Thoughts, Value Investing

Stocks will be Priced According to their Future Earnings

Just saw a video where Bruce Berkowitz of Fairholme Fund was interviewed by Consuelo Mack. One part of the interview is interesting and showed how he thought about investments. He is currently heavily bought into Financials (e.g. C, CIT, AIG, GS, BAC, RF, MBI, MS), and his view is that when their earnings return to normal, the stocks will appreciate. A key point is that I took away is that: If a company can survive through whatever the current crisis is, it will be priced eventually based on its future earnings that it can achieve after the crisis.

Gurufocus has an article here about his thought process in buying Wells Fargo in 1992. The key questions to ask are: i) After this crisis, what would the company be earning in a normal period? ii) how bad is the crisis? will the company survive the crisis?

This also reminds me a bit about John Neff’s point that stocks are priced based on earnings, and you essentially get the periodic dividend payments for free🙂

Berkowitz in the interview also stressed the importance of holding cash to give the flexibility and currently has 1/3 of his Fund in cash / fixed income. Meaning that he does not have to sell stocks if there are redemptions or if something cheaper comes along , is also able to take advantage of opportunities when they present themselves, and can buy more if the price drops further.

Other tidbits from the Gurufocus article is that he looks at free cash flow, defined as the cash a company would generate annually from operations after all cash outlays necessary to maintain the business in its current condition.


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