Value Creators and Destroyers in 2008 -- Page 2

Energy and industrial materials remain the top-performing sectors, after topping this same chart in 2007. Industrial materials and energy price gains were driven by increasing commodity prices demand.

Energy gains were led by foreign oil and gas companies including  Brazilian Petroleum (PBR) and  EnCana Corporation (ECA), both of which make our list of the top 10 value creators for the year. Industrial materials gains were all commodity-driven, with mining and steel companies leading the charge. Agricultural firms were the stars of the first half of 2008, boosted by the creation of the coveted potash product. Agriculture plays  Monsanto (MON) and  Potash Corporation (POT) both appear on our top 10 value creators list.

Top 10 Value Creators
	Market Cap on 12-31-07 ( $MM )	Market Cap on 6-20-08 ( $MM )	Change ( $MM )	Change ( % )	Morninstar Rating
WalMart (WMT)	190,349	225,311	34,962	18%
Brazilian Petroleum (PBR)	252,781	286,342	33,561	13%
Potash Corp. (POT)	45,515	72,747	27,231	60%
The Mosaic Co. (MOS)	41,682	67,476	25,794	62%
BHP Billiton Ltd (BHP)	117,580	140,377	22,797	19%
Arcelor Mittal (MT)	72,308	93,809	21,501	30%
IBM (IBM)	148,957	169,130	20,173	14%
Research in Motion (RIMM)	63,233	80,609	17,375	27%
EnCana Corporation (ECA)	53,263	69,902	16,639	31%
Monsanto Company (MON)	61,018	76,457	15,439	25%

In a repeat of last year, the financial services sector led the downward charge. Companies like  Citigroup (C),  Bank of America (BAC), and  American International Group (AIG) are posting large losses and seeking additional capital from the markets. Citigroup and Bank of America have raised a combined $50 billion in new capital since the beginning of the year (new capital raises are not included in our numbers), after securities write-downs and loan losses from the crumbling housing market caused the financial services sector extreme pain. While we believe the housing market won't bottom out until at least 2009, there are many financial stocks that are priced as if they will never recover, despite their strong balance sheets. We believe it is a good time for long-term investors to search for the bargains and find the diamonds in the rough.

Perception can mean everything in the short term, as is the case with our worst-performing sector on a percentage basis, telecom. High expectations for the industry following an upbeat analyst day at  AT&T (T) have slowly come back down to earth. Fundamentally, little has changed in the telecom world, but investors are waking up to the fact that competition in this space remains alive and well.

Since we are always looking for the next investing opportunity, it's the value destroyers list that gets us excited. The market is often emotional and can unfairly punish stocks for bad news. However, as long-term investors, we like the market's irrational price movements, as they allow us to buy some excellent companies at large margins of safety. Eight of our top 10 value destroyers carry Morningstar's highest 5-star rating. Topping the list is a company continually cited as one of best companies in the world,  General Electric (GE). After a disappointing first quarter, including problems in its financial segment, GE's stock sank. With a 4.5% dividend yield, we believe this is one of those rare opportunities to get a superior company for a bargain-basement price.

Sadly, three stocks on this list are repeats from our 2007 list: AIG, Bank of America, and Citigroup. We expect the problems in the financial services segment to continue, and we recognize that these firms are likely to need additional capital before this credit mess has finally been settled. However, we believe we have adequately accounted for the downside, and we still find these companies to be compelling values.

Top 10 Value Destroyers
	Market Cap on 12-31-07 ( $MM )	Market Cap on 6-20-08 ( $MM )	Change ( $MM )	Change ( % )	Morningstar Rating
General Electric (GE)	374,637	276,708	-97,929	-26%
China Mobile (CHL)	346,921	267,609	-79,312	-23%
Petro China (PTR)	314,128	238,957	-75,171	-24%
Microsoft (MSFT)	333,054	264,104	-68,950	-21%
AIG (AIG)	147,863	81,413	-66,449	-45%
Bank of America (BAC)	183,125	120,278	-62,847	-34%
Nokia Corporation (NOK)	157,209	99,469	-57,740	-37%
Citigroup (C)	146,645	96,136	-50,509	-34%
Merck & Co., Inc. (MRK)	126,480	76,463	-50,018	-40%
ExxonMobil (XOM)	511,887	463,916	-47,971	-9%

The Short Term vs. the Long Term
Six months remains a very short time period for the long-term investor. The paper value created and destroyed by the movement in the stock market is temporary and can create opportunities to buy cheap and sell dear, but that doesn't necessarily translate into long-term value creation. While we generally agree with the market's choice of value creators, Morningstar's fair value estimates for firms on our value destroyers list suggest the market has overreacted. The top 10 creators saw their market caps grow by $213 billion, while our fair value estimates suggest they added $187 billion of long-term value. On the flip side, the top 10 value destroyers lost $607 billion of their market caps, but our fair value estimates imply they destroyed only $128 billion of long-term value. Long-term investors can use this difference to exploit short-term market trends, and by successfully navigating these waters, find many more value creators than destroyers in their portfolios.

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