Mark Holowesko Believes Stocks are as Cheap Now as the Early 80’s

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Consuelo Mack interviewed John Templeton’s successor Mark Holowesko on the lessons learned from his mentor and his view of the current market environment.  Holowesko is a renowned value investor and CEO of Holowesko Partners Limited based in the Bahamas.

Holowesko talked about opportunities created by extraneous events causing stock prices to drop substantially such as the Asian crisis in 1998.  He said at that point you could buy cash at a discount and there wasn’t an obvious catalyst to turn the market, or a particular stock price around.

Mack asked Holowesko what he focuses on when choosing a company to invest in.  Holowesko said they try to understand what they are paying per unit of whatever a company does.  He used the example of a timber company and what the enterprise value was minus the net debt.  He considers this more interesting than the book value or earnings per share.  Holowesko said Templeton had him focus on valuing companies this way.

Holowesko indicated that he doesn’t have companies he monitors on a continuous basis.  He said they do conduct screens on such things as private market values.  Holowesko expects M&A activity to pick up over the next 6-12 months so they are screening for good buyout candidates.  Holowesko believes the catalyst for acquisitions is excess physical capacity; therefore companies don’t need to build capacity.  The spread between borrowing money and what you can get for it is very wide.  In Holowesko’s view it makes sense mathematically for companies to buy assets rather than build assets.

Mack brought up the well publicized fact that companies are sitting on hoards of cash.  She asked Holowesko on his view of what would be the catalyst for companies to use their piles of cash.   Holowesko said at some point a companies cash builds up to such an extent that they become buyout targets themselves.  He said most pharmaceutical companies, over the next five years, will generate 80-100% of their market value in cash.  He said “obviously five years from now you’re not going to be able to buy Merck, Pfizer, or Sanofi at net cash.”  In effect you would get the cash and the business for free.  He predicted they will make acquisitions, stock repurchases or pay dividends.  Holowesko said there are only so many things you can do with cash including letting it build which has resulted in many companies having 15-20% of their market cap in cash.  Companies can also buy back stock which is supportive of the stock price, increase dividends, or engage in mergers and acquisitions.

Holowesko and Mack continued their conversation regarding the cheapness of stocks relative to other assets and the particular attractiveness of stocks in quality businesses.  Holowesko believes stocks are now as cheap as they were back in the early 1980’s.  He added that corporate balance sheets are in better shape now than back then.

Holowesko discussed his firms policies regarding diversification, portfolio turnover, stock selection methods, currency risk, and other lessons from Sir Templeton in the second half of the interview.  He also mentioned the attractiveness of AAA-rated stocks Exxon Mobil (XOM), Johnson & Johnson (JNJ), and Automated Data Processing (ADP).  Holowesko’s portfolio includes XOM and JNJ.

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