SuperInvestor

June 3, 2011

From the Editors of Value Investor Insight

INSIGHT

UP FRONT

IN THIS ISSUE
What Theyre Buying
Its no surprise that SuperInvestors
search for value where uncertainty
is the greatest such ideas were
easy to find last quarter.
Page 2
Table: Playing the Odds
Table: Biggest New Bets

Where to Look

n his first book, You Can Be a Stock

Market Genius, investing legend Joel
Greenblatt recounts a visit to the thenfamed Manhattan restaurant Lutece. He
was perusing the menu when a man came
by to offer help with ordering. Greenblatt
pointed to one of the appetizer choices and
asked, Is this one any good? His helper,
who turned out to be the restaurant's head
chef Andre Soltner, replied No, it stinks!
As Greenblatt writes:
Even though he was just kidding around,
I did get the point. Pretty much everything on the menu was going to be good.
Selecting Lutece was the important culinary decision, my particular menu choices were just fine tuning.
Keep this concept in mind. It's great to
look for investments in places others are
not, but it's not enough. You also have
to look in the right places. If you preselect investment areas that put you ahead
of the game even before you start (the
Luteces of the investment world), the
most important work is already done.
You'll still have plenty of decisions to
make, but if you're picking and choosing
your spots from an already outstanding
menu, your choices are less likely to
result in indigestion.

Ask any SuperInvestor where they typically find opportunity and they have
ready answers examples of which populate the most-bought and most-owned
tables in each issue of SII. The once highgrowth company that hits a wall and needs
to retrench. The small-cap company Wall
Street is ignoring. The spinoff that underpromises but is likely to outperform (a particular Greenblatt favorite). The best com-

What Theyre Selling

Markets werent so jittery in Q1,
but top investors seemed to be with
high-profile tech stocks and recent
highly contrarian buys.
Page 4
Table: Tough Questions
Table: Selling Out
What They Own
Economically sensitive banks
remain popular, but newer core
holdings have more company-spePage 6
cific bets behind them.
Table: Information Edge
Table: Top Holdings
pany in a down-but-not-out sector. The
once-bankrupt company with a new lease
on life. The unwieldy company that needs
to restructure and simplify. The point is not
to be an expert on every possible situation,
but to know what you've seen work,
understand why, and focus precious time
on similar potential opportunities.
One idea category we have yet to hear
touted as fertile ground for bargain hunting: the true initial public offering.
SuperInvestors will buy companies returning to public markets after bankruptcy,
such as LyondellBasell and General
Motors in the fourth quarter of 2010, or
after having gone through private-equity
ownership, such as HCA Holdings last
quarter. Were fairly confident, however,
that Groupon's planned IPO is one they're
likely to sit out. SII

John Heins
Co-Editor-in-Chief

Whitney Tilson
Co-Editor-in-Chief

Stock Spotlight: MetLife

The financial firm attracting the
most new SuperInvestor attention
comes from a decidedly plainPage 8
vanilla neighborhood.

The SuperInvestors
SuperInvestor Insight tracks the activity
of an elite group of value-oriented
hedge-fund managers (plus Berkshire
Hathaway), based on their holdings as
filed in Forms 13F with the SEC. While
specific investors will be highlighted,
the focus is on drawing collective
insight from this group of 30 of the
worlds best investors, which currently
includes William Ackman, Stephen
Mandel, Lee Cooperman, Jeffrey
Ubben, David Einhorn, John Griffin,
Glenn Greenberg, Jon Jacobson,
Seth Klarman, John Paulson, David
Tepper and many more.

WHAT THEYRE BUYING

Value or Trap?
Sure things in investing rarely are, so SuperInvestors spend most of their time searching for value where uncertainty appears the greatest. They found plenty such ideas to go around in this years first quarter.
A quick Internet search of value
trap returns a variety of rather weak
variations on Investopedia.com's description of it as a stock that has experienced
a large price depreciation and is mistaken
to be a value stock. Lacking is a sense of
why such a mistake turns out to be made,
which typically involves the company's
future earnings inexorably declining or, at
the very least, growth prospects declining
such that an ever lower multiple is placed
on those future earnings. Value investors
often cite Eastman Kodak, as digital pho-

tography eroded its core film business, as

a classic example.
Which brings us to Microsoft. Its
shares certainly have a value-trappish air
about them, having flat-lined, at best, for
the past ten years. Critics contend that
time has passed the company and its PCcentric model by. But over the past few
years for naught so far the stock has
become a favorite among bargain-hunting investors, attracted by the company's
giant cash hoard, its rock-bottom valuation, and strong actual earnings perform-

What Theyre Buying:

Playing the Odds
Company

Ticker

ance from its core operating-system, server and Office franchises. Hope springs
eternal: Microsoft tops the list of stocks
that SuperInvestors most-frequently
bought in 2011's first quarter (see table
below). In an interesting addition to the
dialogue on the company, Greenlight
Capital's David Einhorn recently called
out company CEO Steven Ballmer as a
problem that needed to be fixed.
The potential clearing of multi-year
industry headwinds appears to have
attracted top-investor interest in two dis-

Four or more SuperInvestors added to existing positions or established new ones valued at more
than $20 million in these stocks at the end of the first quarter. Long-ignored media companies
NWSA and VIA-B made the list, as did a recent spinoff, MSI, and an initial public offering, HCA.

Industry

Q1 2011

Price@
6/2/11

Low

High

# of New or
Inc. Positions

% Change In Shares
Held - All Funds

Microsoft

MSFT

Computer Software/Services

24.22

24.68

29.46

33.1%

Aon

AON

Insurance Brokerage

51.56

43.31

53.17

18.7%

Banking

40.01

43.40

51.50

(-20.0%)

Citigroup

CVS Caremark

CVS

Pharmacy Services

38.53

32.08

35.95

51.1%

HCA Holdings

HCA

Hospitals

34.36

30.36

34.57

All new positions

MetLife

MET

Insurance

42.68

41.25

48.72

274.5%

Lowes

LOW

Home-Improvement Retail

23.59

23.54

27.45

272.2%

Qualcomm

QCOM

Wireless Technology

57.80

49.59

59.84

94.1%

Seagate Technology

STX

Computer Storage Devices

16.28

12.26

15.33

188.0%

Wells Fargo

WFC

Banking

27.16

29.82

34.25

0.6%

Apple

AAPL

Computers/Consumer Electronics

346.10

324.84

364.90

(-10.4%)

JPMorgan Chase

JPM

Banking

41.61

42.65

48.36

(-0.7%)

Motorola Solutions

MSI

Communications Devices

47.30

37.06

44.94

All new positions

Media/Entertainment

17.58

13.94

18.11

171.7%

News Corp.

NWSA

Pfizer

PFE

Pharmaceuticals

21.00

17.62

20.57

(-10.0%)

Sensata Technologies

ST

Industrial Equipment

35.98

28.85

35.62

99.5%

Target

TGT

Discount Retail

47.95

49.03

60.97

(-25.8%)

Union Pacific

UNP

Railroads

102.22

90.66

99.50

(-19.1%)

Viacom

VIA-B

Media/Entertainment

50.37

39.65

47.34

112.0%

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of March 31, 2011.

June 3, 2011

www.superinvestorinsight.com

SuperInvestor Insight 2

WHAT THEYRE BUYING

parate companies, insurance broker Aon

and home-improvement retailer Lowe's.
Property/casualty insurance pricing has
been weak for more than seven years, a
historically long period without some
combination of natural disasters and lower
industry reserves causing prices to firm. If
a hardening market is at hand, brokers
such as Aon with revenues tied to commissions would be early beneficiaries.
Canyon Capital's Josh Friedman
recently described the investment case for
Lowe's in Value Investor Insight [April
29, 2011], arguing that a rebound in the
company's sales per square foot from
todays $250 to a less-than-peak $280
within the next few years would drive a
return to peak operating margins and
result in normalized after-tax free cash
flow of roughly $4 per share. He called
Lowe's stock, then trading above today's
$23.60 price, a cheap option that the
housing recovery eventually arrives.
Initial public offerings continued to
attract attention among star investors last

quarter, though not of the sexy LinkedIntype variety. Six investors bought shares of
HCA Holdings, the nation's largest private owner and operator of hospitals, the
majority of which are located in the southern U.S. The company was taken private
in 2006 by three private equity firms and
the founding Frist family, who sold underperforming HCA assets, cut costs and
focused on higher-margin outpatient services. Profit margins and free cash flow
have increased, but key to the company's
success will be its ability to manage still
precariously high debt leverage.
Four top investors bought new or
expanded positions in Target, whose
stock trades at 12x earnings and near 52week lows as it battles rising input costs
and ongoing weakness in discretionary
consumer spending. The bull case for the
discount retailer suggests its expect
more, pay less positioning will serve it
well in a difficult economic environment,
as will new cost-savings initiatives,
expanded food offerings and a revamped

What Theyre Buying:

Biggest New Bets
Company

Ticker

credit-card strategy. One investor not

going along for the ride at the moment:
long-time activist shareholder Pershing
Square Capital, which made Target its
largest complete sale last quarter.
As is often the case, companies with
high-profile woes appear among the
largest new SuperInvestor buys (see table
below). Paulson & Co. established a $1
billion-plus position in Hewlett-Packard,
the press reports on which have been far
more focused on a clumsy CEO transition
than on any exciting new H-P products
and services. The market appears increasingly worried that Best Buys high-touch
retail model for selling consumer electronics will fare poorly over time against
online retailers. For Greenlight Capital,
which made Best Buy its top new purchase in the quarter, the verdict appears
to be value over value trap. SII
Funds co-managed by Whitney Tilson own
Citigroup, JPMorgan Chase, Microsoft and
Seagate Technology.

These are the 15 largest brand-new positions taken by different SuperInvestors last quarter. Energyrelated stocks were well-represented, including El Paso, Baker Hughes and Marathon Oil. Those with
share prices the slowest out of the gate so far: Hewlett-Packard, Best Buy and Genworth Financial.

Industry

Q1 2011

Price@
6/2/11

Low

High

Investor

Value @ 3/31
($mil)

Hewlett-Packard

HPQ

Computer Equipment/Services

36.42

36.20

40.56

Paulson

$1,024.3

Clorox

CLX

Consumer Products

68.60

60.56

72.43

Icahn

$700.7

Johnson Controls

JCI

Diversified Industrial

37.79

36.95

42.42

Viking

$493.5

Advanced Micro Devices

AMD

Semiconductors

8.23

7.34

9.58

Ivory

$219.8

El Paso

EP

Oil & Gas

20.60

13.42

18.77

Third Point

$198.0

Pfizer

PFE

Pharmaceuticals

21.00

17.62

20.57

Glenview

$197.8

American Tower

AMT

Wireless Infrastructure

54.38

45.85

56.84

Scout

$186.6

Baker Hughes

BHI

Oil & Gas Services

73.60

54.33

74.94

Blue Ridge

$185.4

Priceline.com

PCLN

Online Travel

512.78

402.25

509.00

Lone Pine

$181.4

Motorola Solutions

MSI

Communications Devices

47.30

37.06

44.94

ValueAct

$178.3

Best Buy

BBY

Electronics Retail

30.54

28.52

36.33

Greenlight

$172.3

Marathon Oil

MRO

Oil & Gas

52.51

36.97

53.74

Karsch

$138.4

Genworth Financial

GNW

Diversified Financial Services

11.05

12.02

14.77

Highfields

$134.6

McGraw-Hill

MHP

Information Services

41.32

36.20

40.56

JANA

$120.7

Valeant Pharmaceuticals

VRX

Pharmaceuticals

52.49

28.06

51.13

Brave Warrior

$119.1

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of March 31, 2011.

June 3, 2011

www.superinvestorinsight.com

SuperInvestor Insight 3

WHAT THEYRE SELLING

Acquired Tastes
Equity markets weren't overly jittery in the first quarter, but SuperInvestors showed signs of being so, particularly
with high-profile technology companies and with certain contrarian bets they'd made just the quarter before.
Jeffrey Ubben of SuperInvestor
ValueAct Capital had a ready answer
when asked in a recent Value Investor
Insight interview (December 30, 2010)
why so many of his portfolio companies
tend to be acquired: We've been on the
board of 27 of the 60 core investments
we've made over the past 11 years and, of
those, we've executed divestitures or
entire company sales in about 20. That
has been driven by our belief that getting
smaller often means getting better. When
all goes well, the result is a high-quality
business with plenty of free cash flow that
has been made simpler and more
investable. That can be interesting to pri-

vate equity or strategic buyers. With

money to spend and organic growth
opportunities constrained, he expected
both corporate and financial buyers to
step up M&A activity in 2011.
While buyouts are excluded from the
SII tables tracking top-investor selling
activity each quarter (because such information isn't actionable), Ubben's prediction so far appears prescient, as an
increasing number of frequent or large
sales last quarter were of acquired companies, including Alcon, Allegheny Energy,
Atlas Energy, Genzyme and McAfee.
Future targets? Here are ValueAct's topfive U.S. holdings at March 31: Valeant

What Theyre Selling:

Tough Questions
Company

Ticker

Pharmaceuticals, Sara Lee, C.R. Bard,

VeriSign and Willis Group.
Shares of high-profile technology companies Apple, Cisco, Yahoo, Google and
Amazon.com were frequently sold by
SuperInvestors last quarter. Negative sentiment was the highest in networking
giant Cisco, a contrarian bet among starinvestors in recent quarters as disappointing earnings pummeled the stock price.
As the pummeling continued its $16.25
share price is near early-2009 lows five
investors took some or all of their money
riding on the company off the table.
Sentiment is more divided on Yahoo.
The Internet graybeard has stabilized

Four or more SuperInvestors reduced or eliminated positions in these stocks during the first
quarter. Tech stocks Apple, Cisco, Yahoo, Amazon.com and Google came in for frequent selling.
Affection proved fleeting in Apollo Group and General Motors. Sold out completely: Supervalu.

Industry

Q1 2011

Price@
6/2/11

Low

High

# of Decreased or % Change In Shares

Closed Positions
Held - All Funds

Potash

POT

Fertilizer

55.50

50.25

63.97

(-62.1%)

JPMorgan Chase

JPM

Banking

41.61

42.65

48.36

(-0.7%)

LyondellBasell

LYB

Chemicals

41.70

33.57

41.12

(-16.8%)

Apollo Group

APOL

For-Profit Education

46.90

34.43

46.42

(-92.8%)

Apple

AAPL

Computers/Consumer Electronics

346.10

324.84

364.90

(-10.4%)

Banking

40.01

43.40

51.50

(-20.0%)

Automobiles

29.60

30.20

39.48

(-46.4%)

Citigroup
General Motors

C
GM

CIsco

CSCO

Network Technology

16.25

16.97

22.34

(-45.2%)

Yahoo

YHOO

Internet Services

16.02

15.41

17.84

16.8%

Amazon.com

AMZN

Internet Retail

193.65

160.59

191.60

(-35.3%)

Commercial Finance

43.68

41.35

49.57

(-31.1%)

CIT Group

CIT

Comcast

CMCSA

Cable Services

24.63

22.05

25.91

(-10.9%)

Express Scripts

ESRX

Pharmacy Services

58.04

50.91

58.77

(-24.8%)

Google

GOOG

Internet Services

528.06

551.28

642.96

(-27.8%)

Pfizer

PFE

Pharmaceuticals

21.00

17.62

20.57

(-10.0%)

Supervalu

SVU

Grocery Stores

9.16

7.06

9.87

(-100.0%)

Teva Pharmaceutical

TEVA

Pharmaceuticals

50.53

47.30

57.08

(-15.7%)

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of March 31, 2011.

June 3, 2011

www.superinvestorinsight.com

SuperInvestor Insight 4

WHAT THEYRE SELLING

under CEO Carol Bartz, who has streamlined operations and recommitted the
company to building out key content
areas in an effort to garner incremental
revenue as advertising dollars continue to
shift online. Big questions remain, however, about how it plans to deploy its significant cash hoard as well as what the ultimate value is of illiquid and intransparent
holdings in Yahoo Japan and China's
Alibaba Group. While five investors
reduced or eliminated positions in Yahoo
last quarter, new stakes established by
Eminence Capital and Greenlight Capital
caused the overall shares held in the company by SuperInvestors to increase.
In addition to collectively changing
their minds about Cisco, star managers
also did a quick about-face last quarter in
Apollo Group and General Motors. Forprofit education companies such as
Apollo have been reeling in anticipation

of stringent new regulations expected

from the Department of Education. From
$75 in October 2009, Apollo's shares
bottomed at $34 in Q4 2010, when it was
among the most-bought stocks by top
investors. In the most recent quarter, in
which Apollo announced its new-student
enrollment fell 45% from the prior year,
six investors apparently concluded any
semblance of stability was too far off and
sold down their positions, five of them
completely. Timing? On the day new
DOE guidelines were announced this
week, Apollo shares rose 11%, to $46.90.
After nine investors took new positions in GM in the prior quarter when it
came public again at $33 six of those
sold all of their shares last quarter.
Having restructured its income statement
and balance sheet, GM will benefit from
significant operating leverage if global
automotive sales continue to rebound and

Citigroup

Ticker

Funds co-managed by Whitney Tilson own

CIT, Citigroup and JPMorgan Chase.

These 15 stocks were the largest positions eliminated by different SuperInvestors last quarter.
Pershing Square went against the grain in selling Target, which four other investors bought.
Pennant and Appaloosa appeared to be of like mind concerning Cisco, with good timing so far.

What Theyre Selling:

Selling Out
Company

if the company's recast product line can

win back customers. Uncertainty over
both may help explain the quick exits
from the stock, as well as its unambitious
7x trailing earnings multiple.
SuperInvestors were not avid owners
of commodity-related stocks as commodities prices ran up over the past year, but
they did take profits in select cases during
the first quarter. Fertilizer-company
Potash was the most-sold stock, as each
of the eight investors with positions at
January 1 cut them back during the quarter. Among the top individual complete
sales: Lone Pine Capital's elimination of
its stake in mining company Teck
Resources, Highfields Capital's exit from
Exxon Mobil, and Omegas sell-off of
Plains Exploration & Production. SII

Industry

Price@
6/2/11

Q1 2011
Low

High

Investor

Value @ 12/31
($mil)

Banking

40.01

43.40

51.50

Viking

$714.2

Teck Resources

TCK

Mining

50.60

47.96

65.37

Lone Pine

$455.0

Target

TGT

Discount Retail

47.95

49.03

60.97

Pershing Square

$444.9

Pfizer

PFE

Pharmaceuticals

21.00

17.62

20.57

Paulson

$399.2

ITT Corp.

ITT

Diversified Industrial

56.31

51.80

64.00

Relational

$376.4

Exxon Mobil

XOM

Oil & Gas

81.33

73.64

88.23

Highfields

$337.3

Express Scripts

ESRX

Pharmacy Services

58.04

50.91

58.77

Blue Ridge

$274.0

Coca-Cola Enterprises

CCE

Beverage Distribution

28.63

23.63

27.46

Scout

$267.6

Charles Schwab

SCHW

Discount Brokerage

17.06

17.10

19.69

Ivory

$188.4

General Motors

GM

Automobiles

29.60

30.20

39.48

JANA

$130.1

Cisco

CSCO

Network Technology

16.25

16.97

22.34

Pennant

$128.5

Airgas

ARG

Industrial Gases

67.57

60.76

67.41

Farallon

$128.2

Cisco

CSCO

Network Technology

16.25

16.97

22.34

Appaloosa

$122.4

Beckman Coulter

BEC

Medical Services/Supplies

83.32

70.65

83.22

Eminence

$111.7

Plains Exploration

PXP

Oil & Gas

35.60

31.90

40.06

Omega

$104.7

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of March 31, 2011.

June 3, 2011

www.superinvestorinsight.com

SuperInvestor Insight 5

WHAT THEY OWN

Deeper Analysis, Better Information

While big banks more or less proxies for economic recovery remain core SuperInvestor holdings, the stories
behind other widely held positions include a smattering of restructurings, spinoffs, and even a new IPO.
There's a telling passage in David
Einhorn's Fooling Some of the People All
of the Time in which he describes setting
up a meeting with a large institutional
owner of Allied Capital stock, which
Einhorn's Greenlight Capital was very
publicly short. The motivation was not
only to convey his work on the company,
but also to learn. In an impersonal and
anonymous market, we like to know
what people on the other side of our
investments are thinking, he writes. To
succeed, we like to feel we have an edge
through deeper analysis or better information than those who disagree with our
views.

What Einhorn learned was how little

his counterpart knew about Allied. He
hadn't looked at Einhorn's famously
detailed analysis of it and when asked why
he held the stock responded only that it
was part of a basket approach to owning high-yielding stocks. Einhorn's conclusion: It wasn't an issue of investors
understanding our views and disagreeing.
In addition to small investors, Allied's
other investors were big funds managing
lots of other people's money too busy or
too lazy to worry about the details other
than the distribution.
Deeper analysis or better information
than those who disagree captures nicely a

Six or more SuperInvestors held stakes in these stocks at the end of March. Megabanks Citigroup,
JPMorgan Chase and Wells Fargo remain popular (if not recently successful) holdings. Aon, MetLife,
CareFusion and HCA Holdings are newcomers this quarter, while Qualcomm is back after a hiatus.

What They Own:

Information Edge
Company

Ticker

Citigroup

Microsoft

central element of how superior investors

succeed. It isn't present in every idea and
obviously doesn't guarantee a positive outcome if it is, but that it more likely supports each SuperInvestor holding is a primary reason to pay attention to what such
investors are buying, what they're selling
and what they own. Trying to divine what
they see that the market is missing can't
help but suggest opportunity.
The list of most frequently owned
stocks by SuperInvestors at the end of the
first quarter (see table below) includes
four newcomers: Aon, CareFusion, HCA
Holdings and MetLife. Medical equipment and supply company CareFusion

Industry

Price@
6/2/11

52-Week
Low
High

# of Portfolios
That Own

Price vs.
52-Week High

Banking

40.01

36.20

51.50

11

(-22.3%)

MSFT

Computer Software/Services

24.22

22.73

29.46

11

(-17.8%)

JPMorgan Chase

JPM

Banking

41.61

35.16

48.36

10

(-14.0%)

Apple

AAPL

Computers/Consumer Electronics

346.10

235.56

364.90

(-5.2%)

LyondellBasell

LYB

Chemicals

41.70

14.86

48.12

(-13.3%)

Wells Fargo

WFC

Banking

27.16

23.02

34.25

(-20.7%)

Aon

AON

Insurance Brokerage

51.56

35.10

54.58

(-5.5%)

CVS Caremark

CVS

Pharmacy Services

38.53

26.84

39.50

(-2.5%)

Google

GOOG

Internet Services

528.06

433.63

642.96

(-17.9%)

Pfizer

PFE

Pharmaceuticals

21.00

14.00

21.45

(-2.1%)

UnitedHealth

UNH

Health Insurance

49.39

27.13

51.46

(-4.0%)

CareFusion

CFN

Medical Equipment/Supplies

27.74

20.63

29.97

(-7.4%)

HCA Holdings

HCA

Hospitals

34.36

30.36

35.31

(-2.7%)

MetLife

MET

Insurance

42.68

35.38

48.72

(-12.4%)

Potash

POT

Fertilizer

55.50

27.95

63.97

(-13.2%)

Qualcomm

QCOM

Wireless Technology

57.80

31.63

59.84

(-3.4%)

WellPoint

WLP

Health Insurance

78.00

46.52

81.92

(-4.8%)

Williams

WMB

Oil & Gas

30.58

17.53

33.47

(-8.6%)

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of March 31, 2011.

June 3, 2011

www.superinvestorinsight.com

SuperInvestor Insight 6

WHAT THEY OWN

continues on the restructuring path it has

pursued since being spun off by Cardinal
Health in September 2009, including an
extensive efficiency drive and the divestiture of non-core operations. While
restrained spending by recession-wary
hospitals has obscured tangible financial
evidence of the recast operations, six top
investors appear to be betting that such
evidence will be forthcoming as pent-up
customer demand is released. The story is
somewhat more straightforward at insurer MetLife, whose business continues to
steadily return to pre-crisis normalcy
while its valuation reflects post-crisis fear
(see Stock Spotlight, p. 8).
CVS Caremark, owned by seven star
investors, returns to the most-owned list
for the ninth quarter in a row. Jon
Jacobson of Highfields Capital described
the investment case for the stock recently
in Value Investor Insight [February 28,
2011], focused on the strong cash flow

characteristics and secular tailwinds in

the company's retail drugstore business,
what he considers a free option on the
turnaround of its pharmacy benefits management operation, and the potential for
significant share buybacks.
Integrated natural gas firm Williams
remains the only energy company to garner widespread SuperInvestor interest,
owned by six investors at quarter's end.
Given its various and sundry assets
upstream, downstream, in-production
and pre-development the company
lends itself to a sum-of-the-parts analysis
like that articulated by Atlas Capital's
Robert Alpert in the April 29 issue of VII,
resulting in an intrinsic share value of
$42, more than 35% above today's price.
Among the single largest holdings of
individual top managers (see table below)
is one recent spinoff, Motorola Solutions,
which provides communications devices
and systems primarily used by govern-

Funds co-managed by Whitney Tilson own C,

JCP, JPM and MSFT.

These are the 15 largest holdings of different individual SuperInvestors as of the end of 2011s first
quarter. Two investors made Valeant Pharmaceuticals their largest holding, while no other investors
held positions of any size in individual top holdings Sears (by Lampert) and Estee Lauder (by Viking).

What They Own:

Top Holdings
Company

mental customers, from police forces to

road crews. In a presentation last month
at the Value Investing Congress, ValueAct
Capital's Jeff Ubben described multiple
ways to win with the stock, including
margin expansion, new broadband product cycles driving demand, an eventual
rebound in state and local government
spending, and intelligent use of the company's cash pile, now accounting for
roughly 40% of its market cap. Fellow
SuperInvestor Icahn Capital obviously
agrees, as evidenced by its $1.4 billion
stake in the company at quarter's end.
The conviction behind only two of the
fifteen biggest individual positions was
uniquely held: no other SuperInvestors
joined Viking Global in owning Estee
Lauder, or Eddie Lampert's ESL
Investments in holding Sears. SII

Ticker

Industry

52-Week

Price@
6/2/11

Low

High

Investor

Price vs.
52-Week High

Coca-Cola

KO

Beverages

66.04

49.47

68.77

Berkshire

(-4.0%)

SPDR Gold Trust

GLD

Gold ETF

149.50

113.08

153.61

Paulson

(-2.7%)

Sears

SHLD

Department Stores

68.29

59.21

94.79

Lampert

(-28.0%)

Motorola Solutions

MSI

Communications Devices

47.30

36.52

47.91

Icahn

(-1.3%)

J.C. Penney

JCP

Department Stores

33.07

19.42

41.00

Pershing Square

(-19.3%)

Valeant Pharmaceuticals

VRX

Pharmaceuticals

52.49

18.07

55.00

ValueAct

(-4.6%)

SLM Corp.

SLM

Student Lending

16.84

10.05

17.11

Highfields

(-1.6%)

CVS Caremark

CVS

Pharmacy Services

38.53

26.84

39.50

Relational

(-2.5%)

Estee Lauder

EL

Cosmetics/Fragrances

99.48

54.17

104.00

Viking

(-4.3%)

El Paso

EP

Oil & Gas

20.60

10.60

21.54

JANA

(-4.4%)

Apple

AAPL

Computers/Consumer Electronics

346.10

235.56

364.90

Lone Pine

(-5.2%)

Pfizer

PFE

Pharmaceuticals

21.00

14.00

21.45

Greenlight

(-2.1%)

McKesson

MCK

Pharmacy Services

85.04

57.81

87.32

Glenview

(-2.6%)

Valeant Pharmaceuticals

VRX

Pharmaceuticals

52.49

18.07

55.00

Blue Ridge

(-4.6%)

ViaSat

VSAT

Satellite Communications

43.21

30.80

46.00

Baupost

(-6.1%)

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of March 31, 2011.

June 3, 2011

www.superinvestorinsight.com

SuperInvestor Insight 7

STOCK SPOTLIGHT: METLIFE

Mr. Clean
It's probably a sign of the times that the financial-services company attracting the most aggressive SuperInvestor
buying attention in the first quarter comes from a decidedly plain-vanilla neighborhood of the sector.
There are any number of financialservices companies today trading at rockbottom share valuations as investors
remain vexed by widespread uncertainty.
Are capital levels adequate to withstand
another sharp economic downturn or to
satisfy increasingly proactive regulators?
What happens to earnings if historically
low interest rates start to consistently
increase? What ticking timebombs
remain in vast investment or loan portfolios? SuperInvestors have certainly not
shied away from such uncertainty three
of the six most widely held stocks in their
portfolios at the end of the first quarter
were megabanks Citigroup, JPMorgan
Chase and Wells Fargo.
It's most likely a sign of the times that
the financial player attracting the most
ardent top-investor buying attention last
quarter comes from a plain-vanilla neighborhood of the financial sector. Six
investors established new positions or
added to existing ones in MetLife, the
$45-billion-market-cap insurer focused
on life, health and annuity-based products worldwide. With its Peanuts-inspired
advertising and squeaky-clean reputation
for prudence borne out by its ability to
raise private capital early in the financial
crisis and not needing to take any government aid it's a no-surprises type of company at a time when the market's appetite
for potential surprise in financials
appears to be low.
Prospects overall in the company's
main lines of business remain solid.
Relatively weak is U.S. life insurance,
where MetLife is the largest player, due
to chronic commodity pricing of individual policies and more cyclically low
prices for group plans. One offset to that
has been a boom in sales of annuitybased products, as buyers gravitate
toward annuities backed by the largest
and most financially secure companies
and as once-aggressive competitors like
June 3, 2011

Hartford and AIG's SunAmerica retreat

from the business.
The bigger profit driver today is the
company's expanded international presence, fueled by its $15.5 billion acquisition last year of government-ward AIG's
ALICO subsidiary. Once a tentative player outside the U.S., MetLife now generates a 40% and growing share of its rev-

enues internationally up from 15% preacquisition after adding ALICOs wellestablished franchises in Japan as well as
elsewhere in Asia, eastern Europe, the
Middle East and Latin America. Profit
growth outside the U.S. was the biggest
contributor to the company's expectations-beating 20% increase in 2011 firstquarter earnings.

INVESTMENT SNAPSHOT

MetLife
(NYSE: MET)

Valuation Metrics

Business: Global provider of individual life,

auto and homeowners insurance, as well as
a wide variety of commercial insurance,
retirement and savings products.

(@6/2/11):

Share Information

Largest Institutional Owners

(@6/2/11):

Trailing P/E
Forward P/E Est.

MET
15.0
8.2

S&P 500
16.4
13.4

(@3/31/11):

Price

42.68

52-Week Range
Dividend Yield
Market Cap

35.38 48.72
1.7%
$45.11 billion

Financials (TTM):

Revenue
Operating Profit Margin
Net Profit Margin

$55.90 billion
8.5%
5.3%

Company

% Owned

State Street Corp

Vanguard Group
Fidelity Mgmt & Research
JPMorgan Chase
Massachusetts Financial Svcs

4.0%
3.6%
2.6%
2.5%
2.3%

Short Interest (@5/13/11):

Shares Short/Float

2.9%

METLIFE PRICE HISTORY

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

2009

2010

2011

10

THE BOTTOM LINE

The market isnt recognizing the companys earnings power as its core businesses
return to normal and it assimilates the recent transformative acquisition of AIGs
ALICO subsidiary, says Alan Straus. Applying a 1.2x multiple to his $51-52 estimate
of year-end 2012 company book value, the shares would trade in the low $60s.
Sources: Company reports, other publicly available information

www.superinvestorinsight.com

SuperInvestor Insight 8

STOCK SPOTLIGHT: METLIFE

Alan Straus of SuperInvestor Omega

Advisors, which quintupled its stake in
MetLife last quarter, believes the operating momentum will continue. He expects
the companys earnings per share to
increase from 2010s depressed $4.37 to
nearly $6 in 2012. That would return it
to historical profitability levels, with
return on equity rising 100 basis points
per year, to 12.2% by 2012.
What would such performance mean
for MetLife's shares, now trading around
$42.70? Excluding accumulated other
comprehensive income essentially taking out quarter-to-quarter gains and losses in its investment portfolio the company's book value at the end of the first
quarter was $43.63. That the shares
trade at a slight discount to book value
makes no sense, says Straus, for an insurance company earning more than $5 per
share in net income and double-digit
returns on equity. More appropriate
would be a 1.2x multiple, he says, which
on a book value that he believes will
increase to $51-52 per share by the end

of 2012 would result in a stock price in

the low $60s.
The risks? While no $440 billion
investment portfolio is without its troubled holdings MetLife owns some vul-

ON METLIFES VALUATION:

Something will correct the

misvaluation. Companies
like this just should not trade
at book value.
nerable European sovereign debt, for
example Straus considers the overall
portfolio to be incredibly clean. Rising
interest rates would negatively impact the
value of the company's vast fixed-income
assets, but he would expect the ultimate
impact on book value to be relatively
small as company earnings replenish the
coffers and cash flow from the portfolio
can be reinvested at higher rates.

Also softening any potential blows is

the at least $2 billion in excess capital
that Straus expects the company to have
at its disposal by this year's second half. If
the economic environment remains relatively sanguine, he would expect some or
all of that to be deployed to fund additional acquisitions or to return capital to
shareholders through share repurchases.
The prospect of management misallocating the excess capital doesn't greatly concern him: If they can find another deal
with the financial characteristics and
assets of ALICO and I wouldn't expect
them to do one otherwise I'd take that
all day long over share repurchases.
Whatever the catalyst, Straus doesn't
expect the unrecognized value he sees in
MetLife to stay that way for long:
Maybe it's the capital continuing to
grow, or the return on equity continuing
to increase, or the announcement of a big
share buyback, but something will correct the misvaluation, he says.
Companies like this just should not
trade at book value. SII

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SuperInvestor Insight 9

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