Looking For Hidden Value With Whitney Tilson

Talk about your largest holdings. What is compelling about those stocks as a group?

We much prefer to own great businesses at good prices rather than the reverse, and are delighted that our portfolio has many such positions today. In fact, our seven largest holdings are Wendy's(WEN Quote), Berkshire Hathaway(BRK-A Quote), McDonald's(MCD Quote), Wal-Mart(WMT Quote), Microsoft(MSFT Quote), Anheuser-Busch(BUD Quote) and Costco(COST Quote). The investment thesis is similar for all of them: With the exception of Wendy's, which is a good, but not great, business, we think these are among the world's greatest companies and that they will continue to dominate their industries for the foreseeable future. Such companies have historically traded at a significant premium to the market, as well they should, but today, on average, they trade at a midteens P/E multiple, which is actually lower than the market's. That's crazy!

We think that, on average, these businesses will grow their intrinsic values at about 10% annually and that their P/E multiples are likely to expand as well over time, such that we should earn 15%-20% compounded for the next few years, with low downside risk.

Talk to us about Microsoft, one of your largest positions.

Given how skeptical we are about the tech sector, owning Microsoft is a real leap for us, but this is a fantastic businesses and the stock is attractively priced. Microsoft has a dominant franchise; some of the most jaw-dropping economic characteristics ever achieved; capable, honest, shareholder-friendly management; and, unlike most technology companies, reasonably predictable future prospects. We're optimistic about Microsoft's future prospects for a number of reasons. Most importantly, the company will be releasing in the next year major new upgrades of its two cash cows, Windows and Office. Historically, these events have been big and highly profitable events for Microsoft, and there's no reason to believe otherwise this time. At a recent price around $27, Microsoft, after adjusting for the company's cash hoard, is trading at under 17 times earnings estimates for this calendar year. We don't claim this is screaming cheap, but it's close to the lowest P/E multiple the stock has ever traded at and is, we believe, a very attractive price for a company of its quality and bright future.