A Look Into Top Lou Simpson's Investments (Part I)

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Warren Buffett has appraised one investment manager in a section called: “Portrait of a Disciplined Investor” in his 2004 letter to shareholders. It is 74-year-old Lou Simpson, who had spent more than 30 years managing investments for GEICO Insurance. He has delivered a 20% annual return since 1980, far higher than a 14% return of the S&P in the same period. After leaving GEICO, he started his own investment advisory firm, SQ Advisory LLC. Simpson has run a quite concentrated portfolio. As of September, he held around 15 stocks worth $1.17 billion. Let’s see what he is investing right now.  

Berkshire Hathaway is No Doubt the Best Value Investment

The first top positions were his former employer, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). He owned more than 1.41 million Class B shares of Berkshire Hathaway, with a total value of more than $127 million, accounting for 10.9% of his total portfolio. Investors around the world have no doubt about the company’s sustainable growth record. Both the book value and the float have experienced the annual compounded growth of more than 20% for more than half a century. The company has bought back 9,200 Class A shares for $131,000 per share from one of its long-time shareholders and raised the cap to repurchase the shares up to 120% of the book value. Its book value in September last year was recorded at more than $184.6 billion. Berkshire Hathaway is reported to have $72 billion in float, which was generated by its insurance business. I have estimated the true value of Berkshire Hathaway at the current moment to be around $284 - $303 billion.

Superb and Consistent Operation

With more than 1.68 million shares, Fiserv (NASDAQ: FISV) accounted for around 10.7% of Lou Simpson’s total portfolio as of September. Fiserv is considered to be the global financial service technology provider with around 16,000 clients worldwide including financial companies, retailers, and government agencies. Only 7% of total revenue was generated from its international market operations in fiscal 2011. The majority of its revenue was from the Processing and Services, $3.54 billion, accounting for 81.7% of the total sales. In the past 3 years Fiserv has generated healthy and consistent operating margins in the range of 23% - 24.4%. The company had two business segments including Payments and Financials, with similar revenue contributions from each segment. In the last 10 years, Fiserv has consistently generated positive operating and free cash flow. For the trailing twelve months, its operating and free cash flow was $820 million and $626 million, respectively. During the same period, the return on equity has consistently stayed above 15.5%. The TTM ROE was more than 17.9%. At the current trading price of $80.70 per share, the market is valuing Fiserv at nearly 10.2x EV/EBITDA. The valuation is a bit richer than its peers including Fidelity National Information Services (NYSE: FIS) and Accenture (NYSE: ACN). Fidelity is valued the cheapest, at 8.45x EV/EBITDA, and Accenture is valued at 9.12x EV multiples. Furthermore, Fiserv had the best operating margin, of 24%, whereas Accenture had only 14% operating margin and the operating margin of Fidelity’s was 19%.

Foolish Bottom Line

With the sustainable operating performance, both Berkshire Hathaway and Fiserv could be considered to be in the long-term portfolio of value investors. In the next article, I will discuss two next largest holdings in Lou Simpson’s concentrated portfolio. Fool On!

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Accenture Ltd. and Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!



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