A Look Into Lou Simpson's Investments (Last Part)

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Lou Simpson had a very successful investing career. During his tenure as an investment manager for GEICO Insurance, he had consistently delivered a 20% annual return in more than 30 years. In the two previous articles, I have talked about his four biggest positions, including Berkshire Hathaway, Fiserv, TE Connectivity, and Lowe’s Companies. In this article, I will continue with two other companies that also represented a large portion of his concentrated portfolio. One is a banking giant and another is a digital TV entertainment provider. Those two positions combined accounted for 15% of his portfolio.

A Long-Term Holding in This Bank Giant 

The only bank position in his portfolio is also the most favorite bank of his previous well-known boss, Warren Buffett. That bank is Wells Fargo & Company (NYSE: WFC). As of September 2012, he owned nearly 2.8 million shares of the bank, with the value of more than $96 million, accounting for 8.2% of his total portfolio. In the recent quarter, Wells Fargo has announced below target revenue and net interest margin. However, its net interest margin was 3.66% for the previous quarter, much higher than that of its peers. Bank of America (NYSE: BAC) had only 2.21% net interest margin and JP Morgan Chase (NYSE: JPM) closed the quarter with only 2.43%. Wells Fargo has been one of the top holdings of Warren Buffett as well. It was the second biggest position with more than 422.5 million shares as of September 2012. 

On Jan 15, Wells Fargo will announce its next quarterly earnings. Last year, the company earned around 73 cents per share, and analysts are expecting the result of 87 cents EPS for the fourth quarter of fiscal 2012. Compared to the other two peers, Wells Fargo seems to be the most expensive in terms of P/B valuation. Its P/B is 1.3x whereas the P/B of Bank of America and JP Morgan Chase are 0.6x and 0.9x respectively. Warren Buffett has mentioned that the banking business was the tricky one, with 20 to 1 asset to equity ratio. Thus, several dumb loan decisions might wipe out the equity completely. That is why management was critical in driving the performance of the bank. Buffett has shown his big confidence in Wells Fargo with his outsized position.

And a Global Leaading Digital Entertainment

The digital TV entertainment company is DIRECTV (NASDAQ: DTV). As of September 2012, Lou Simpson held more than 1.73 million shares of this company, with the total value of nearly $90.8 million, accounting for 7.8% of his total portfolio at that time. It was also the 8th biggest position in Warren Buffett’s portfolio, with more than 29.5 million shares, accounting for around 2.1%. DIRECTV has been a cash cow business, along with the company’s effort to consistently buying back shares in the stock market. The total shares outstanding have been reduced from 1.2 billion in 2002 to only 612 million currently. Interestingly, DIRECTV has used $24 billion in share repurchases in just 6 years. Compared to DISH Network (NASDAQ: DISH), DIRECTV had a much higher ARPU with lower churn rate. The ARPU of DIRECTV was $93.27, with a 1.56% churn rate, whereas the ARPU of DISH was only $76.93, with a 1.65% churn rate in 2011. At the current price, DIRECTV is valued at 12.4x trailing P/E, whereas the market is valuing DISH at a much higher valuation, of 22.2x P/E.

Foolish Bottom Line

With the superb operating performances, these two companies are decent for investors to hold over a very long period of time. I strongly prefer DIRECTV due to its much better operating performance than its peers, potential growth in emerging markets and cheap valuation.  

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo & Company. The Motley Fool owns shares of Bank of America Corp, JPMorgan Chase & Co., and Wells Fargo & Company. 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!


blog comments powered by Disqus