New Positions!!!

Initiated two new positions today.  TARP warrants of Bank of America (BAC.WS.A) and Wells Fargo (WFC.WS). Both positions are individually slightly over 1% of the portfolio and are long term plays with a 5 to 7 year investment horizon. The positions are small enough to warrant more buys if prices decline further. Bank of America TARP warrants are a current holding of Francis Chou. Bank of America stock is held by Bruce Berkowitz. Wells Fargo is a well documented holding of Warren Buffett and Prem Watsa. Francis Chou holds warrants on WFC as well. The risk reward scenarios on the warrants are a lot better than the common stock.

I, probably hold the most hated list of stocks in the US market today. Long on Cisco, Goldman Sachs, Bank of America, Wells Fargo and Fairfax financial. Short on the S&P. The portfolio is positioned to be more volatile but consists of undervalued companies with a margin of safety.  With utter disregard to the macro economy and the concentration in the financial sector, I will be lagging the market for a considerable time. A significant portion of my portfolio is still in cash. However, I am finding a few cheap stocks in the large cap environment.

I am continuing to evaluate Wal-Mart, Google and Johnson and Johnson. Will post more on the warrants.

Investment Idea --> Google!

Ticker --> GOOG
Current Price --> $597 / Share
Financials --> Below.
PE --> 15 after cash (after the recent quarterly earnings)
Intrinsic Value --> $650 / Share to $730 / share


Business Description --> (from 10-k)

Google is a global technology leader focused on improving the ways people connect with information. Google aspires to build products that improve the lives of billions of people globally. The mission is to organize the world’s information and make it universally accessible and useful. The innovations in web search and advertising have made the website a top internet property and the brand one of the most recognized in the world.

Google generates revenue primarily by delivering relevant, cost-effective online advertising. Businesses use  AdWords program to promote their products and services with targeted advertising. In addition, the third parties that comprise the Google Network use the AdSense program to deliver relevant ads that generate revenue and enhance the user experience.

Google's Moat --> A strong brand name with over 65% market share in the US search engine business. 
(See here for market share by country (slightly dated (especially China) --> https://spreadsheets.google.com/ccc?key=pLaE9tsVLp_0y1FKWBCKGBA#gid=0) Has a strong network externality working for it. The more people use Google, the more better the search gets. The more better the search gets, the more people will use Google. Microsoft spent tens of billions of dollars in search technologies and lawyer fees but has hardly made a dent into Google's market share. Google has a strong brand name beyond the just the search functionality making it tough for competitors (even if the competition comes up with a better search technology.) Whenever billions of dollars does not allow you to dent a competitor's business, you can safely claim that it has a moat around that business (without sacrificing profitability)


Management --> Brin and Page  are still young and top notch engineers and innovators. With Page as CEO, the company is trying to stay in the start-up mode. Very competent and honest management. 'Don't be Evil' is an appropriate tagline to be associated with the company.


Real Option --> At 15 times the search engine business (which makes up more than 90% of the sales), you get thrown a free social networking site (Google+), a video site (Youtube), email services (Gmail), maps, Chrome, Andriod and a whole suite of other services. Also, the company is best suited to adopt to a cloud computing environment. All future growth from these services are embedded options in the stock. A top class business model (probably the most successful business model to monetize a pure internet play) with a good management and real options thrown on top of it!


Risks include --> Anti-trust hearings, start-ups like Facebook (It will be very interesting to see how Facebook reacts to Google+) and dependent on the Economy but no CAT risk.


Intrinsic value Estimates
2012 Consensus Earnings is about $39.2 EPS. --> 13 Times 2012 earnings + $144 dollars in cash = $653 / Share to 15 times 2012 earnings + $144 in Cash = $732 / Share 

Current Investment Ideas

Am currently investigating the following investment ideas

Large Cap ideas!!

1. Wal-Mart --> Strong Competitive Moat around the business, trading at a PE of 12. Similar to a bond... a recession proof play.

2. Google --> Strong competitive moat with excellent management. A rock solid business model to monetize search with a free real option of a social networking business (google+) PE after cash is in low teens.

3. Johnson and Johnson --> Strong competitive moat and an earnings increase of 10%+ over the last hundred years. Recession resistant stock as well. PE is low double digits.

Large caps are presenting compelling ideas for now!

Detailed research on the above ideas soon...