are just as amplified and dramatic. Too dramatic unless you have nerves of steel. Most people don't.

Other concerns are banks that "fill the cookie jar". The Wall Street Journal pointed out that when the portfolios catch a rebound in the future, they will artificially inflate profits. With these portfolios taking understated positions on balance sheets, a bounce will look massive. When this happens, don't fall for the sudden and freakish improvement - their is virtue in slow, steady, and conservative growth in banks.

The greatest lesson from this cycle is what is learned about management. Compare the actions of the firms listed above (CFC being the most dramatic/news worthy) and the safe, well managed banks owned by Berkshire (STI, UBS, WFC, BAC). Wells Fargo, and their genius contrarian management, have just begun building up a mortgage branch with the cheap, fallen ruble of the over-aggressive, short sighted firms.

For income investors, these dividends can act as income for life if you don't fear concentration.

October 5, 2007
STI - 3.78%
UBS - 4.78%
WFC - 3.3%,
BAC - 4.89%
Average - 4.1875%

Market Notes (CVA) (PVM)

Odd week.

Have you seen the weird and unsustainable rally in homebuilders and retail? All the pundits have their explanations but that's unimportant. The important thing is not to get caught up in it. We like (NVR), a homebuilder, but this shouldn't shake our conviction to get an even better price. We're waiting.

The retailers shot up big as well. Our (SHLD) shares are up 11.27% since the recommendation a week ago. This to is not sustainable in the short-term.

However, we are excited to see some life in our second pick, (BX). Blackstone is up 8.33%. This gain is also suspect but it is an important sign that BX's unexplained decline has in fact bottomed. I hate to brag but... called it!

On a different note, we've been researching ETF's and indexing. Buffett, in recent years, has been promoting these instruments for small, retail investors. Average returns minus tiny, tiny fees equals better returns than investing in average funds with larger fees. Expand this strategy over decades and you've got a fortune saved.

In an attempt to juice this strategy, check out some "smart" ETF's that focus on value picks. These are the kind of ETF's that you can buy, forget and still get better than average returns.
Check out the portfolio of PowerShares Deep Value Portfolio. This is a great way to diversify, reduce risk, fees, and improve long-term returns with very little work. The portfolio is also a way to get investing ideas.

A stock to check out, (CVA). CVA has one of the greatest gigs in business. They get paid for raw material collection and paid for their final product. CVA collects trash in New York state (and fees), then they burn it and sell the electricity that's produced back to their customers. A hand full of companies do this with trash, used oils, and scrap recyclables. CVA is interesting because they are a recent IPO, have side projects in China and water facilities, and Sam Zell has a large stake. This company seems to have all the right stuff for long term, safe growth. We aren't adding it to our portfolio (yet). But, it's an interesting company worth putting on the "maybe" list.

Additions to Markel Porfolio (MKL)

Markel, a Va. based insurer, has been called a 'mini' or 'next' Berkshire Hathaway. It's portfolio has returned an average of 14.7% annually, 6 points better than the S&P. This portfolio is much larger (diversity wise) than BRK so we will only list the new and dropped investments. The investments were made before June 30, the filings were release mid-September so you may have missed the best prices. Keep track of future changes with the SEC filings.

Here are the recent New Purchases:
AIG - (AIG) Insurance
Cintas - (CTAS) Business services
Federated Investors - (FII) Asset management
Home Depot - (HD) Home improvement
Medtronic - (MDT) Medical equipment
Microsoft - (MSFT) Tech software/hardware
NuStar GP - (NSH) Oil/gas equipment & services
St Joseph - (JOE) Real Estate development (Gulf Region)

Recent Sells:
Abbott Labratories - (ABT) Pharmaceuticals
Nuveen Investments - (JNC) Asset management
Penn National Gaming - (PENN) Gambling Sites
Valero - (VLO) Refining, marketing


Markelcorp.com
Ranked 1,388 in Forbes Global 2000

North Virginia Ryan (NVR)

The Long Term Investor needs the vision to look past current market troubles and see what companies will survive and thrive. That said the homebuilders are amid a slow and seemingly bottomless decline. For an investor with guts and nerves of steel this is a great time to find the best of breed and prepare to buy.

TLTI has stepped up to the homebuilder plate with its lone suggestion: North Virginia Ryan (NVR). This homebuilder is unique because even during the housing boom, it stuck with its low risk strategy which includes controlling land via option contracts, and only building homes to suit. These strategies kept balance sheets trim, debt low, and risk minimal. NVR is now poised for the strongest return when compared to its inventory and debt heavy competitors. It was the only public home builder to actually have more cash than debt. It is that cash that allows NVR to repurchase its shares even in this economic climate. Since 1997, NVR has reduced shares outstanding from 11.1 million to 5.5 million shares. Even this July, NVR repurchased $300 million worth of stock. Buybacks during the lean times should be a sign that NVR has the shareholders interest in hand.

NVR is continuing to drop, creating new 52 weeks lows on a regular basis. Citi Group upgraded the entire sector today (10/1/07). Your best bet is to keep an eye on this chart and look for a quite, flattened, low point. The threat of US recession will damage this domestic company. It will get cheaper. Some analysts already have a buy rating but there is no rush. For advanced investors: buy this stock and collect fees by allowing others to short sell this stock; it has a huge short-seller following. Talk to a broker for more advice on this strategy.

Here is a breakdown of regional segments:

FoxRidge Homes (Nashville, TN)

NVHomes (MD, VA, NJ, PA, WV)

Ryan Homes (NY, DE, OH, VA, MD, MI, NC, SC, PA, NJ, TN, WV)

Rymarc Homes (Columbia, SC)

Approximately 37% of its home settlements during the year ended December 31, 2006, occurred in the Washington, D.C. and Baltimore, Maryland metropolitan areas, which accounted for 52% of its homebuilding revenues in 2006. D.C. area tends to hold up long-term because of government based economy.

GE Outline and Profits (GE)

GE is a major multinational conglomerate and one of the most respected companies on the planet. It is a portion of Warren Buffett's portfolio and creates some of the greatest business leaders in America. Considering the size, diversity, and ever changing nature of this company, it is important for investors to have an idea of what sectors make this company tick. Below is a break down of profits by segments and then a brief outline of what each segment contains. Finally, we finish with a chart containing the profits by segment for the last five years. Hopefully these brief notes provide an investor with a stronger understanding of GE and how it makes money.


Fiscal 2006 Profits $26,311 million

Industrials 34.35%
Commercial 19.11%
GE money 13.12%
Healthcare 11.94%
NBC Universal 11.09%
Industrial 10.24%

Businesses

GE Commercial Finance

• Corporate Financial Services
• Healthcare Financial Services
• Capital Solutions
• Real Estate

GE Healthcare

• Diagnostic Imaging
• Interventional Cardiology and Surgery
• Clinical Systems
• Healthcare Information Technologies
• Services
• Bio-Sciences

GE Industrial

• Consumer & Industrial
• Equipment Services
• GE Fanuc
• Inspection Technologies
• Plastics
• Security
• Sensing

GE Infrastructure

• Aviation
• Commercial Aviation Services
• Energy
• Energy Financial Services
• Oil & Gas
• Transportation
• Water & Process Technologies

GE Money

• GE Consumer Finance

NBC Universal

• Television Networks
• Production & Distribution
• Film
• Parks & Resorts

Businesses 2006 2005 2004 2003 2002

Infrastructure		$ 9,040			$ 7,769			$ 6,797			$ 7,362			$ 9,178
Commercial Finance		5,028			4,290			3,570			2,907			2,170
GE Money		3,507			3,050			2,520			2,161			1,799
Healthcare		3,143			2,665			2,286			1,701			1,546
NBC Universal		2,919			3,092			2,558			1,998			1,658
Industrial		2,694			2,559			1,833			1,385			1,837

Bank of America (BAC)

Some of the best ideas are stolen from others. After an appearance on the cover of Forbes and a small stake created by Berkshire Hathaway (BRK-B), Bank of America’s old-school strategy is starting to look very wise and tempting; not to mention the generous +5% yield.

The over-riding strategy for BAC can be summed up in a single word (barrowed from Forbes): ubiquity. By having more branches, more ATMS, and solid to great service, BAC hopes to be the default retail banking choice of average Americans. The numbers are impressive.

ATMs - 17,000 Closest competitor - 8,700
Retail Deposits - $472 bil. Closest competitor - $300
Credit Card Balances - $152 bil. Closest competitor - $148

With 5,700 branches and three quarters of the population in its service area, it’s no wonder that Buffett sees this company as a strong and conservative company. And, it doesn’t hurt to mention the 5% yield again does it?

As a matter of regulation, a US bank can not exceed 10% of America’s deposit base. That gives BAC several options as it nears that point; 1) expanding branches through out the US via organic growth (slower and expensive) 2) pursue growth in investment banking, brokerages, derivatives (cyclical, risky) 3) expand aggressively overseas using a similar strategy.

In an effort to keep investing simple, visualize what Bank of America is good at:
Interest Paid in savings account: 0.2%
Interest Earned on a car loan: 7.2%
The larger BAC grows its deposit base, the more profitable volume it can create for shareholders.

Recommendation
Buffett’s been buying so that should give you the go ahead to buy on the down days. We’re waiting for the sector to take a few more shots in the chin before we jump in (1-9 months). This means missing out on the yield but a money market account can offer similar/safer returns. It’s all about the looooong plate appearance, so be patient. If the financials get crushed, look for BAC in the ruble. We’ll let you know if we see it happen.

Other Buffett banks: USB, WFC, STI -All have strong yields and safe balance sheets for income investors.

Blackstone (BX)

Some of the best investments are stocks that act like funds in that they have the freedom to invest assets how every they seem profitable. The finest example of this is Berkshire Hathaway (BRK-B) and Warren Buffett’s amazing capitol allocation. With a salary of just $100,000 dollars, this is one hell of a deal compared to the 1.25% management fees of some one like Bill Miller with Legg Mason funds. This theory is one of the reasons TLTI is so fond of Sears Holding (SHLD). Another way to find stocks of this ilk is to examine the world of public ‘private’ equity groups, business development groups, and conglomerates similar to BRK-B.

Although we make no recommendations on the following stock, The Blackstone Group (BX) is an interesting institution worth following. This private equity group came public this year and has done nothing but drop 16%. A problem with investing in this company is that most individuals don’t understand what it does or its structure. BX has grown from a $400,000 investment group in 1985 to a massive, multinational, financial leviathan.

Structure/Divisions

Private Equity Division
As of June 30, BX had stakes in 44 companies ($31.8 billion assets). Early in BX’s life, they invested in US based companies. In recent years they have expanded globally. Sector exposure includes: Packaging, retail, food & beverage, pharma, telecom, healthcare, clothing, transportation, shipping, media & publishing, theme parks, financial services, soft drinks, reinsurance, energy software, lodging, chemicals, waste management, auto parts, and much more.

Real Estate Division
As of June 30, BX controlled real estate valued at $23.1 billion dollars mostly in US but growing in Europe. This includes real estate great Sam Zell’s former REIT Equity Office Property Trust. The real estate portfolio includes offices, theme parks, lodging, realty, hospitals, resorts, etc.

Marketable Alternative Derivatives Division
May 1, BX managed $35.5 billion in assets. These include hedge funds ($24.4 billion) focused on institutional customers, hedge fund advisors, mezzanine funds ($1.5billion), close-ended mutual funds including The India Fund (IFN) & The Asian Tiger Fund (GRR), and senior debt vehicles ($8.4 billion).

Financial Advisory Division
Division includes Corporate & Mergers & Acquisitions, Restructuring & Reorganization, and Private Placement Advisory.


Further research is underway to determine appropriate buy prices. This stocks provides strong diversification because of its many unique investments. One thing we fear is that this company may be too large for its own good. Keep an eye on BX.

Sears Holding Group (SHLD)

The number one reason to own Sears for the long haul is one: Eddie Lampert. This honest, Buffett-esque hedge fund manager understands his sole reason for being in business is to create shareholder wealth. Just read this sample from his strikingly honest letter in the 2006 annual report:

We allocate capital to initiatives that we believe will provide the greatest returns and create the most value for our shareholders. 2006 was no different, as we deployed $2.14 billion of capital to repurchase shares, invest in our business, and reduce debt, as follows:

• $816 million used for share repurchases (we repurchased over 6 million shares in the year at an average price of about $133 per share);
• $474 million used for capital expenditure reinvestments in our businesses;
• $318 million contributed to fund our legacy pension obligations;
• $282 million used to purchase an additional interest in Sears Canada. Our ownership level is now 70%, up from 54% last year; and
• $250 million used for net debt reductions as our domestic debt balance declined to $3.0 billion (or $2.3 billion excluding capital lease obligations).

As an investor, the most important information to glean from this segment is the average repurchase price ($133). This should tell they lay person something crucial; Sears management things that its stock is a deal, undervalued, at or below $133.

Before delving deeper into Sears operations, we need to return to Eddie Lampert. Using his uniquely long-term and patient hedge fund, he has took control of Sears Roebuck and K-Mart before pulling of an efficient, effective merger in 2004. They control 42.5% of SHLD shares.


The business is divided into three main segments; K-Mart, Sears Domestic, Sears Canada.

K-Mart Segment
As of February 3, 2007, Holdings operated a total of 1,388 K-Mart stores within the US. During fiscal 2005, the Company began selling proprietary Sears brand products (Kenmore, Craftsman, DieHard, and services) within certain K-Mart stores. Approximately 100 Kmart stores were selling this assortment of Sears brand products. During the fall of fiscal 2006, the Company added Craftsman tool assortments into Kmart locations nationwide. In addition, as of February 3, 2007, approximately 180 Kmart stores were also selling an assortment of major home appliances, including Kenmore.

Sears Domestic
Domestic consists of 935 broadline stores of which 861 are full-line stores in 50 states. Store inventory includes home appliances, consumer electronics, tools, fitness and lawn and garden equipment, certain automotive services and products, such as tires and batteries, home fashion products, as well as apparel, footwear and accessories for the whole family.

Domestic also includes 1,095 Specialty Stores, including: 817 Independently owned dealer stores, 111 Sears Hardware Stores and 85 Orchard Supply Hardware Stores (Small Hardware stores), 16 The Great Indoors Stores, 47 Outlet Stores, and Commercial Sales Division.

Domestic continues its diverse operations with 'Direct to Consumer' division including Land's End brand, via internet, catalog, and overstock retail sales (15 storefronts, also in Sears store sales).

Homes services offers over 10,000 service technicians making over 13 million service calls annually, this business delivers a range of retail-related residential and commercial services in 50 states.

Sears Canada
Owning 70% of this subsidiary, Sears Canada operated a total of 123 full-line stores, 48 furniture and appliance stores, 158 dealer stores operated under independent local ownership, 5 appliances and mattresses stores, 28 Corbeil stores, 11 outlet stores, 50 floor covering stores, approx. 1,900 catalog pick-up locations, 100 travel offices, and internet based Sears store.

Finances and Figures

-In the first quarter of 2007, SHLD repurchased 97,343 shares for an average price of $165.95.
-Over the past three years book value per share has grown 64%
$ 82.65 -2006
$ 72.67 -2005
$ 50.39-2004 (PreMerger)
-Gross margin improvements offset small decline in same store sales.
-Investment income $254 million up over $127 million the year before. Representing 18% of income.
-$74 million via Total Return Swaps*
-Debt reduced by $0.4 billion
-$2.0 billion common share repurchase program ($0.6 billion complete)
- S&P Debt Rating +BB
-ROE - 12.2%

Recommendation
With a precived weak US market, the price of SHLD should continue to drift down. Currently trading around $126, the stock sells well below prices that the Company repurchases. The real test is the fourth quarter (Holiday season). Last 4Q created EPS of $5.33; with this season expected to be disappointing, expect SHLD to remain cheap through years end. This stock is tied to North American consumers in regards to its cash flow. TLTI's recommendation is to slowly add this stock to your portfolio over time. Find SHLD on the bad days and add to your stake. With Lampert at the helm, hold this stock for as long as he does. Forever.

*Total Return Swaps which are derivative instruments that synthetically replicate the
economic return characteristics of one or more underlying marketable equity securities. In exchange for receivingthe return tied to the position underlying a total return swap, the Company pays a floating rate of interest tied to LIBOR on the notional amount of the contract.