Twenty-six months ago I recommended that investors buy Loews (NYSE:L), the holding company run by the Tisch family. Since then the stock is up 112% compared to 84% for the Dow Jones U.S. Total Stock Market Index. You might think that the strong performance of its stock over the last two years would make me hesitant to recommend it once again; you'd be mistaken. Even trading above $42, there are at least three reasons why you should buy Loews stock. (For more on growth stock, check out Steady Growth Stocks Win The Race.)
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Sum of the Parts
As part of Loews 2010 discussion of its business, it included a four-page financial portrait. One of the sections was entitled "Sum Of Its Parts," which broke down the potential intrinsic value of its business. The first and most obvious place to start is its ownership stake in Diamond Offshore (NYSE:DO), CNA Financial (NYSE:CNA) and Boardwalk Pipeline (NYSE:BWP). Loews owns just over 50% of Diamond, 90% of CNA Financial and 61% of Boardwalk Pipeline. As of May 10, this represents $15.7 billion in market cap while all of Loews is $17 billion. This means you get $4.6 billion in cash and short-term investments, 100% ownership of privately held HighMount Exploration, Loews Hotels and Boardwalk Pipeline's general partner, not to mention Class B shares and subordinated debt in Boardwalk Pipeline for just $1.3 billion.
Put another way, the three public companies are worth $38 a share. Add approximately $11 a share for the cash and short-term investments and you are getting $7 in cash and short-term investments as well as the private companies for nothing. That's a good deal. (To learn more about value investing, read The Value Investor's Handbook.)
Tangible Book Value
Benjamin Graham looked for companies trading at less than two-thirds tangible book value per share. That's rare today. Coca-Cola (NYSE:KO) currently trades at 32.1 times tangible book value per share, while Loews has a lowly multiple of one. Even Berkshire Hathaway (NYSE:BRK.A), also a holding company and the standard everyone lives by, trades for slightly less than two times tangible book value per share. While there are surely others trading for less, no company that I'm aware of does a better job allocating capital.
Gavin Graham, CEO of Graham Investment Strategy, recently suggested that Loews is trading at a double-discount. First, its stock trades for less than the net asset value per share at the end of 2010 and secondly, two of the three public companies discussed earlier; also trade at a discount to NAV. (To learn more on the importance of book value to investors, see Book Value: How Reliable Is It For Investors?)
In the past 40 years, Loews management has reduced its share count 68% from 1.3 billion to 413 million. It repurchases shares when it feels the intrinsic value of its stock isn't being reflected in the price. Since 1950, its shares have averaged an annual total return of 17.6%, 800 basis points higher than the S&P 500. In 2010, it repurchased nearly 11 million shares at an average price of $37. Normally this wouldn't be that impressive because that was 22% more than the stock's low in 2010. However, given its total return over the past 60 years, combined with share repurchases as high as $43.06 in the first quarter of 2011, it seems that management is quite confident that shareholder cash is being used effectively and that the price will be much higher soon enough. (For more check out A Breakdown Of Stock Buybacks.)
The Bottom Line
Loews five-year high is $58.57, a 40% increase from here. I see it blowing through the $60 mark sometime in early 2012, which is a perfectly adequate return in just 12 months. (For more help on choosing stocks, read How To Choose The Best Stock Valuation Method.)
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