My interest of late in Warren Buffett's quest to find a potential apprentice is not just for curiosity's sake. The candidates are value-oriented investors, the best kind of investors to piggyback. Here's why:
- They are typically long-term buy-and-hold investors. They don't like to sell a stock until it has reached what they feel is the "intrinsic value" of the company.
- They do an enormous amount of due diligence and research. For example, candidate Ken Shubin Stein's Spencer Capital had several researchers put three months of nonstop work into Tyco (TYC) . This is more than I'm willing to do. And I don't have a bunch of analysts working for me, either.
- They tend to be focused investors, not afraid to take big stakes in a company. I highlighted this trait in my prior articles on Stein and Mohnish Pabrai.
- They tend to average down on dips. They do this with the theory that if the stock price is going lower, the company's shares are simply better values at that point. Most long-term investors do not play with stop-losses. The only type of stop-loss they have is an "information stop-loss" -- that is, if new information about the company comes out that catches them unprepared, they get out of the stock.
Now let's take a look at four more potential candidates for Buffett's job.
First up is super-investor Bruce Sherman, who probably has invested in more companies that Buffett ended up buying than anyone else. He started his
fund in 1986 and has had an average return of 20% annually ever since.
He recently loaded up on
, purchasing 4.9 million shares of the digital media software company at an average price of approximately $37.25 per share. The company has a pristine balance sheet, with $172 million in cash in the bank and almost $100 million in cash flows. Avid currently trades at just 12 times cash flows, with analysts expecting revenue to improve over the next year.
Sherman also has been a holder of software giant
and hardware name
. For the rest of his value picks, check out the
Next up is
, who runs the Omaha-based Weitz family of funds. Often considered the
Oracle of Omaha, Weitz's initial Value fund, started in 1983, has had an average return of 15.1% annually since its inception.
In his most recent quarterly letter, Weitz went over his central belief that although cheap stocks do go up in the long run, it's very difficult to time things exactly. But he sees 2007 as another good year for his holdings. He does not believe these holdings are very cheap, but at the same time he is confident that stocks such as
( BRKA) will simply continue to grow in value.
For instance, one of his top holdings,
, recently announced an increased dividend and share-buyback program. The
spinoff has seen increased earnings and revenue, and it trades at less than 10 times cash flows.
CBS President and CEO Les Moonves has made all the right moves: spinning off the amusement business to
, getting Katie Couric to anchor the "CBS Evening News," hiring Quincy Smith to head up the company's Internet business, combining the UPN and WB television networks to form the CW, and so on. I think CBS can easily see $35 to $40 this year, particularly with the new share-buyback program in place.
I also like another of Weitz's holdings,
. People don't realize how cheap the Internet bellwethers have become in the past few years, as investors have shied away from all things dot-com except for
. Looking at the basic numbers for IAC, it has an $11 billion market cap, $2.33 billion in cash and no debt.
In addition, it has $974 million in EBITDA. In other words, IAC trades for about 10 times earnings before interest, taxes, depreciation and amortization. Meanwhile, earnings and revenue are expected to grow in the double digits. The company has been successfully bolting on Internet acquisitions as well and now owns a range of properties, including Match.com, LendingTree.com, Ask.com and CollegeHumor.com.
For the rest of Weitz's holdings, check out
The third candidate is Ahmet Okumus, manager of the
hedge fund. I became a fan after reading an interview with Okumus in Jack Schwager's book
Stock Market Wizards
. Ahmet Okumus is a strict disciple of Graham and Dodd-style investing, meaning that he buys stocks with undervalued assets, speculating that these assets will appreciate to their true value. He started his first fund, Okumus Opportunity, in 1997, and it has had an annualized return of 35% per year since inception. He manages about $800 million, 20% of which is his own money.
One value play Okumus has a stake in is
-- portfolio manager of Legg Mason Value Trust -- and Wally Weitz. I'm intrigued by Okumus' ownership of
( ARB), the media and marketing research firm. The company has $61 million in cash in the bank, the stock trades at 13 times cash flows, and analysts expect earnings to go from $1.46 per share to $1.95 per share this year.
Finally, there is Thomas Gayner from
, perhaps the front-runner for the title of Buffett apprentice. Gayner is the chief investment officer of Markel, which, like Berkshire, is an insurance company that makes most of its profits from investing its $7.6 billion float.
However, according to
Securities and Exchange Commission
filings, Gayner took home just $700,000 in pay in 2005. One of Buffett's criteria is that his protege must be willing to make less in terms of salary than he or she would if managing similar money in the hedge fund business.
Along with traditional giants such as
and Berkshire, Markel also has an interesting holding in
International Game Technology
, which has been slowly creating a monopoly for itself in the slot machine business.
Another interesting pick of Gayner's, which is also owned by super hedge fund Caxton Associates, is the hospitality name
. For Gayner's top holdings, check out
So who knows if any of these guys will end up as Warren Buffett's heir apparent. But each one of the funds I've mentioned in this series has strictly followed Buffett's style of investing. Rarely do their holdings overlap, and in every case, I view the portfolios of these great investors as starting points for my own research to find good stocks.
Stockpickr tip of the day
: If you'd like to automatically receive an email whenever a value fund's portfolio on Stockpickr is updated, do the following: Click on the links provided throughout this article to view the portfolio of the particular fund, and then bookmark it by rating it with four stars on the top left of the portfolio.
Whenever that fund is updated, you'll immediately get an email. Furthermore, if there is a discussion on that fund's portfolio page, you'll be notified. I hope this will be a useful tool for readers of Stockpickr.
At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.
James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
to send him an email.
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