Once on the hit TV series “Happy Days,” Mrs. Cunningham had to fill in for her husband at his hardware store. I don’t remember why Mr. Cunningham needed her to run the store for him – perhaps he had to go on a business trip.
Anyway, when he returned, he found that his wife had been running a sale on paint. Her asking price was ridiculously low, as I recall, and Mr. Cunningham was upset. He thought his wife had ruined his profit margin – until she explained her reasoning. On her trips to the grocery store, she had often seen potatoes priced very low, but they were placed next to the items that most people like to eat on a baked potato – butter, sour cream, bacon bits, chives, etc. – and those items were always marked up.
It occurred to her, she said, that you don’t make your money on the potatoes; you make your money on the things that consumers put on their potatoes, and very few people eat baked potatoes plain. Some people prefer to look for bargains so they will buy their butter and sour cream elsewhere, she observed, but many will buy it all in one store. Using that same reasoning, she had raised prices on things that people need when they paint their homes – brushes, tarps, trays, etc. – and the store had made more money than it would have made on the paint alone at its usual price.
A similar kind of logic may have been playing a role in some of guru Martin Whitman (Trades, Portfolio)’s investing decisions in 2015.
Since last summer, a lot of attention has been paid to the rapid decline of oil prices. Investors, understandably, don’t want to buy oil stock until they are reasonably satisfied that it has reached its lowest price and will soon start to go back up, but it has been a godsend for motorists, many of whom have increased their recreational driving now that it is more affordable. Oil, of course, is vital for people to operate their cars, trucks and recreational vehicles, but it isn’t the only thing that motorists need. Could Mrs. Cunningham’s logic be applied to this situation?
Perhaps Whitman has been doing precisely that.
Whitman has been investing in some oil stocks in recent quarters – most recently, Total SA (XPAR:FP, Financial), a Paris-based oil and gas company, last fall – but many of his related investments are of the butter and sour cream variety.
If some drivers are driving more because fuel costs less, they are putting more wear and tear on the parts of their vehicles – like tires, for example.
A year ago, in January 2014, months before oil prices started to go down, Whitman added a stake in France-based Michelin (XPAR:ML, Financial), one of the three largest tire makers in the world. Whitman acquired 247,739 shares in the company at that time for an average price of €77.94 per share (roughly $85.32 in the current exchange rate).
That is the largest buy Whitman has made in Michelin, but he did buy nearly 170,000 shares in July of 2014 – around the time that gas prices started to drop – for an average price of €88.41 per share (nearly $96.79 in the current exchange rate).
That was the last time Whitman invested in Michelin until January of this year. He acquired 45,344 shares for an average price of €74.92 per share ($82.01 in the current exchange rate).
Michelin has a P/E of 16.7, a Price/Book of 1.8 and a Price/Sales of 0.9.
Guru Bernard Horn (Trades, Portfolio) also has shares of Michelin in his portfolio.
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