Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) gets a lot of attention in the financial press. It is easy to see why – this investment vehicle is a great way to keep an eye on the world’s best investor.
The information published publicly about the business and its equity holdings is a high starting point for investors who want to replicate the Oracle of Omaha’s investment style. On the other hand, for investors who don’t want to replicate his style but want to profit alongside the billionaire, buying the stock is a great way to have one of the world’s most successful investors manage your money.
However, while Berkshire gets a lot of attention, the Daily Journal (NASDAQ:DJCO), which is managed by Buffett’s right-hand man, Charlie Munger (Trades, Portfolio), tends to be overlooked.
The Journal vs. Berkshire
The two companies are not particularly comparable, but one thing they do have in common is an equity portfolio that’s managed by some of the best value investors of all time. As such, for investors looking for a way to play the market without having to pick value stocks themselves, buying the Daily Journal could be a good option.
According to the corporation’s latest 13F at the end of June 2020, the Daily Journal owned just four stocks: Bank of America Corp. (NYSE:BAC), Wells Fargo (NYSE:WFC), U.S. Bancorp (NYSE:USB) and POSCO (NYSE:PKX). At current market prices, the approximate values of these individual positions are as follows:
- Bank of America: $54.5 million
- Wells Fargo: $39.1 million
- U.S. Bancorp: $5.0 million
- POSCO: $380,000
In total, these positions are worth $99 million at the time of writing. That’s compared to the group’s current market cap of $383 million. On top of these investments, at the end of its most recent fiscal year, the company reported nearly $11 million in cash. At the end of its 2019 fiscal year, total shareholder equity was $138 million.
Computing a value for the rest of the business is a bit more challenging. The company reported a significant net loss last year and has only made a net profit in three out of the past six years.
Gross profit (which excludes changes in investment value) has fallen from $17 million in fiscal 2014 to $11 million for fiscal 2019. Still, on a cash flow basis, the Daily Journal looks a lot more attractive. Last year, the company delivered free cash flow of $1.3 million, following a $5.9 million return in 2018.
Using an average of these two figures for a discounted cash flow projection, assuming a 6% discount rate and 0% growth rate, suggests a value of around $60 million for the operating business. I should note that these are just rough figures designed to give an indication of the firm’s intrinsic value.
Added together, the value of the investment portfolio, cash, debt and operating business suggest a base value of $200 million for the Daily Journal. However, this also assumes the stock holdings are fairly valued (or were fairly valued at the end of 2019).
While it is unlikely that the portfolio is fairly valued, in my opinion, it is notable that over the past few months, the stock has increased in value by around 30% even as the equity portfolio has languished.
With that being the case, it seems likely that the market has gotten ahead of itself here. The Daily Journal has an attractive investment portfolio, but the core business is struggling. Even after adjusting for the core business value, the current valuation does not seem to stack up.
In comparison, Berkshire looks much cheaper as it has been overlooked by the market this year, so it might be the better buy at current levels.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Mohnish Pabrai on Leverage and the Polarized Market
- Cruise Companies: Value Trap or Value Investment?
- Mohnish Pabrai: Even With Great Companies, Valuation Matters
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This article first appeared on GuruFocus.