The Fat Pitch Financials Portfolio weathered the stormy market in January pretty well. The portfolio was down only 1.18% versus a decline of 6.00% for the S&P 500. There were no new trades in January for the Fat Pitch Financials Portfolio, so my positions are the same as what I reported for the Fat Pitch Financials Portfolio at the end of 2007.
There were a couple of names that I was interested in buying, but I anticipated that market would go down further after the international market plunge on Martin Luther King Jr. Day. However, the U.S. markets have held up pretty well as a result of significant cuts in the Fed rate and the development of an economic stimulus package by Congress. I am a bit remiss in not putting some of the $491,061.96 of the portfolio’s cash to work. At a minimum, I should have average down a bit on a couple of my positions. The lesson learned is that one should always do their homework, so you can be ready for the temporary market fluctuations.
One of the names that I did actually add to recently (on December 31, 2007 to be exact) was McGraw-Hill (MHP). I’ve been meaning to write up my analysis of McGraw-Hill, but fellow blogger Mike Price contacted me shortly after I bought McGraw-Hill. Mike had produced a detailed research report on McGraw-Hill and wanted to have it published on Value Investing News. Value Investing News has recently started accepting full length articles on a ad share basis. I didn’t want to post an article about McGraw-Hill while I was reviewing Mike’s research.
Mike published his McGraw-Hill research this morning on Value Investing News, so now I feel more comfortable talking about it now. The conclusions of my analysis are fairly similar to that of Mike’s. I ended up valuing McGraw-Hill at around $76 using a slightly modified version of my Fat Pitch Finder spreadsheet. Mike used a different method of valuation, but came up with a similar value of $72.82 per share. He used Mohnish Pabrai’s approach to valuing stocks using a discounted free cash flows, and several other methods. I encourage you to read Mike’s research report on MHP. The main difference with my method of valuation is that I model free cash flow growth for wide moat companies using a linear trend. I often base the linear trend of off a linear regression of the past 10 years of free cash flows for a company. Most other models use an exponential growth function, which is simply a percent increase from the previous year. I believe that using percent growth rates tends to overestimate the growth of most mature businesses. My use of a fixed dollar amount of growth each year is a bit more conservative. However, in the case of McGraw-Hill it appears that using either approach gets you to a similar number.
The Fat Pitch Financials Portfolio closed out the month with a balance of $1,375,445.21. My return since inception is 38.18% versus 29.94% for the S&P500. My annualized return is now up to 10.09%. These numbers are okay, but I hope to start edging out the S&P500 by a wider margin in the future. The key to doing that will be to wait patiently for fat pitch opportunities in excellent companies with sustainable competitive advantages.
Disclosure: I own shares of McGraw-Hill (MHP).