More on Dumping Mueller Water Products and Office Depot, and Buying Cheung Kong Holdings ADRs

I’ve never been much for selling a stock just because it has fallen in price. Even when falling like a rock. Usually I just hold on and (for the most part) have been rewarded even when patience meant waiting several years. Yet the recent market meltdown has yielded the opportunity to “upgrade” the portfolio (love that word, “upgrade”).

So I dumped two stocks last Friday and put the resulting funds into a better name. Or I should emphasize what I believe is a better name, because there are no guarantees.

Mueller Water Products Series A stock was sold for $6.04. I bought Mueller in 2006 at an average cost of $15.64. Factoring in some dividends, this position lost 61%. With hindsight, I should have sold MWA when I sold Walter Industries and the Mueller B shares received in a spin off from Walter. I sold the B stock because the A and B stock together made Mueller an oversized portfolio position. I was slow to realizing that Mueller Water was more a residential housing play than an infrastructure play. And I should have paid more attention to the fact that Meryl Witmer’s firm sold both classes of Mueller stock.

Office Depot stock was sold for $2.32. I bought Office Depot in late 2007 for $15. This position lost 85%. Throughout the second half of 2007 it was obvious we were headed for an economic downturn. I thought Office Depot would hold up better, and I, with hindsight, should have paid more attention to the fact that much of the company’s business is where the housing crisis has been especially painful (such as Florida). When I bought Office Depot it was a large holding in Longleaf Partners Small-Cap Fund. They dumped it as well (but at a better price than me, of course).

Cheung Kong Holdings ADRs (CHEUY/OTC) were bought at US$8.60. Cheung Kong is a Hong Kong-based holding company controlled by Li Ka-shing with investments primarily in real estate and equity holdings. It owns more than 49% of Hutchison Whampoa, which has investments in ports, property, retail, energy, infrastructure, finance and telecom). Cheung Kong has rock-solid finances, and a tangible net asset value of approximately US$12.95, meaning its currently depressed shares trade for less than 70% of hard book. The company should be able to weather the global downturn and even take advantage of any investment opportunities.

Among the value players followed here, Longleaf Partners have re-purchased Cheung Kong for their International Fund. And Marty Whitman reports that Cheung Kong accounts for more than 9% of his flagship Third Avenue Fund. But like I always say (and my experiences with Mueller Water and Office Depot certainly demonstrate), do your own due diligence before buying Mr. Li’s company. Potential investors can start (but not limit their research) with the company's website.

UPDATE 02/22/09: On Friday, 2/20, I added a few more ADRs to my holding in Cheung Kong Holdings -- and I do mean just a few. I had a bit of cash in that particular account, nothing much, and decided to add it to this position since I could get in at a price lower than my original entry price. I boosted my ADR count by 9%, buying on Friday at $8.10. I originally established the holding at $8.60, and my average cost is now $8.56.

Comments

[Steve]

Any updated thoughts on Cheung Kong? Has tangible net asset value gone up or is share price now caught up?

[John]

@Steve: It is not the dirt-cheap bargain it was late last year/earlier this year. If the ADRs rise a few more bucks, it'll double in price from when I bought it and I'll sell some. Which will be reported here when/if that happens.

[Steve]

Thanks John, I appreciate the answer. I have also been holding. Real estate prices in HK have also been rising...not sure how much this increases the current NAV per share

[Steve]

John: one thing that may be worth considering is that although CK is trading close to Dec2008 NAV, about 65% of NAV is comprised of holdings in associates. CK, for instance holds about 50% of Hutchison whose market cap has gone from HK$165billion to $240bn since Dec 31, 2008. This would add about HK$37.5 billion to CK's Dec 08 NAV of HK$235billion alone. I have not done the math but my guess is the other holdings have probably appreciated as well.

Interim results are due Aug 13...so should get more up to date NAV number at that point.

[John]

@Steve: Good to see we're fellow travelers in the company. Cheung Kong is a world-class outfit and I'd be delighted for the NAV to grow faster than the stock price forever. I am a bit worried that the behavior of Mainland banks/gov't stimulus could impact the stock price negatively if China blows up. But CK has rock-solid finances and I'll just ride everything out.