Subscribers,
Excitement brings trepidation. Last week, I traveled to Disney Springs, the part of Disneyworld that used to be known collectively as Downtown Disney and Pleasure Island, and it indeed felt like spring. There were not just crowds but throngs. The sun was out and energy radiated in every direction. Lines had formed everywhere and the social-distancing minders dressed as Stormtroopers had fled. People were wearing masks but otherwise there was no indication of pandemic or fear. It was impossible not to imagine an imminent Easter resurrection, of the kind that President Trump had mused about last March during one of his interminable COVID press conferences. And it may happen. In ways, it’s certain to.
But remember that there were two crises back in February of 2020. One is on the cusp of being conquered, and impressively so, by science. The other, which preceded it, has gotten far worse. A fog rolled in one year ago and many of us got lost in it and used to it and the idea of it lifting too suddenly is, well, spooky. Because it has consumed or shielded many of us, if temporarily. The non-viral crisis is an America in debt, three hundred-plus million people living relatively large yet largely unable to ride out much of a storm without immediate assistance from a government that has largely lost control of itself. There is, in short, the possibility that when the command is given to carry on without moratoria and checks and bailouts and excuses and the like, the cure will have proven worse than the disease. COVID became a debt crisis before it was a death crisis, that it would become political was a foregone conclusion. Another $2 trillion in stimulus will almost certainly squeak by on a party-line loophole this week, but there will be consequences. There’s a price paid for being indebted and divided—and not just along the red/blue state lines. Like the rent, it cannot be deferred forever.
Into this fog, Warren Buffett has released his annual Chairman’s letter and it’s mercifully short. I highly recommend reading it; click on the link above when the spirit moves you. (Actually, I recommend reading all of his letters, which are archived at www.berkshirehathaway.com/letters/letters.html.) Buffett is already being accused of glossing over the tribulations and political controversies of the year. And while it’s true that the oracle is adept at staying above politics, more or less, and picking his battles as well as he picks his stocks, he is neither a fool nor a denier. Here’s the operative paragraph of this year’s missive:
Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide. At a point, also, the soaring price of a promoted stock can itself become the “proof” that an illusion is reality.
Talk about a warning! Also causing some controversy is this paragraph:
Last year we demonstrated our enthusiasm for Berkshire’s spread of properties by repurchasing the equivalent of 80,998 “A” shares, spending $24.7 billion in the process. That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet.
The Wall Street Journal immediately published a rather passive-aggressive analysis/critique under the headline, “Warren Buffett Defends Berkshire Hathaway’s $25 Billion in Buybacks.” Which was rather misleading, as the article started by dredging up a quote from several years ago in which Buffett had criticized some companies for buying back shares he considered overpriced; the author then segued to some investor complaints that Buffett did not elucidate what exactly has caused his reluctance to invest more of his 12-figure cash hoard in this market. Fair enough, I guess, though these folks remind me of people who fly to expensive resorts in order to complain about everything. I will say this for The Journal. They name their sources, unlike some other papers of record lately…
Apparently unbeknownst to The Journal, however, Buffett has written glowingly of shareholder buybacks for decades. Its eagerness to dunk on him says far more about the state of American journalism than about Buffett. Sadly! Buffett’s more recent criticism should be taken in the context of modern executives, of whom he is not one, goosing short-term earnings to increase short-term share prices in order to goose their compensation. As for Buffett’s failure to be more specific about why he’s not buying, that he’s not buying at current prices says more than enough. As does the first paragraph I quoted. The COVID fog has hidden a lot. For now…
What is far more curious about the buybacks, in my opinion at least, is their timing. Buffett clearly finds stocks, at least the big ones he’s forced to consider, too frothy—except for his own. Years ago he promised Berkshire would only buy back its stock at or less than 1.1 times its book value. It currently trades at 1.3 times book value.
So what happened? Either Buffett bought when Berkshire crashed with the rest of the market in April/May, although this would have lessened its book value as the market value of its portfolio sank, or else he has gotten a little impatient and decided to play a probability game rather than his typical value jam. As the oracle has long observed in his letters—the ones The Journal hasn’t read apparently, snap!—Berkshire tends to underperform in hot markets and over-perform in cold ones. In other words, when the market is cheap, Berkshire seems expensive. But when the market is expensive, Berkshire becomes a bargain. That’s quality for you. (Worth noting that Benjamin Graham points out the corollary in The Intelligent Investor, i.e. the investor’s most present danger in a bull market is buying non-quality stocks.)
2018 was the last year that Berkshire outperformed the S&P 500, which posted a loss that year. In 2019 and 2020, Berkshire’s stock has lagged the index, and dramatically so. Now that the market is teetering, perhaps Buffett likes Berkshire’s odds. Given his and Berkshire’s track record, I do too.
weekend updates
· The U.S. House has passed a $1.9 trillion stimulus bill, including $1,400 direct payments to individuals. The bill now goes to the Senate for approval. (The Hill)
· US negotiators have dropped demands for a “safe harbor” provision in a global digital tax, opening the door to a likely agreement on global minimum corporate tax rate on tech giants. (AFP)
· The US Food & Drug Administration has issued an emergency use authorization for the Johnson & Johnson (JNJ) COVID vaccine, the third such vaccine approved in the U.S.. Separately, a company spokesman says 20 million doses of its vaccine will be delivered by the end of March. (FDA.gov)
· So-called “bots” have been used extensively to hype Gamestop (GME) and possibly other stocks on social media networks. (Reuters)
· Bitcoin dropped 22% last week, its worst week since last March. (Bloomberg)
· The New York Stock Exchange will delist Chinese oil major CNOOC in order to comply with a Trump-era executive order that the Biden Administration has let stand, for now. (The Wall Street Journal)
· An internal review conducted by EV Semi developer/SPAC Nikola’s (NKLA) has found that the company’s founder lies a lot. (Financial Times)
· Bill Gates is now the largest owner of farmland in the United States. (The Land Report)
lolz
Twitter plans to double its revenues in three years by allowing its users to pay to read other user’s Tweets. (Variety)
markets
The DJIA, S&P 500 and NASDAQ all fell last week: -1.8%, -2.5% and -4.9% respectively. 1043 of 3365 NYSE issues traded—or 31%—advanced last week; the NASDAQ Composite saw 949 of 4193—or 23%—of its component stocks advance over the same time period.
IN 40s
By contrast, 12 of our 40 cigar butts, or 30%, advanced last week. On average, they fell 2.3%, outperforming our benchmark, the S&P 500, once again*, though this was hardly something to celebrate. In seventeen weeks, our “CBs” are up 29.9%(!) versus an 11% gain in the S&P 500 during the same time period. Two months into 2021, our ‘Butts are 14.3% bigger. The S&P is up only 1.47% over the same time period.
Our “wallflowers,” i.e. large but unpopular companies, were not as attractive. Last week, 36% of these advanced. The average change was -2.7%, slightly underperforming our benchmark S&P 500. Y-T-D, however, our ‘flowers have grown 10.7%--far more than the S&P.
All in all, kind of a meh week. And weird! The Fed lost control of interest rates, Redditors ran wild once again, Texas ran out of energy and so too the stock market.
So bring a drink to our Zoom valuation class tonight (7 p.m. EST). An invitation will follow this morning. Hope to see you there!
James
Indexes
This weekend, the DJIA trades at a 34% premium to its quantitative value (QV*); the S&P 500 at a 35% premium; the NASDAQ Composite at a 27% premium; and the Russell 2000 +99%(!) Our estimated bear-to-bull-market trading ranges are:
DJIA: 15303 (low) to 34261 (high)
S&P 500: 1892 (low) to 4236 (high)
NASDAQ Comp: 7020 (low) to 15717 (high)
Russell 2000: 750 (low) to 1680 (high)
The IN 40s
NOTE: The first column of numbers = Intrinsic Value/Intrinsic Value adjusted for Margin of Safety/Current Price. The second = Weekly/Annual % return.
Cigar Butts (value > price)
Qurate Retail (QRTEA)__________29.80/20.00/12.55_____-5.3/+102.3
Alibaba (BABA)__________729.50/488.80/238.15_____-9.6/+16.0
G Willi-Food (WILC)__________110.63/74.10/24.50_____-5.4/+66.7
Knoll Inc. (KNL)__________34.20/22.90/16.31_____+2.7/-8.4
Steelcase Inc. (SCS)__________113.92 /76.30/13.94_____+5.0/-15.1
Signet Jewelers Ltd (SIG)__________157.20/105.30/49.78_____+7.8/+119.9
ACCO Brands Corp (ACCO)__________11.80/7.90/8.10_____-2.6/0.4
Papa John’s Int’l (PZZA)__________151.00/101.17/90.19_____-13.0/+55.0
Weibo (WB)__________81.00/54.20/55.17_____-7.6/+34.6
Sally Beauty Holdings (SBH)__________23.80/16.00/16.10_____+2.5/+28.6
Wendy’s Co. (WEN)__________46.50/31.10/20.60_____+0.2/+1.7
Caesarstone Ltd. (CSTE)__________44.10/29.60/12.61_____-4.7/+8.5
Pitney Bowes Inc. (PBI)__________11.61/7.78/8.41_____-2.4/+155.4
United Rentals Inc. (URI)__________300.00/200.00/297.38 _____+2.5/+129.4
United Natural Foods (UNFI)__________59.30/39.70/26.45_____-2.4/+330.8
PBF Energy Inc. (PBF)__________18.50/12.40/14.20_____+4.6/-37.0
TTM Technologies Inc. (TTMI)__________19.90/13.30/14.12_____-2.5/+10.1
NCR Corp. (NCR)__________37.60/25.20/34.76_____+0.3/+34.7
HanesBrands Inc. (HBI)__________20.50/13.70/17.71_____-0.8/+37.6
Berry Global Group, Inc. (BERY)__________82.80/55.48/55.40_____-3.2/+47.4
Booking Holdings (BKNG)__________3150.00/2109.00/2328.51_____+1.5/+40.3
Biogen (BIIB)__________651.00/436.00/272.80_____-2.0/-12.0
BorgWarner (BWA)__________42.36/28.39/45.00____+3.3/+47.1
Facebook (FB)__________519.99/348.40/257.62_____-1.5/+35.8
Cisco Systems (CSCO)__________66.00/44.22/44.90_____-1.5/+12.1
Net Ease (NTES)__________223.00/149.41/109.85____-11.3/+70.6
Check Point Soft (CHKP)__________521.00/349.07/110.00_____-5.1/+8.5
Walgreens-Boots (WBA)__________84.00/56.28/47.96_____-1.7/+3.7
Regeneron (REGN)__________808.00/541.36/450.57_____-4.3/+4.4
American Express (AXP)__________201.60/135.07/135.26_____+2.7/+19.9
Goldman Sachs (GS)__________405.50/271.69/320.05_____+1.3/+55.3
EQT Corp. (EQT)__________32.00/21.44/17.80_____-3.2/+230.7
DXC Technology Co. (DXC)__________69.00/46.23/25.22_____-3.0/+5.4
Energizer Holdings (ENR)__________89.00/59.63/42.00_____-4.9/-5.4
Flowers Foods (FLO)__________47.00/31.49/21.75_____-2.1/-2.6
Foot Locker (FL)__________74.00/49.58/48.00_____-7.4/+43.3
Gannett (GCI)__________19.00/12.73/4.98_____-13.1/+3.1
Quest Diagnostics (DGX)__________206.00/138.02/119.23_____-3.0/+4.2
Sprouts Farmers Markets (SFM)__________54.00/36.18/21.40_____-2.2/+28.3
Thor Industries (THO)__________193.00/129.31/117.06_____-1.7/+55.0
Wallflowers (large & unpopular companies)
Piper Sandler Cox (PIPR)__________88.20/59.10/106.32_____-0.5/+45.7
Gilead Sciences Inc. (GILD)__________58.30/39.10/61.44_____-4.6/-15.5
Lenovo (LNVGY)__________16.70/11.16/25.30_____-8.6/+92.8
Best Buy (BBY)__________114.00/76.38/100.30_____-15.0/+28.1
Berkshire-Hathaway (BRK.B)__________225.00/180.00/240.49_____-0.6/+15.8
Comfort Systems USA (FIX)__________45.10/30.20/61.94____+2.3/+43.1
Allegion PLC (ALLE)__________111.00/74.31/108.78_____-0.3/-7.9
Albemarle Corp. (ALB)__________152.70/102.30/157.20_____+1.2/+94.6
Scotts Miracle-Gro (SMG)__________186.19/124.70/213.15_____-8.7/+92.4
Alphabet Inc. (GOOG)__________1878.90/1258.90/2036.40_____-3.0/+54.5
AmerisourceBergen (ABC)__________146.60/98.22/101.23_____-4.4/+16.9
Paccar Inc. (PCAR)__________82.60/55.30/90.99_____-4.4/+34.3
Supernus Pharma (SUPN)__________25.20/16.90/27.00_____-8.8/+49.3
Sony Corp (SNE)__________51.12/34.30/106.01_____-8.8/+73.8
SpartanNash Co (SPTN)__________23.20/15.60/18.23_____+0.1/+55.8
Acuity Brands, Inc. (AYI)__________98.27/65.84/123.30_____+1.3/+23.6
AECOM (ACM)_________60.01/40.00/57.89_____+1.3/+25.6
Comcast (CMCSA)__________67.00/44.89/52.78_____+1.5/+28.4
Keurig Doctor Pepper (KDP)__________45.00/30.82/30.52_____-2.4/+8.1
Ford (F)__________18.00/12.00/11.70__________+1.0/+67.9
International Game Technology (IGT)__________34.00/22.78/18.30_____+3.6/+62.7
Interactive Brokers (IBKR)_________121.00/81.07/72.39_____-2.9/+40.2
HP Inc. (HPQ)__________57.00/38.19/29.00_____+7.0/+32.4
Service Corporation Intl. (SCI)__________82.00/54.94/47.76_____-2.9/-1.7
Teradyne, Inc. (TER)__________171.00/114.57/128.62_____-10.0/+120.2
/i/Bets aka “Boring Kitty” (speculations)*
Beazer Homes (BZH)__________-/-**
Lionsgate Films (LGF.A)__________48.00/32.00/14.52
Nature’s Sunshine Products (NATR)__________38.00/25.48/16.48
Seneca Foods (SENEA)__________-/-
Solitron Devices (SODI)__________-/-
Supermax Corporation Bhd (SPMXF)__________4.27/2.86/1.75
Qualstar Corp. (QBAK)__________-/-
Orbit International Corp. (ORBT)__________-/-
Quarterhill (QTRHF)__________-/-
Olam International Ltd. (OLMIF)__________3.22/2.16/1.2475
Hon Hai Precision Industry Co. Ltd. (HNHPF)__________12.45/8.34/8.26
City Developments Ltd. (CDEVY)__________8.51/5.66/5.52
Dundee Corp. (DDEJF)__________2.73/1.83/1.04
Fosun International (FOSUY)__________98.35/65.89/38.63
Travelcenters of America Inc. (TA)__________46.02/30.83/24.70
* These stocks were picked in last week’s newsletters, so returns begin next week, based on Friday’s closing prices. I’ve added TA to the list, which is now closed for 12 months.
** Dashes imply an alternative valuation called “nascent bargain issue,” discussed and defined last week. For once, it’s complicated!
Workouts, aka Special Situations
· On July 13, 2020 Analog Devices, Inc. (ADI) and Maxim Integrated Products, Inc. (MXIM) announced a merger in which MXIM shareholders would receive 0.630 of a share of ADI per MXIM share. The deal is to be completed in the summer of 2021. This implies a premium of 5.4% to MXIM’s current price, or a roughly 10% return on an annualized, non-compounded basis.
· On October 8, 2020, Morgan Stanley (MS) announced that it would acquire Eaton Vance (EV) for $28.25 per share in cash plus 0.5833 MS shares, to be completed on March 1st. (EV shareholders were also to receive a pre-closing dividend of $4.25 per share; this was paid on December 18, 2020.) EV’s current price is above the acquisition price.
· On October 29, 2020 Marvell Technology Group (MRVL) announced that it would purchase Inphi Corporation (IPHI) for $66 in cash and 2.323 shares of stock. The deal is to be completed by June 30, 2021 and implies a premium of 8.2% to IPHI’s current price, or about 20% on an annualized, non-compounded basis.
· On October 30, 2020 AMD announced an agreement to purchase Xilinx (XLNX) for 1.72 shares of AMD stock per share of XLNX. The deal is to be completed by the end of this year. This implies a premium of 11% to XLNX’s current price, or a roughly 13% return on an annualized, non-compounded basis.
· On December 1, 2020 Salesforce (CRM) announced its acquisition of Slack (WORK) for $26.79 in cash plus 0.0776 shares of CRM, to be completed mid-2021. This implies a premium of 6.6% to WORK’s current price, or a roughly 15% return on an annualized, non-compounded basis.
· On December 12, 2020, AstraZeneca (AZN) announced its acquisition of Alexion Pharma (ALXN) for $60 in cash plus 2.1243 AZN shares, to be completed in Q3 2021. This implies a premium of 6.6% to ALXN’s current price, or a roughly 12% return on an annualized, non-compounded basis.
· On December 20, 2020, Lockheed Martin announced its purchase of Aerojet Rocketdyne (AJRD) for $56 per share, in cash, to be completed in Q4 2021. This implies a premium of 8.7% to AJRD’s current price, or a roughly 11% return on an annualized, non-compounded basis.
· On December 21, 2020, Blackwells Acquisition LLC offered to buy Monmouth Real Estate Investment Corporation (MNR) for $18 per share, in cash, to be completed in Q2 2021. This implies a 3.9% premium of MNR’s current price, or 16% on an annualized, non-compounded basis.
· Also on December 21, 2020, HMS Holdings (HMSY) announced that it agreed to be acquired by Gainwell Technologies for $37 per share, in cash, to be completed in Q2 2021. This implies a premium of 0.6% to HMSY’s current price, or a roughly 2.5% return on an annualized, non-compounded basis.
· On January 14, 2021, Cisco Systems increased its offer for Acacia (ACIA) to $115 per share, in cash, which equals ACIA’s current price. No timeline has been given.
· On January 19, 2021, Lumentum Holdings (LITE) announced it would acquire Coherent Inc. (COHR) for $100 per share in cash plus 1.1851 shares of LITE. The deal is to be completed in H1 2021. The acquisition price is well below COHR’s current price.
· On January 25, 2021 NCR (NCR) announced an agreement to buy all outstanding shares of Cardtronics (CATM) for $39 apiece. The deal is to be completed in mid-2021. This implies a premium of 1.2% to CATM’s current price, or a roughly 2.5% return on an annualized, non-compounded basis.
· On February 16, 2021, Tribune Publishing Co. (TPCO) announced that it would be acquired by its major shareholder, Alden Global Capital, for $17.25 in cash, with the deal expected to close in the second quarter of this year. This implies a premium of 1.6% to TPCO’s current price, or a roughly 6% return on an annualized, non-compounded basis.
Weekend Chart
