SII 2011.06

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In his first book, You Can Be a Stock

Market Genius, investing legend Joel

Greenblatt recounts a visit to the then-

famed Manhattan restaurant Lutece. He

was perusing the menu when a man came

by to offer help with ordering. Greenblatt

pointed to one of the appetizer choices andasked, “Is this one any good?” His helper,

who turned out to be the restaurant's head

chef Andre Soltner, replied “No, it stinks!”

As Greenblatt writes:

Even though he was just kidding around,

I did get the point. Pretty much every-

thing on the menu was going to be good.

Selecting Lutece was the important culi-

nary decision, my particular menu choic-

es were just fine tuning.

Keep this concept in mind. It's great to

look for investments in places others are

not, but it's not enough. You also have

to look in the right places. If you prese-

lect investment areas that put you ahead

of the game even before you start (the

“Luteces” of the investment world), the

most important work is already done.

You'll still have plenty of decisions to

make, but if you're picking and choosing

your spots from an already outstanding

menu, your choices are less likely to

result in indigestion.

Ask any SuperInvestor where they “typ-

ically” find opportunity and they have

ready answers – examples of which popu-

late the most-bought and most-owned

tables in each issue of SII . The once high-

growth company that hits a wall and needs

to retrench. The small-cap company Wall

Street is ignoring. The spinoff that under-

promises but is likely to outperform (a par-

ticular Greenblatt favorite). The best com-

pany in a down-but-not-out sector. The

once-bankrupt company with a new leaseon life. The unwieldy company that needs

to restructure and simplify. The point is not

to be an expert on every possible situation,

but to know what you've seen work,

understand why, and focus precious time

on similar potential opportunities.

One idea category we have yet to hear

touted as fertile ground for bargain hunt-

ing: the true initial public offering.

SuperInvestors will buy companies return-

ing to public markets after bankruptcy,

such as LyondellBasell and GeneralMotors in the fourth quarter of 2010, or

after having gone through private-equity

ownership, such as HCA Holdings last

quarter. We’re fairly confident, however,

that Groupon's planned IPO is one they're

likely to sit out. SII

I N T H I S I S S U E

What They’re Buying

It’s no surprise that SuperInvestorssearch for value where uncertaintyis the greatest – such ideas wereeasy to find last quarter. Page 2

Table: Playing the OddsTable: Biggest New Bets

What They’re Selling

Markets weren’t so jittery in Q1,but top investors seemed to be with

high-profile tech stocks and recenthighly contrarian buys. Page 4Table: Tough QuestionsTable: Selling Out

What They Own

Economically sensitive banksremain popular, but newer coreholdings have more company-spe-cific bets behind them. Page 6

Table: Information EdgeTable: Top Holdings

Stock Spotlight: MetLifeThe financial firm attracting themost new SuperInvestor attentioncomes from a decidedly plain-vanilla neighborhood. Page 8

INSIGHTSuperInvestor

From the Editors of Value Investor Insight

U P F RO NT

SuperInvestor Insight tracks the activityof an elite group of value-orientedhedge-fund managers (plus BerkshireHathaway), based on their holdings as

filed in Forms 13F with the SEC. Whilespecific investors will be highlighted,the focus is on drawing collectiveinsight from this group of 30 of theworld’s best investors, which currentlyincludes William Ackman, StephenMandel, Lee Cooperman, JeffreyUbben, David Einhorn, John Griffin,Glenn Greenberg, Jon Jacobson,Seth Klarman, John Paulson, DavidTepper and many more.

The SuperInvestors

Where to Look

June 3, 201

John HeinsCo-Editor-in-Chief

Whitney TilsonCo-Editor-in-Chief

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SuperInvestor Insight 2 June 3, 2011 www.superinvestorinsight.com

Value or Trap?Sure things in investing rarely are, so SuperInvestors spend most of their time searching for value where uncer-

tainty appears the greatest. They found plenty such ideas to go around in this year’s first quarter.

A quick Internet search of “value

trap” returns a variety of rather weak

variations on Investopedia.com's descrip-

tion of it as “a stock that has experienced

a large price depreciation and is mistaken

to be a value stock.” Lacking is a sense of

why such a mistake turns out to be made,

which typically involves the company's

future earnings inexorably declining or, at

the very least, growth prospects declining

such that an ever lower multiple is placed

on those future earnings. Value investors

often cite Eastman Kodak, as digital pho-

tography eroded its core film business, as

a classic example.

Which brings us to Microsoft. Its

shares certainly have a value-trappish air

about them, having flat-lined, at best, for

the past ten years. Critics contend that

time has passed the company and its PC-

centric model by. But over the past few

years – for naught so far – the stock has

become a favorite among bargain-hunt-

ing investors, attracted by the company's

giant cash hoard, its rock-bottom valua-

tion, and strong actual earnings perform-

ance from its core operating-system, serv

er and Office franchises. Hope springs

eternal: Microsoft tops the list of stocks

that SuperInvestors most-frequently

bought in 2011's first quarter (see table

below). In an interesting addition to the

dialogue on the company, Greenligh

Capital's David Einhorn recently called

out company CEO Steven Ballmer as a

problem that needed to be fixed.

The potential clearing of multi-year

industry headwinds appears to have

attracted top-investor interest in two dis

W HA T T H EY ’ RE B UY I NG

Company Ticker IndustryPrice@6/2/11

Q1 2011 # of New orInc. Positions

% Change In SharesHeld - All FundsLow High

Microsoft MSFT Computer Software/Services 24.22 24.68 29.46 8 33.1%

Aon AON Insurance Brokerage 51.56 43.31 53.17 6 18.7%

Citigroup C Banking 40.01 43.40 51.50 6 (-20.0%)

CVS Caremark CVS Pharmacy Services 38.53 32.08 35.95 6 51.1%

HCA Holdings HCA Hospitals 34.36 30.36 34.57 6 All new positions

MetLife MET Insurance 42.68 41.25 48.72 6 274.5%

Lowe’s LOW Home-Improvement Retail 23.59 23.54 27.45 5 272.2%

Qualcomm QCOM Wireless Technology 57.80 49.59 59.84 5 94.1%

Seagate Technology STX Computer Storage Devices 16.28 12.26 15.33 5 188.0%

Wells Fargo WFC Banking 27.16 29.82 34.25 5 0.6%

Apple AAPL Computers/Consumer Electronics 346.10 324.84 364.90 4 (-10.4%)

JPMorgan Chase JPM Banking 41.61 42.65 48.36 4 (-0.7%)

Motorola Solutions MSI Communications Devices 47.30 37.06 44.94 4 All new positions

News Corp. NWSA Media/Entertainment 17.58 13.94 18.11 4 171.7%

Pfizer PFE Pharmaceuticals 21.00 17.62 20.57 4 (-10.0%)

Sensata Technologies ST Industrial Equipment 35.98 28.85 35.62 4 99.5%

Target TGT Discount Retail 47.95 49.03 60.97 4 (-25.8%)

Union Pacific UNP Railroads 102.22 90.66 99.50 4 (-19.1%)

Viacom VIA-B Media/Entertainment 50.37 39.65 47.34 4 112.0%

Four or more SuperInvestors added to existing positions or established new ones valued at morethan $20 million in these stocks at the end of the first quarter. Long-ignored media companiesNWSA and VIA-B made the list, as did a recent spinoff, MSI, and an initial public offering, HCA.

What They’re Buying:Playing the Odds

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of March 31, 2011.

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parate companies, insurance broker Aon

and home-improvement retailer Lowe's.

Property/casualty insurance pricing has

been weak for more than seven years, a

historically long period without some

combination of natural disasters and lower

industry reserves causing prices to firm. If

a hardening market is at hand, brokers

such as Aon – with revenues tied to com-

missions – would be early beneficiaries.

Canyon Capital's Josh Friedman

recently described the investment case for

Lowe's in Value Investor Insight [April

29, 2011], arguing that a rebound in the

company's sales per square foot from

today’s $250 to a less-than-peak $280

within the next few years would drive a

return to peak operating margins and

result in normalized after-tax free cashflow of roughly $4 per share. He called

Lowe's stock, then trading above today's

$23.60 price, “a cheap option that the

housing recovery eventually arrives.”

Initial public offerings continued to

attract attention among star investors last

quarter, though not of the sexy LinkedIn-

type variety. Six investors bought shares of

HCA Holdings, the nation's largest pri-

vate owner and operator of hospitals, the

majority of which are located in the south-

ern U.S. The company was taken private

in 2006 by three private equity firms and

the founding Frist family, who sold under-

performing HCA assets, cut costs and

focused on higher-margin outpatient serv-

ices. Profit margins and free cash flow

have increased, but key to the company's

success will be its ability to manage still

precariously high debt leverage.

Four top investors bought new or

expanded positions in Target, whose

stock trades at 12x earnings and near 52-

week lows as it battles rising input costs

and ongoing weakness in discretionaryconsumer spending. The bull case for the

discount retailer suggests its “expect

more, pay less” positioning will serve it

well in a difficult economic environment,

as will new cost-savings initiatives,

expanded food offerings and a revamped

credit-card strategy. One investor no

going along for the ride at the moment

long-time activist shareholder Pershing

Square Capital, which made Target its

largest complete sale last quarter.

As is often the case, companies with

high-profile woes appear among the

largest new SuperInvestor buys (see table

below). Paulson & Co. established a $1

billion-plus position in Hewlett-Packard

the press reports on which have been far

more focused on a clumsy CEO transition

than on any exciting new H-P products

and services. The market appears increas

ingly worried that Best Buy’s high-touch

retail model for selling consumer elec

tronics will fare poorly over time agains

online retailers. For Greenlight Capital

which made Best Buy its top new pur-chase in the quarter, the verdict appears

to be “value” over “value trap.”

Funds co-managed by Whitney Tilson own

Citigroup, JPMorgan Chase, Microsoft and

Seagate Technology.

SII

W HA T T H EY ’ RE B UY I NG

Company Ticker Industry Price@6/2/11

Q1 2011 Investor Value @ 3/31($mil)Low High

Hewlett-Packard HPQ Computer Equipment/Services 36.42 36.20 40.56 Paulson $1,024.3

Clorox CLX Consumer Products 68.60 60.56 72.43 Icahn $700.7

Johnson Controls JCI Diversified Industrial 37.79 36.95 42.42 Viking $493.5

Advanced Micro Devices AMD Semiconductors 8.23 7.34 9.58 Ivory $219.8

El Paso EP Oil & Gas 20.60 13.42 18.77 Third Point $198.0

Pfizer PFE Pharmaceuticals 21.00 17.62 20.57 Glenview $197.8

American Tower AMT Wireless Infrastructure 54.38 45.85 56.84 Scout $186.6

Baker Hughes BHI Oil & Gas Services 73.60 54.33 74.94 Blue Ridge $185.4Priceline.com PCLN Online Travel 512.78 402.25 509.00 Lone Pine $181.4

Motorola Solutions MSI Communications Devices 47.30 37.06 44.94 ValueAct $178.3

Best Buy BBY Electronics Retail 30.54 28.52 36.33 Greenlight $172.3

Marathon Oil MRO Oil & Gas 52.51 36.97 53.74 Karsch $138.4

Genworth Financial GNW Diversified Financial Services 11.05 12.02 14.77 Highfields $134.6

McGraw-Hill MHP Information Services 41.32 36.20 40.56 JANA $120.7

Valeant Pharmaceuticals VRX Pharmaceuticals 52.49 28.06 51.13 Brave Warrior $119.1

These are the 15 largest brand-new positions taken by different SuperInvestors last quarter. Energy-related stocks were well-represented, including El Paso, Baker Hughes and Marathon Oil. Those withshare prices the slowest out of the gate so far: Hewlett-Packard, Best Buy and Genworth Financial.

What They’re Buying:Biggest New Bets



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Acquired TastesEquity markets weren't overly jittery in the first quarter, but SuperInvestors showed signs of being so, particularly

with high-profile technology companies and with certain contrarian bets they'd made just the quarter before.

Jeffrey Ubben of SuperInvestor

ValueAct Capital had a ready answer

when asked in a recent Value Investor

Insight interview (December 30, 2010)

why so many of his portfolio companies

tend to be acquired: “We've been on the

board of 27 of the 60 core investments

we've made over the past 11 years and, of

those, we've executed divestitures or

entire company sales in about 20. That

has been driven by our belief that getting

smaller often means getting better. When

all goes well, the result is a high-qualitybusiness with plenty of free cash flow that

has been made simpler and more

investable. That can be interesting to pri-

vate equity or strategic buyers.” With

money to spend and organic growth

opportunities constrained, he expected

both corporate and financial buyers to

step up M&A activity in 2011.

While buyouts are excluded from the

SII tables tracking top-investor selling

activity each quarter (because such infor-

mation isn't actionable), Ubben's predic-

tion so far appears prescient, as an

increasing number of frequent or large

sales last quarter were of acquired compa-

nies, including Alcon, Allegheny Energy,Atlas Energy, Genzyme and McAfee.

Future targets? Here are ValueAct's top-

five U.S. holdings at March 31: Valeant

Pharmaceuticals, Sara Lee, C.R. Bard

VeriSign and Willis Group.

Shares of high-profile technology com

panies Apple, Cisco, Yahoo, Google and

Amazon.com were frequently sold by

SuperInvestors last quarter. Negative sen

timent was the highest in networking

giant Cisco, a contrarian bet among star

investors in recent quarters as disappoint

ing earnings pummeled the stock price

As the pummeling continued – its $16.25

share price is near early-2009 lows – five

investors took some or all of their moneyriding on the company off the table.

Sentiment is more divided on Yahoo

The Internet graybeard has stabilized

W HA T T H EY ’ RE S E LL I NG


Q1 2011 # of Decreased orClosed Positions

% Change In SharesHeld - All FundsLow High

Potash POT Fertilizer 55.50 50.25 63.97 8 (-62.1%)


LyondellBasell LYB Chemicals 41.70 33.57 41.12 7 (-16.8%)

Apollo Group APOL For-Profit Education 46.90 34.43 46.42 6 (-92.8%)



General Motors GM Automobiles 29.60 30.20 39.48 6 (-46.4%)

CIsco CSCO Network Technology 16.25 16.97 22.34 5 (-45.2%)

Yahoo YHOO Internet Services 16.02 15.41 17.84 5 16.8%

Amazon.com AMZN Internet Retail 193.65 160.59 191.60 4 (-35.3%)

CIT Group CIT Commercial Finance 43.68 41.35 49.57 4 (-31.1%)

Comcast CMCSA Cable Services 24.63 22.05 25.91 4 (-10.9%)

Express Scripts ESRX Pharmacy Services 58.04 50.91 58.77 4 (-24.8%)

Google GOOG Internet Services 528.06 551.28 642.96 4 (-27.8%)


Supervalu SVU Grocery Stores 9.16 7.06 9.87 4 (-100.0%)

Teva Pharmaceutical TEVA Pharmaceuticals 50.53 47.30 57.08 4 (-15.7%)

Four or more SuperInvestors reduced or eliminated positions in these stocks during the firstquarter. Tech stocks Apple, Cisco, Yahoo, Amazon.com and Google came in for frequent selling.Affection proved fleeting in Apollo Group and General Motors. Sold out completely: Supervalu.

What They’re Selling:Tough Questions




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under CEO Carol Bartz, who has stream-

lined operations and recommitted the

company to building out key content

areas in an effort to garner incremental

revenue as advertising dollars continue to

shift online. Big questions remain, howev-

er, about how it plans to deploy its signif-

icant cash hoard as well as what the ulti-

mate value is of illiquid and intransparent

holdings in Yahoo Japan and China's

Alibaba Group. While five investors

reduced or eliminated positions in Yahoo

last quarter, new stakes established by

Eminence Capital and Greenlight Capital

caused the overall shares held in the com-

pany by SuperInvestors to increase.

In addition to collectively changing

their minds about Cisco, star managers

also did a quick about-face last quarter inApollo Group and General Motors. For-

profit education companies such as

Apollo have been reeling in anticipation

of stringent new regulations expected

from the Department of Education. From

$75 in October 2009, Apollo's shares

bottomed at $34 in Q4 2010, when it was

among the most-bought stocks by top

investors. In the most recent quarter, in

which Apollo announced its new-student

enrollment fell 45% from the prior year,

six investors apparently concluded any

semblance of stability was too far off and

sold down their positions, five of them

completely. Timing? On the day new

DOE guidelines were announced this

week, Apollo shares rose 11%, to $46.90.

After nine investors took new posi-

tions in GM in the prior quarter – when it

came public again at $33 – six of those

sold all of their shares last quarter.

Having restructured its income statementand balance sheet, GM will benefit from

significant operating leverage if global

automotive sales continue to rebound and

if the company's recast product line can

win back customers. Uncertainty over

both may help explain the quick exits

from the stock, as well as its unambitious

7x trailing earnings multiple.

SuperInvestors were not avid owners

of commodity-related stocks as commodi

ties prices ran up over the past year, but

they did take profits in select cases during

the first quarter. Fertilizer-company

Potash was the most-sold stock, as each

of the eight investors with positions at

January 1 cut them back during the quar

ter. Among the top individual complete

sales: Lone Pine Capital's elimination of

its stake in mining company Teck

Resources, Highfields Capital's exit from

Exxon Mobil, and Omega’s sell-off o

Plains Exploration & Production.

Funds co-managed by Whitney Tilson own

CIT, Citigroup and JPMorgan Chase.

SII

W HA T T H EY ’ RE S E LL I NG


Q1 2011Investor

Value @ 12/31($mil)Low High

Citigroup C Banking 40.01 43.40 51.50 Viking $714.2

Teck Resources TCK Mining 50.60 47.96 65.37 Lone Pine $455.0

Target TGT Discount Retail 47.95 49.03 60.97 Pershing Square $444.9

Pfizer PFE Pharmaceuticals 21.00 17.62 20.57 Paulson $399.2

ITT Corp. ITT Diversified Industrial 56.31 51.80 64.00 Relational $376.4

Exxon Mobil XOM Oil & Gas 81.33 73.64 88.23 Highfields $337.3

Express Scripts ESRX Pharmacy Services 58.04 50.91 58.77 Blue Ridge $274.0

Coca-Cola Enterprises CCE Beverage Distribution 28.63 23.63 27.46 Scout $267.6

Charles Schwab SCHW Discount Brokerage 17.06 17.10 19.69 Ivory $188.4

General Motors GM Automobiles 29.60 30.20 39.48 JANA $130.1

Cisco CSCO Network Technology 16.25 16.97 22.34 Pennant $128.5

Airgas ARG Industrial Gases 67.57 60.76 67.41 Farallon $128.2

Cisco CSCO Network Technology 16.25 16.97 22.34 Appaloosa $122.4

Beckman Coulter BEC Medical Services/Supplies 83.32 70.65 83.22 Eminence $111.7

Plains Exploration PXP Oil & Gas 35.60 31.90 40.06 Omega $104.7

These 15 stocks were the largest positions eliminated by different SuperInvestors last quarter.Pershing Square went against the grain in selling Target, which four other investors bought.Pennant and Appaloosa appeared to be of like mind concerning Cisco, with good timing so far.

What They’re Selling:Selling Out



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Deeper Analysis, Better InformationWhile big banks – more or less proxies for economic recovery – remain core SuperInvestor holdings, the stories

behind other widely held positions include a smattering of restructurings, spinoffs, and even a new IPO.

There's a telling passage in David

Einhorn's Fooling Some of the People All

of the Time in which he describes setting

up a meeting with a large institutional

owner of Allied Capital stock, which

Einhorn's Greenlight Capital was very

publicly short. The motivation was not

only to convey his work on the company,

but also to learn. “In an impersonal and

anonymous market, we like to know

what people on the other side of our

investments are thinking,” he writes. “To

succeed, we like to feel we have an edgethrough deeper analysis or better infor-

mation than those who disagree with our

views.”

What Einhorn learned was how little

his counterpart knew about Allied. He

hadn't looked at Einhorn's famously

detailed analysis of it and when asked why

he held the stock responded only that it

was part of a “basket approach” to own-

ing high-yielding stocks. Einhorn's conclu-

sion: “It wasn't an issue of investors

understanding our views and disagreeing.

In addition to small investors, Allied's

other investors were big funds managing

lots of other people's money – too busy or

too lazy to worry about the details otherthan the distribution.”

“Deeper analysis or better information

than those who disagree” captures nicely a

central element of how superior investors

succeed. It isn't present in every idea and

obviously doesn't guarantee a positive out

come if it is, but that it more likely sup

ports each SuperInvestor holding is a pri-

mary reason to pay attention to what such

investors are buying, what they're selling

and what they own. Trying to divine what

they see that the market is missing can't

help but suggest opportunity.

The list of most frequently owned

stocks by SuperInvestors at the end of the

first quarter (see table below) includesfour newcomers: Aon, CareFusion, HCA

Holdings and MetLife. Medical equip

ment and supply company CareFusion

W HA T T HE Y O WN



52-Week # of PortfoliosThat Own

Price vs.52-Week HighLow High


Microsoft MSFT Computer Software/Services 24.22 22.73 29.46 11 (-17.8%)



LyondellBasell LYB Chemicals 41.70 14.86 48.12 8 (-13.3%)

Wells Fargo WFC Banking 27.16 23.02 34.25 8 (-20.7%)

Aon AON Insurance Brokerage 51.56 35.10 54.58 7 (-5.5%)

CVS Caremark CVS Pharmacy Services 38.53 26.84 39.50 7 (-2.5%)

Google GOOG Internet Services 528.06 433.63 642.96 7 (-17.9%)


UnitedHealth UNH Health Insurance 49.39 27.13 51.46 7 (-4.0%)

CareFusion CFN Medical Equipment/Supplies 27.74 20.63 29.97 6 (-7.4%)

HCA Holdings HCA Hospitals 34.36 30.36 35.31 6 (-2.7%)

MetLife MET Insurance 42.68 35.38 48.72 6 (-12.4%)

Potash POT Fertilizer 55.50 27.95 63.97 6 (-13.2%)

Qualcomm QCOM Wireless Technology 57.80 31.63 59.84 6 (-3.4%)

WellPoint WLP Health Insurance 78.00 46.52 81.92 6 (-4.8%)

Williams WMB Oil & Gas 30.58 17.53 33.47 6 (-8.6%)

Six or more SuperInvestors held stakes in these stocks at the end of March. Megabanks Citigroup,JPMorgan Chase and Wells Fargo remain popular (if not recently successful) holdings. Aon, MetLife,CareFusion and HCA Holdings are newcomers this quarter, while Qualcomm is back after a hiatus.

What They Own:Information Edge


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continues on the restructuring path it has

pursued since being spun off by Cardinal

Health in September 2009, including an

extensive efficiency drive and the divesti-

ture of non-core operations. While

restrained spending by recession-wary

hospitals has obscured tangible financial

evidence of the recast operations, six top

investors appear to be betting that such

evidence will be forthcoming as pent-up

customer demand is released. The story is

somewhat more straightforward at insur-

er MetLife, whose business continues to

steadily return to pre-crisis normalcy

while its valuation reflects post-crisis fear

(see Stock Spotlight, p. 8).

CVS Caremark, owned by seven star

investors, returns to the most-owned list

for the ninth quarter in a row. Jon Jacobson of Highfields Capital described

the investment case for the stock recently

in Value Investor Insight [February 28,

2011], focused on the strong cash flow

characteristics and secular tailwinds in

the company's retail drugstore business,

what he considers a free option on the

turnaround of its pharmacy benefits man-

agement operation, and the potential for

significant share buybacks.

Integrated natural gas firm Williams

remains the only energy company to gar-

ner widespread SuperInvestor interest,

owned by six investors at quarter's end.

Given its various and sundry assets –

upstream, downstream, in-production

and pre-development – the company

lends itself to a sum-of-the-parts analysis

like that articulated by Atlas Capital's

Robert Alpert in the April 29 issue of VII ,

resulting in an intrinsic share value of

$42, more than 35% above today's price.

Among the single largest holdings of individual top managers (see table below)

is one recent spinoff, Motorola Solutions,

which provides communications devices

and systems primarily used by govern-

mental customers, from police forces to

road crews. In a presentation last month

at the Value Investing Congress, ValueAct

Capital's Jeff Ubben described “multiple

ways to win” with the stock, including

margin expansion, new broadband prod

uct cycles driving demand, an eventua

rebound in state and local government

spending, and intelligent use of the com-

pany's cash pile, now accounting for

roughly 40% of its market cap. Fellow

SuperInvestor Icahn Capital obviously

agrees, as evidenced by its $1.4 billion

stake in the company at quarter's end.

The conviction behind only two of the

fifteen biggest individual positions was

uniquely held: no other SuperInvestors

joined Viking Global in owning Estee

Lauder, or Eddie Lampert's ESLInvestments in holding Sears.

Funds co-managed by Whitney Tilson own C

JCP, JPM and MSFT.

SII

W HA T T HE Y O WN


52-Week Investor

Price vs.52-Week HighLow High

Coca-Cola KO Beverages 66.04 49.47 68.77 Berkshire (-4.0%)

SPDR Gold Trust GLD Gold ETF 149.50 113.08 153.61 Paulson (-2.7%)

Sears SHLD Department Stores 68.29 59.21 94.79 Lampert (-28.0%)

Motorola Solutions MSI Communications Devices 47.30 36.52 47.91 Icahn (-1.3%)

J.C. Penney JCP Department Stores 33.07 19.42 41.00 Pershing Square (-19.3%)

Valeant Pharmaceuticals VRX Pharmaceuticals 52.49 18.07 55.00 ValueAct (-4.6%)

SLM Corp. SLM Student Lending 16.84 10.05 17.11 Highfields (-1.6%)

CVS Caremark CVS Pharmacy Services 38.53 26.84 39.50 Relational (-2.5%)

Estee Lauder EL Cosmetics/Fragrances 99.48 54.17 104.00 Viking (-4.3%)

El Paso EP Oil & Gas 20.60 10.60 21.54 JANA (-4.4%)

Apple AAPL Computers/Consumer Electronics 346.10 235.56 364.90 Lone Pine (-5.2%)

Pfizer PFE Pharmaceuticals 21.00 14.00 21.45 Greenlight (-2.1%)

McKesson MCK Pharmacy Services 85.04 57.81 87.32 Glenview (-2.6%)

Valeant Pharmaceuticals VRX Pharmaceuticals 52.49 18.07 55.00 Blue Ridge (-4.6%)

ViaSat VSAT Satellite Communications 43.21 30.80 46.00 Baupost (-6.1%)

These are the 15 largest holdings of different individual SuperInvestors as of the end of 2011’s firstquarter. Two investors made Valeant Pharmaceuticals their largest holding, while no other investorsheld positions of any size in individual top holdings Sears (by Lampert) and Estee Lauder (by Viking).

What They Own:Top Holdings



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Mr. CleanIt's probably a sign of the times that the financial-services company attracting the most aggressive SuperInvestor

buying attention in the first quarter comes from a decidedly plain-vanilla neighborhood of the sector.

There are any number of financial-

services companies today trading at rock-

bottom share valuations as investors

remain vexed by widespread uncertainty.

Are capital levels adequate to withstand

another sharp economic downturn or to

satisfy increasingly proactive regulators?

What happens to earnings if historically

low interest rates start to consistently

increase? What ticking timebombs

remain in vast investment or loan portfo-

lios? SuperInvestors have certainly notshied away from such uncertainty – three

of the six most widely held stocks in their

portfolios at the end of the first quarter

were megabanks Citigroup, JPMorgan

Chase and Wells Fargo.

It's most likely a sign of the times that

the financial player attracting the most

ardent top-investor buying attention last

quarter comes from a plain-vanilla neigh-

borhood of the financial sector. Six

investors established new positions or

added to existing ones in MetLife, the$45-billion-market-cap insurer focused

on life, health and annuity-based prod-

ucts worldwide. With its Peanuts-inspired

advertising and squeaky-clean reputation

for prudence – borne out by its ability to

raise private capital early in the financial

crisis and not needing to take any govern-

ment aid – it's a no-surprises type of com-

pany at a time when the market's appetite

for potential surprise in financials

appears to be low.

Prospects overall in the company'smain lines of business remain solid.

Relatively weak is U.S. life insurance,

where MetLife is the largest player, due

to chronic commodity pricing of individ-

ual policies and more cyclically low

prices for group plans. One offset to that

has been a boom in sales of annuity-

based products, as buyers gravitate

toward annuities backed by the largest

and most financially secure companies

and as once-aggressive competitors like

Hartford and AIG's SunAmerica retreat

from the business.

The bigger profit driver today is the

company's expanded international pres-

ence, fueled by its $15.5 billion acquisi-

tion last year of government-ward AIG's

ALICO subsidiary. Once a tentative play-

er outside the U.S., MetLife now gener-

ates a 40% and growing share of its rev-

enues internationally – up from 15% pre-

acquisition – after adding ALICO’s well-

established franchises in Japan as well as

elsewhere in Asia, eastern Europe, the

Middle East and Latin America. Profit

growth outside the U.S. was the biggest

contributor to the company's expecta

tions-beating 20% increase in 2011 first

quarter earnings.

S T O C K S P O T L I G H T : M E T L I F E

MetLife(NYSE: MET)

Business: Global provider of individual life,auto and homeowners insurance, as well asa wide variety of commercial insurance,retirement and savings products.

Share Information

(@6/2/11):

Price 42.6852-Week Range 35.38 – 48.72Dividend Yield 1.7%Market Cap $45.11 billion

Financials (TTM):

Revenue $55.90 billionOperating Profit Margin 8.5%Net Profit Margin 5.3%

THE BOTTOM LINE

The market isn’t recognizing the company’s earnings power as its core businessesreturn to normal and it assimilates the recent transformative acquisition of AIG’sALICO subsidiary, says Alan Straus. Applying a 1.2x multiple to his $51-52 estimateof year-end 2012 company book value, the shares would trade in the low $60s.

I N V E S T M E N T S N A P S H O T

METLIFE PRICE HISTORY

Sources: Company reports, other publicly available information

80

70

60

50

40

30

20

10

80

70

60

50

40

30

20

102009 2010 2011

Valuation Metrics

(@6/2/11):

MET S&P 500Trailing P/E 15.0 16.4Forward P/E Est. 8.2 13.4

Largest Institutional Owners

(@3/31/11):

Company % Owned

State Street Corp 4.0%Vanguard Group 3.6%Fidelity Mgmt & Research 2.6%

JPMorgan Chase 2.5%Massachusetts Financial Svcs 2.3%

Short Interest (@5/13/11):

Shares Short/Float 2.9%


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S T O C K S P O T L I G H T : M E T L I F E

Alan Straus of SuperInvestor Omega

Advisors, which quintupled its stake in

MetLife last quarter, believes the operat-

ing momentum will continue. He expects

the company’s earnings per share to

increase from 2010’s depressed $4.37 to

nearly $6 in 2012. That would return it

to historical profitability levels, with

return on equity rising 100 basis points

per year, to 12.2% by 2012.

What would such performance mean

for MetLife's shares, now trading around

$42.70? Excluding “accumulated other

comprehensive income” – essentially tak-

ing out quarter-to-quarter gains and loss-

es in its investment portfolio – the com-

pany's book value at the end of the first

quarter was $43.63. That the shares

trade at a slight discount to book valuemakes no sense, says Straus, for an insur-

ance company earning more than $5 per

share in net income and double-digit

returns on equity. More appropriate

would be a 1.2x multiple, he says, which

on a book value that he believes will

increase to $51-52 per share by the end

of 2012 would result in a stock price in

the low $60s.

The risks? While no $440 billion

investment portfolio is without its trou-

bled holdings – MetLife owns some vul-

nerable European sovereign debt, for

example – Straus considers the overall

portfolio to be “incredibly clean.” Risinginterest rates would negatively impact the

value of the company's vast fixed-income

assets, but he would expect the ultimate

impact on book value to be relatively

small as company earnings replenish the

coffers and cash flow from the portfolio

can be reinvested at higher rates.

Also softening any potential blows is

the at least $2 billion in excess capita

that Straus expects the company to have

at its disposal by this year's second half. If

the economic environment remains rela

tively sanguine, he would expect some or

all of that to be deployed to fund addi-

tional acquisitions or to return capital to

shareholders through share repurchases

The prospect of management misallocat

ing the excess capital doesn't greatly con

cern him: “If they can find another dea

with the financial characteristics and

assets of ALICO – and I wouldn't expect

them to do one otherwise – I'd take that

all day long over share repurchases.”

Whatever the catalyst, Straus doesn't

expect the unrecognized value he sees in

MetLife to stay that way for long“Maybe it's the capital continuing to

grow, or the return on equity continuing

to increase, or the announcement of a big

share buyback, but something will cor

rect the misvaluation,” he says

“Companies like this just should not

trade at book value.” SII

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ON METLIFE’S VALUATION:

Something will correct the

misvaluation. Companies

like this just should not trade

at book value.

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