Author: Amour Gefen
Covestor model: Macro Plus Fundamentals
Disclosures: Disclosures: Long SAM, OKSB
I’m writing this month’s letter on June 17 as we are coming off a terrible week marked by a huge decline in equities this past Tuesday. While I still believe that being diversified is a pillar to a successful long term strategy, this week all sectors gave in to the poor job data and underwhelming economic reports.
To us it comes as little surprise. Last month I wrote about the spike in commodities not keeping up with wage growth. With 70% of our GDP reliant on our consumers’ confidence, the numbers are quite in line with expectations. I believe that as long as input costs do not rise due to a knee jerk reaction (QE3), this will be a 1-2 quarter phenomenon. The same can be said for the recent Euro strength.
I promised to take some time to reflect on our holdings. This month I want to share my take on two stocks we own, SAM and OKSB. SAM is our latest addition, and OKSB is to date our worst performer.
The Boston Beer Co (NYSE: SAM) is a perfect example of the value in a brand. We own other stocks that have impeccable brand recognition such as Target Corporation (NYSE: TGT), Google Inc. (NASDAQ: GOOG), and Dr Pepper Snapple Group Inc. (NYSE: DPS). In order to develop and maintain that brand, SAM has spent heavily and wisely on advertising. They are now the largest American-owned U.S brewery, yet represent a paltry 1% of the entire market. There is plenty of room for growth. SAM has a history of buybacks and sports a pristine balance sheet with no debt and strong free cash flow. SAM buys hops in Euros and sells their beverages domestically in USD. If the Euro weakens and commodity prices retrace, we should see earnings and margins improve. While SAM may seem a bit expensive, their brand and management team are worth paying up for….cheers.
Southwest Bancorp (NASDAQ: OKSB) is the holding company for Stillwater National Bank and Trust Co, and Bank of Kansas. While it happens to be our worst performer to date, I believe this stock is simply suffering from the broad-based underperformance of the banking sector. There is validity to the fears and lower valuations being put on the sector as a whole, but I believe OKSB dodges most of the problems facing other banks. Lending in the states of OK, KS, and TX is less risky than CA, FL, and NV. Relatively few of the company’s loans are for single family to four family housing - the company primarily lends to the health care sector. As of end of Q1 2011, OKSB trades at a discount to book value, and is well-capitalized. OKSB does still owe money to the government from TARP - about $70 million.
This market is tough to be long. However, unless I see fundamentals breaking down in my current macro outlook, I do not anticipate making large changes to our holdings.
Sources:
SAM Balance Sheet information from Yahoo Finance http://finance.yahoo.com/q/bs?s=SAM+Balance+Sheet&annual
Company investor presentation, February 2011, http://www1.snl.com/Cache/1001157496.PDF?D=&O=PDF&IID=100577&Y=&T=&FID=1001157496
OKSB Balance Sheet information from Yahoo Finance:http://finance.yahoo.com/q/bs?s=OKSB+Balance+Sheet&annual