Greetings from snowy Las Vegas.
I had the pleasure of previewing Warren Buffet’s 2018 annual letter to Berkshire Hathaway’s (BRK/A; BRK/B) shareholders on Yahoo! Finance (now owned by Verizon (VZ) ) Friday afternoon. Here is that interview (unfortunately you have to click on the link as I could not embed the video here):
There is no doubt in my mind that Warren Buffet is – hands down – the best investor of the last six decades and likely of all time. His 20.5% compounded annual return has bettered the S&P 500 Total Return Index (SPTR) by over 10% on average since 1965.
Of course, that is backward looking, not forward looking. As to the future I have some concerns as to where BRK (A & B) might be going. My main concern is that the company has a large portfolio of legacy positions which would be hard to liquidate without causing a market disruption in those and other related stocks, and perhaps; the entire market. These holding presented on page 12 of the annual report had a market value of $172.8 billion at the end of 2018. That represents 24.4% of the company’s assets, just under 50% of the company’s shareholder equity and 34.4% of the company’s market cap.
All of that likely includes BRK’s nearly 326 million shares of Kraft Heinz (KHC) which was worth about $17 billion on 12/31/18. KHC plummeted last Friday by 27.45%.
Another concern is what Buffet will do with the $112 cash stockpile BRK holds. Buffet still likes the US economy but maintains that asset prices in the US are too high. Holding that cash at short-term treasury rates will garner about 2.5% in annual returns.
One can conclude that Buffet will look for another significant market or economic downturn to put that cash to work. He has successfully done so in the past. Such opportunities will not occur for several years as he did not take advantage of the stock market downdraft in last year’s 4th quarter. He could have added to Apple (AAPL) at severely depressed prices.
BRK stock is off about 1.1% in 2019 and is underperforming the SPX by nearly 12% this year. Absent a dramatic comeback, BRK stock will underperform its benchmark index two years in a row. Such poor results have not occurred since a three year in a row underperformance in 2000-2002. Buffet’s best performance occurs after the market has emerged from an economic recession, when stock prices are depressed and he can buy good value. So, I would consider BRK a post-recession investment rather than a bull market investment.
How can BRK best handle those $172.8 billion in what I see as dead money holdings? The stock price appreciation potential in the aggregate I believe is underwhelming. These are higher dividend paying stocks which on the on the back of an envelope earn about 2.5% in dividends in the aggregate. I suggest that those stocks be spun off into another class of BRK share – call it class C shares – and investors can decide what to do with their spun-off aggregate holdings. Thus, BRK does not have to worry about liquidation of those stocks. Furthermore, it would raise the return on equity of the core BRK business.
In other news, the Academy Awards were presented last night. I did not watch; have not done so since Billy Crystal last hosted in 2012. I am not alone as I am certain that ratings fell once again. The big winners were Netflix (NFLX) for the awards that it won for Roma (a movie that I did not see but will do) and The Green Book an excellent movie that I did see, produced by Comcast’s (CMCSA) Universal Studios. The Academy made up for last year’s debacle (in my opinion) in awarding Best Picture to The Shape of Water. In case you missed that one, it reminded me of a Creature Features B-movie embedded with Cold War espionage and sex with an amphibian from outer space. I watched it because it was broadcast on a series of flights which I took on the way to speak at a conference in Bogota, Columbia last March.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL, NFLX, VZ, SPY, SSO, & SPXL; although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant, beverage, and agricultural stocks. An individual subscription to the newsletter can be ordered at www.restaurantstox.com Furthermore; Scott is a professor at the Seton Hall Stillman School of Business in South Orange, NJ.
– You can email Scott at firstname.lastname@example.org
© 2019 LakeView Asset Management, LLC. All rights reserved.