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|  | AUGUST 2, 2005
A Growing Dash of BuffettIn his quest to find well-priced stocks, Sanibel Captiva Trust's Timothy Vick has found no better model than the Sage of OmahaStocks are still the place to be for the long haul, says Timothy Vick, senior vice-president of the Sanibel Captiva Trust Co., despite recent issues such as high oil prices and terrorist attacks. A long-time practitioner of the methods taught by Benjamin Graham and Warren Buffett, Vick thinks that as long as the economy continues to have strong legs and earnings rise, stock prices will keep pace. The money manager has modified the Buffett-Graham approach to target long-term growth companies that are trading at attractive values. Instead of "cheap-value plays," Vick prefers to focus on growth at the right price. Companies that fit this bill that he has recently purchased include eBay (EBAY ), Chico's FAS (CHS ), UPS (UPS ), First Data (FDC ), Washington Mutual (WM ), and Wal-Mart (WMT ). FAMILIARITY BREEDS CONTENT. Among smaller-cap names, he likes VeriSign (VRSN ), Affiliated Computer Systems (ACS ), and Mercury Interactive (MERQ ). These were a few highlights of an investing chat with Vick presented July 28 by BusinessWeek Online on America Online, in response to questions from the audience and from Karyn McCormack of BW Online. Edited excerpts from this chat follow. AOL subscribers can find a full transcript at aol.businessweek.com/chat. Q: Tim, the stock market finished on a strong note today, as investors cheered earnings news. What's your outlook for stocks at this juncture? A: We think that a lot of the uncertainty that has been facing investors the past several months has been slowly evaporating. The market is getting used to oil at $60 a barrel, getting used to periodic terrorist attacks in the Middle East, and getting used to conflicting economic signals. Beyond that, we see, so far, unexpectedly good growth on the part of a lot of companies that have reported earnings. This should be a good catalyst, propelling the market upward in the second half of the year. As long as earnings continue to rise at current rates and we can sustain economic growth in the 3% range, the stock market has to keep pace. Q: Update us on your investing strategy -- are you still practicing the teachings of Benjamin Graham and Warren Buffett? A: Absolutely. I think any long-term investor needs a good educational grounding in the methods of Graham and Buffett. It can't help but make you a better investor. At Sanibel Captiva Trust, we've modified the Buffett-Graham approach to target long-term growth companies that are trading at attractive values. We don't necessarily chase the traditional value stocks that trade at single-digit price-earnings ratios. First and foremost, we study companies looking for the best and brightest in each industry. Then we measure how fast these companies can grow and whether or not the present price can deliver a suitable return for our clients. In a market like this, there are many types of cheap-value plays out there that anybody can make money on. But we prefer to focus on growth, foremost, while making sure that the price we're paying for growth can deliver a return that can exceed the S&P 500-stock index. We think the S&P 500 can deliver returns between 5% and 7% a year over the next decade. (Given that, we are always on the prowl for longer-term investments that can get us returns in the 10-15% range.) From time to time, we will sprinkle in some shorter-term value plays if we think the fundamentals are strong and the market has mispriced the security egregiously. But we're not finding too many of the traditional Graham-Buffett plays right now. Q: What are the stocks that you're buying or holding right now? (Top holdings?) A: Lately, we've been picking up a lot of mid-cap and large-cap companies that show good growth prospects but that have recently been beaten up to good values. For example, and this may surprise a lot of value investors, we were buying eBay (EBAY ) at around $31. We were also buying the apparel retailer Chico's FAS (CHS ) in the low $30s. We have also picked up shares of UPS (UPS ) under $70; we averaged down on Harley-Davidson (HDI ) when it sunk into the mid-$40's, and we've been taking positions in more traditional, established, growing companies such as First Data (FDC ), Washington Mutual (WM ), and even Wal-Mart (WMT ). In the small-cap sector, we like VeriSign (VRSN ), Affiliated Computer Systems (ACS ), and Mercury Interactive (MERQ ). Q: What would Buffett say about Google (GOOG ) today and in the future? A: First of all, from Mr. Buffett's perspective, there's no way it can pass the "moat" test. I don't think any of us here can close our eyes and imagine what kind of company Google is going to be in 5 or 10 years. We don't know, still, how competitive the market is going to be for its services, and whether companies like Microsoft (MSFT ) might one day muscle them out of business. Keep in mind that while Google sounds very sexy to the lay investor, it is still essentially a new-era model of an old telephone book. At some point, companies like this experience mature growth and start generating a lot of cash flow. Only then can you really value the stocks in the marketplace. I took a look at Google when it came public and determined the company was not worth the offering price. Since then, the stock has nearly quadrupled, although there has not been a concurrent growth in the intrinsic value of the company. Momentum players might make more money on it in the near term, but the company is going to have to generate significantly more sales and earnings to make it worth the present price of $294. Needless to say, we didn't buy Google, and we are crying into our finance textbooks. Q: Would he invest in China stocks? A: He already has. If you recall, he took a sizable interest in PetroChina (PCCYF.PK ) in 2003, back when the company was trading for around $21 per share. He has more than quadrupled his money in that investment in a couple of years. I don't think Mr. Buffett necessarily bought the company because it's located in China, however. That country is still fraught with economic, political, and corruption risks. What Mr. Buffett saw was a huge oil conglomerate being valued at about five times its earnings, perhaps six times its cash flow, throwing off a 6% dividend yield in a market where oil prices were still only $21 a barrel. He hit the proverbial Chinese home run. This gets to the point that Mr. Buffett is starting to scour more of the world in trying to find values that can add to the share price of Berkshire Hathaway. In the future, it would not surprise me to see him take multibillion-dollar positions in foreign companies, especially if he can latch onto companies with economic moats.
BW MALL
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