The above table shows
that Blue Chip stocks are much cheaper today than they were at the
2007 stock market peak. Relative to 2007, therefore, stocks
represent great value. When we are offered Blue Chip businesses at
sale prices, as they are today, we buy.
investors should be optimistic. In addition to Blue Chips being
bargains today, the U.S. is at an advantage to the rest of the world
because we have cleaned up our banking system, our housing recovery
continues, and we are experiencing a long-term energy production
Q1 Portfolio Changes
During the quarter we
made two changes to the portfolio. We sold out of our position in
Charles Schwab (“Schwab”) and initiated a position in in American
International Group (“AIG”).
Please keep in mind,
these commentaries should not be construed as a recommendation to
buy or sell the securities discussed. Such decisions are made only
within the context of the market environment as we perceive it at
the time of the decisions and the structure of the diversified
portfolio of which the securities are a component.
Sale of Charles
In 2012, when we
began purchasing shares of Charles Schwab, their earnings were being
depressed by the Fed’s low interest rate policy. Specifically, low
interest rates force Schwab to waive fees on its money market funds
and suppress the spread income Schwab earns on its loan book. Our
feeling was that the eventual rise in interest rates and, thus,
earnings would drive the stock higher.
As interest rates
rose to begin the year, investors began to view Schwab similarly.
Importantly though, we have yet to see any improvement in company
earnings. To use a common expression, we believe “the stock has
gotten ahead of itself.” Fundamentally-speaking, without an
improvement in earnings there is little to support the stock;
therefore, we concluded a major decline in price from current levels
is quite possible.
Since our primary
goal at Golub Group is to protect your capital, we decided to sell
Schwab out of your portfolio with the hope that we’ll have the
opportunity to reinvest in the company on more favorable terms in
Purchase of American
AIG is our most
recent addition to the portfolio. Those of us who follow the news
are well-aware of the government bailout provided to the company
during the financial crises. What many individuals fail to realize,
however, is that AIG’s insurance operations did not cause the
company’s demise; in actuality, a unit that managed a large
derivatives portfolio, called AIG Financial Products, was primarily
The company has made
enormous progress since the dark days of 2009. New management has
sold off non-core businesses, all government bailout proceeds have
been repaid, and, most importantly, the complex derivatives
portfolio that necessitated the government bailout has been wound
down by more than 95%.
Despite all of this
favorable progress, investor sentiment toward AIG remains poor, and
the stock continues to trade at depressed levels. According to our
calculations, AIG trades at a P/E multiple of just 6.5x our estimate
of “normalized” earnings. Therefore, as sentiment improves over
time, we expect to see a material reevaluation of the share price.