With AAPL taking a beating recently, I've been reading a lot of comments about how much money Berkshire Hathaway lost (unrealized losses) and whether Buffet made a mistake again investing outside of his area of expertise (tech stocks).
Here are my thoughts on the matter that I hope will help existing/potential shareholders of AAPL and BRK.B (If you can afford BRK.A, you're ahead of the game than the rest of us).
- Generally speaking, don't do as Berkshire Hathaway does. Instead, invest in BRK.B.
- Even Buffet makes mistakes.
- Buffet might not be the one who made the stock purchase. Todd Combs and Ted Weschler are former hedge fund managers who don't hesitate to make short term investments (https://247wallst.com/energy-business/2016/02/29/warren-buffett-comes-clean-on-kinder-morgan-purchase-it-was-not-me/). If you buy and sell stock in companies based on what Berkshire Hathaway does, you'll likely buy at a higher price and liquidate at a lower price than they did.
- Berkshire Hathaway has access to deals the average investor doesn't have access to (https://www.fool.com/investing/2018/12/22/warren-buffett-bailed-out-a-bank-then-the-bank-bai.aspx).
- Berkshire Hathaway can afford to make mistakes or wait longer for their investment to generate returns because they are not heavily leveraged, don't pay dividends and have massive cash flows (https://www.marketwatch.com/investing/stock/brk.a/financials/cash-flow).
- Berkshire Hathaway will probably buy more shares of Apple at these depressed valuations.
- They wouldn't have invested over 50 billion in AAPL unless they are extremely confident in their investment thesis and have calculated the downside. Between Munger, Buffett, Combs and Weschler, you have decades of investment experience. I'll trust the billionaires who have generated market beating returns for their shareholders over random analysts.
- Berkshire Hathaway places large bets on companies that they believe is undervalued and they believe can continue generating cash in the long run.
- In the first detailed explanation of Berkshire's investment thesis for Apple, Weschler says that the smartphone business had been transformed by the app economy and cloud computing. "As network speed has gotten faster and faster, and with it the information that people can absorb on the network, things like photo applications, and apps, they create a stickier ecosystem". Statistics showed that there was a high likelihood iPhone or iPad buyers would also purchase their next device from Apple, he added: "Once you are fully invested in the App ecosystem and you have got your thousands of photographs up in the cloud and you are used to the keystrokes and functionality and where everything is, you become a sticky consumer."
- For the individual investor, AAPL shares are starting to look attractive. Now would be a good point to initialize a small position and dollar cost average as it goes lower.
- EV/EBITDA and forward PE are approximately 9.5 i.e shares are pretty cheap compared to other stocks.
- Net Debt/EBITDA ~ 0.5 and interest coverage ratio ~23.5 i.e the company has a solid balance sheet and can easily cover interest payments.
- Operating margin ~ 26% and ROIC ~ 25% (almost twice that of the s&p500) i.e AAPL is way more profitable than your average publicly traded large cap company.
- The payout ratio is ~23%. i.e There is ample room for dividend growth because it is well covered by earnings.
- Over 64 billion in free cash flow last year, only 13 billion of which was paid in dividends. Seeing how the company doesn't have ton of debt, the rest will go into dividends and share buybacks.
All that being said, there's always a possibility that AAPL might turn out to be another IBM. But having a strong balance sheet and generating massive cash flows minimizes downside risk and gives AAPL time to rethink its growth strategy. There's always risk in the stock market, but a key to generating long term returns is to minimize your downside risk. Also very important to keep in mind that you only invest money that you DO NOT have an immediate need for.
Expect other popular stocks to take a beating at some point in the future when people realize there will be periods when a company cannot keep growing revenues indefinitely.
At this point I believe BRK.B is a more compelling buy than AAPL though. I get exposure to AAPL and a plethora of other stocks and businesses well entrenched in the American economy. Here is a slightly dated but still relevant slideshow of the true value of Berkshire https://www.tilsonfunds.com/BRK.pdf (Analysis starts after the 15th slide or so).
BRK generally trades at a price to book value around 1.45. It is currently trading at a price to book value of 1.26. Add to that a conservative 5% growth in book value (Though Buffet has said they can manage higher than that) and share buybacks (they recently bought back shares at higher prices because they believed it to be undervalued), I expect annual returns of close to 20% for shares bought today when the shares trade at fair value again.
TLDR: Buy Berkshire for a conservative portfolio. Consider buying AAPL if you're a more aggressive investor.
I am long BRK.B
EDIT: To answer the question as to what would happen to Berkshire after Buffett, the slides address the topic towards the end.
The gist of it is, Buffet's death is already factored into the price and his management team should continue to do a decent job. There might be some volatility in the stock price soon after, but business fundamentals should remain intact. If you want to read more about the topic, I would suggest this book https://www.amazon.com/Berkshire-Beyond-Buffett-Enduring-Values/dp/0231170041.
EDIT 2: Check out these slides https://www.tilsonfunds.com/BRK.pdf for any questions you may have about BRK. I'll try my best to answer any that aren't addressed in there.
Submitted January 03, 2019 at 07:12PM by vipnasty http://bit.ly/2F64r8E
