Oakmark’s Bill Nygren also manages the Oakmark Select fund. He sent his 2Q10 letter to the fund shareholders. During the quarter, the fund declined 9% last quarter compared to an 11% loss for the S&P 500. For the calendar year-to-date, the Fund is down 4% compared to the S&P 500, which is down 7%. During the past 10 years, the fund returned 6.2%.
In the letter, Nygrem commented on the fund new purchase Calpine Corporation:
Read the complete letter.
In the letter, Nygrem commented on the fund new purchase Calpine Corporation:
One of our better relative performers for the quarter was our newly purchased Calpine Corporation. Calpine is an independent power producer with arguably the most environmentally friendly plants in the industry. The weak economy and low natural gas prices combined to sharply reduce Calpine’s cash flow from operations, which caused the stock to decline to about half of its replacement construction cost. Calpine’s plants would perform best in a recovering economy that has moderately higher natural gas prices, more environmental restrictions , and somewhat more inflation. Looking ahead a few years, we believe all of those conditions are likely to occur. CEO Jack Fusco has previously successfully managed independent power companies and then sold them when valuations approached replacement cost. A quote from a recent brokerage report on Calpine might help explain why our long-term time horizon brought us to a different conclusion from the consensus: “Our calculated net-asset-value (CNAV) is $50. We determine our CNAV based on a full discounted cash flow model…..Our target price is $13 and set at a discount to the CNAV due to current economic weakness and lower demand forecasts as well as lower expected natural gas prices.” With a gap that large, and with this management, we are excited to have Oakmark Select invested in these assets.
Read the complete letter.
