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Value-oriented Equity Investment Ideas for Sophisticated Investors

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“If our efforts can further the goals of our members by giving them a discernible edge
over other market participants, we have succeeded.”

Investing In The Tradition of


Graham, Buffett, Klarman
Year IV, Volume I
January 31, 2011
LARGE CAP STOCKS:
HOW CHEAP ARE THEY?
When asked how he became so
successful, Buffett answered:
“We read hundreds and hundreds
of annual reports every year.”

Top Ideas In This Report ► Five takes on U.S. equity market valuation
► Cheapest 20 DJIA components profiled and analyzed
(Nasdaq: …………………
► Proprietary selection of Top Three investment candidates
(NYSE: ……………………...
► Plus: Superinvestor holdings update
(NYSE: ……………………... ► Plus: Favorite stock screens for value investors
Also Inside ► Plus: Exclusive insights from VALUEx participants
Editorial Commentary ………………. 5
MOI Performance Review ………….. 9 Companies mentioned in this issue include
Superinvestor Update ………………12 3M, Abbott Labs, Alcoa, Amazon.com, America Movil, American Express,
Five Takes on Market Valuation ….. 13 Anglo American, Anheuser-Busch, Apple, AstraZeneca, AT&T,
Browsing for Large-Cap Ideas …… 18 Australia and NZ, Banco Bradesco, Banco Santander, Bank of America,
Cheapest 20 DJIA Components …… 30 Bank of Nova Scotia, Barclays, BASF, Bayer, Berkshire Hathaway,
BHP Billiton, BP, British Am. Tobacco, Canon, Caterpillar, Chevron,
Exclusive VALUEx Insights ………..110
China Life Insurance, China Mobile, China Telecom, Cisco Systems,
Favorite Value Screens ……………171
Citigroup, CNOOC, Co. Bebidas Americas, Coca-Cola, Comcast,
This Month’s Top Web Links …….. 179 ConocoPhillips, Daimler, Ecopetrol, Eni, Exxon Mobil, Ford Motor,
General Electric, GlaxoSmithKline, Goldman Sachs, Google,
About The Manual of Ideas Hewlett-Packard, Home Depot, Honda, HSBC, IBM, Intel, Itau Unibanco,
Our goal is to bring you investment Johnson & Johnson, JPMorgan Chase, Kraft Foods, McDonald’s, Merck,
ideas that are compelling on the Microsoft, Mitsubishi UFJ, Novartis, Novo Nordisk, NTT, NTT DoCoMo,
basis of value versus price. In our
Occidental Petroleum, Oracle, PepsiCo, PetroChina, Petroleo Brasileiro,
quest for value, we analyze the top
holdings of top fund managers. We Pfizer, Philip Morris, Procter & Gamble, Qualcomm, Roche,
also use a proprietary methodology Royal Bank of Canada, Royal Dutch Shell, SAP, Schlumberger, Siemens,
to identify stocks that are not widely
followed by institutional investors.
Sinopec, StatoilHydro, Suncor Energy, Taiwan Semiconductor, Telefonica,
Our research team has extensive The Travelers Companies, TOTAL, Toyota, UBS, Unilever, United
experience in industry and security Technologies, UPS, Vale, Verizon, Visa, Volkswagen, Wal-Mart,
analysis, equity valuation, and Walt Disney, Wells Fargo, Westpac Banking,, and more.
investment management. We bring a
“buy side” mindset to the idea
generation process, cutting across
industries and market capitalization (analyzed companies are underlined)
ranges in our search for compelling
equity investment opportunities.

Copyright Warning: It is a violation of federal copyright law to reproduce all or part of this publication for any purpose without the prior written consent of
BeyondProxy LLC. Email support@manualofideas.com if you wish to have multiple copies sent to you. © 2008-2011 by BeyondProxy LLC. All rights reserved.
Value-oriented Equity Investment Ideas for Sophisticated Investors

Table of Contents
EDITORIAL COMMENTARY ..........................................................................5
THE MANUAL OF IDEAS PERFORMANCE REVIEW ..................................9
SUPERINVESTOR HOLDINGS UPDATE ................................................... 12
VIEW FROM THE TOP: FIVE TAKES ON MARKET VALUATION ............ 13
TOBIN’S Q............................................................................................................................. 14
SHILLER’S TEN-YEAR TRAILING P/E ........................................................................................ 15
U.S. EQUITY MARKET CAPITALIZATION TO GDP....................................................................... 16
S&P EARNINGS YIELD VERSUS INTEREST RATES ..................................................................... 16
DOW JONES INDUSTRIALS IN TERMS OF GOLD ......................................................................... 17

BROWSING FOR POTENTIAL LARGE CAP OPPORTUNITIES ............... 18


LARGEST 100 COMPANIES (BY MARKET VALUE), SORTED BY FORWARD P/E ............................... 18
LARGEST 100 COMPANIES TRADING AT <= 12X FORWARD P/E ................................................. 20
“MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME (MV > $5 BILLION)........................ 22
“MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES (MV > $5 BILLION) ........................ 23
“MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES (MV > $5 BILLION) ....................... 24
VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK (MV > $5 BILLION).......................... 25
PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS (MV > $5 BILLION) .................. 26
DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE (MV > $5 BILLION) ......................... 27
DEEP VALUE: NEGLECTED GROSS PROFITEERS (MV > $5 BILLION) ........................................... 28
ACTIVIST TARGETS: POTENTIAL SALES OR RECAPITALIZATIONS (MV > $5 BILLION)..................... 29

CHEAPEST 20 MEMBERS OF DOW JONES INDUSTRIAL AVERAGE ... 30


ALCOA (AA) – CAPITAL WORLD .............................................................................................. 30
AMERICAN EXPRESS (AXP) – BARES, BERKSHIRE, MARKEL ..................................................... 34
AT&T (T) – CAP RE, T ROWE................................................................................................. 38
BANK OF AMERICA (BAC) – APPALOOSA, BRK, CHOU, BRAVE WARRIOR, FAIRHOLME, PAULSON 42
CHEVRON (CVX) – BP CAPITAL, FPA ..................................................................................... 46
CISCO SYSTEMS (CSCO) – APPALOOSA, CENTAUR, EDINBURGH, GLENVIEW, PENNANT ............ 50
EXXON MOBIL (XOM) – BRK, KLEINHEINZ, MARKEL, PENNANT, VIKING ..................................... 54
GENERAL ELECTRIC (GE) – BRK, EDINBURGH, FAIRHOLME, MARKEL ....................................... 58
HEWLETT-PACKARD (HPQ) – APPALOOSA, FPA, GLENVIEW, MAVERICK, SHUMWAY .................. 62
IBM (IBM) – CAPITAL W ORLD, MARKEL, T ROWE .................................................................... 66
INTEL (INTC) – APPALOOSA, EDINBURGH, MARKEL .................................................................. 70
JOHNSON & JOHNSON (JNJ) – APPALOOSA, BRK, FAIRFAX, FPA, MARKEL, WEST COAST ......... 74
JPMORGAN (JPM) – BLUE RIDGE, CASTLE POINT, KLEINHEINZ, LONE PINE, PAULSON, VIKING ... 78
KRAFT FOODS (KFT) – BRK, EAGLE, FAIRFAX, FPA, PERSHING SQUARE, WEST COAST ............ 82
MERCK (MRK) – APPALOOSA, FAIRFAX................................................................................... 86
MICROSOFT (MSFT) – APPALOOSA, BARES, BLUE RIDGE, FPA, GREENLIGHT, MARKEL, W EITZ.. 90
PFIZER (PFE) – BLUE RIDGE, FPA, GREENLIGHT, KLEINHEINZ, MAVERICK, PAULSON, PENNANT 94
TRAVELERS (TRV) – FPA, GREENLIGHT, SOUTHEASTERN........................................................ 98
WAL-MART (WMT) – BRK, EAGLE, FAIRFAX, FPA, KLEINHEINZ, MARKEL, WEITZ .................... 102
WALT DISNEY (DIS) – CHILDREN’S, SOUTHEASTERN .............................................................. 106

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Value-oriented Equity Investment Ideas for Sophisticated Investors

EXCLUSIVE INSIGHTS FROM VALUEX PARTICIPANTS ...................... 110


ETHAN BERG, G4 ................................................................................................................ 110
PHILIP BEST, ARGOS INVESTMENT MANAGERS ...................................................................... 113
JAMES BRADFORD, PRIVATE INVESTOR ................................................................................. 114
DAVID COYNE, SETANTA ASSET MANAGEMENT ...................................................................... 115
SHAI DARDASHTI, DARDASHTI CAPITAL MANAGEMENT ........................................................... 119
SIMON DENISON-SMITH, METROPOLIS CAPITAL ..................................................................... 120
DR. CHRISTOPHER DETWEILER, PRIVATE INVESTOR............................................................... 122
TIM DU TOIT, EUROSHARELAB .............................................................................................. 123
CHRISTIAN ECK, UBS .......................................................................................................... 127
ORI EYAL, EMERGING VALUE CAPITAL MANAGEMENT ............................................................. 127
DON FITZGERALD, TOCQUEVILLE FINANCE ............................................................................ 132
MASSIMO FUGGETTA, HORATIUS .......................................................................................... 134
BENEDIKT GERMANIER, PRIVATE INVESTOR ........................................................................... 135
PABLO GONZALEZ, ABACO CAPITAL ...................................................................................... 136
DR. OLAF HEIN, SPARTA AG ................................................................................................ 137
MARKUS HENZ, WÜTHRICH, HENZ & CO................................................................................ 139
ROBERT KARAS, SCHOELLERBANK (UNICREDIT GROUP) ........................................................ 139
ANDREAS LECHNER, PRIVATE INVESTOR ............................................................................... 141
SÉBASTIEN LEMONNIER, TOCQUEVILLE FINANCE.................................................................... 141
KAUSHAL MAJMUDAR, THE RIDGEWOOD GROUP.................................................................... 143
PAUL MCNULTY, SETANTA ASSET MANAGEMENT ................................................................... 144
WILLIAM O’CHEE, HIMALAYA CONSULTING ............................................................................ 146
BERNARD PEPERSTRAETE, NGN CAPITAL ............................................................................. 147
MATTHIAS RIECHERT, PRIVATE INVESTOR ............................................................................. 150
STEPHEN ROSEMAN, THESIS FUND MANAGEMENT ................................................................. 151
MARC SAINT JOHN W EBB, ARGOS INVESTMENT MANAGERS ................................................... 152
YUSUF SAMAD, BELFIELD CAPITAL ........................................................................................ 153
RAHUL SARAOGI, ATYANT CAPITAL ....................................................................................... 155
BENJAMIN SCHMITT, VARUS FUND ........................................................................................ 156
ALAN SCHRAM, W ELLCAP PARTNERS .................................................................................... 157
ANDREAS SCHWEITZER, PRIVATE INVESTOR .......................................................................... 159
KEVIN SLEMP, PRIVATE INVESTOR ........................................................................................ 159
GUY SPIER, AQUAMARINE CAPITAL MANAGEMENT ................................................................. 161
CHRISTOPH STAHL, PRIVATE INVESTOR ................................................................................ 161
ARMIN STRACKE, CITIGROUP................................................................................................ 162
JOSH TARASOFF, GREENLEA LANE CAPITAL MANAGEMENT .................................................... 163
PAOLO TRAMONTANA, KRAEMER, SCHWAB ........................................................................... 165
CARTER VENKAT, PRIVATE INVESTOR ................................................................................... 167
JACOB WOLINSKY, VALUE ADVISORY .................................................................................... 168
PETER WÜTHRICH, WÜTHRICH, HENZ & CO........................................................................... 170

FAVORITE STOCK SCREENS FOR VALUE INVESTORS ...................... 171


“MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME ................................................. 171
“MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES ................................................. 172
“MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES ................................................ 173
VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK ................................................... 174
PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS............................................ 175
DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE ................................................... 176
DEEP VALUE: NEGLECTED GROSS PROFITEERS .................................................................... 177
ACTIVIST TARGETS: POTENTIAL SALES, LIQUIDATIONS OR RECAPS ......................................... 178

THIS MONTH’S TOP 10 WEB LINKS ....................................................... 179

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Value-oriented Equity Investment Ideas for Sophisticated Investors

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