For those of you who are less familiar with our show and our research we are big fans of Warren Buffett’s investment style. Now for those of you who are unfamiliar with Warren Buffet – from an investment perspective I say, pull your head out of your butt and pay attention.
With a net worth of over $60 billion, which is greater than the annual GDP of countries like Costa Rica, Croatia, and Serbia – Forbes ranks Buffett and the third richest person on the planet.
Because part of our research strategy is bases on Warren Buffett’s investment philosophy, we track his transactions quite closely.
Major Changes Seen in Warren Buffett and Berkshire Hathaway Stocks: Apple, Wal-Mart, Phillips 66, Deere and More
Buffett’s public investments run through the company Berkshire Hathaway Inc. (NYSE: BRK-A) – the company just released its public equity holdings as of June 30, 2016. What makes this so interesting for Warren Buffett fans, outside of Buffett being one of the richest men alive, is that there have been some interesting changes in the Buffett stocks over the past few quarters. The Berkshire Hathaway earnings report in recent weeks showed that the total equity securities listed on the balance sheet was $102.563 billion, while the 13F filing with the SEC showed the balance as of June 30 as being $129.7 billion – so the company has sold nearly $27 billion of stock recently.
While the changes are noteworthy, investors should keep in mind that approximately 61% of the aggregate fair value of the common equity securities is concentrated in four companies: Wells Fargo & Co. (NYSE: WFC) at $23.7 billion, International Business Machines Corp. (NYSE: IBM) at $12.3 billion, Coca-Cola Co. at $18.1 billion and American Express Co. (NYSE: AXP) at $9.2 billion.
These are what we call Buffett’s Big 4 – and there was not much change here…
Buffett also has large stakes in food-giant Kraft Heinz Co. (NYSE: KHC) and refining giant Phillips 66 (NYSE: PSX), and the March quarter showed a new $1 billion stake in Apple Inc. (NASDAQ: AAPL). Berkshire Hathaway also ended the June 2016 quarter with almost $72.7 billion in cash and cash equivalents.
Of the big 4 his positions in IBM, Coca-Cola Co. and American Express Co. were listed as the same. His position in Wells Fargo increased ever so slightly – this appears to be a position that Buffett might add to for infinity, well infinity of someone in his mid eighties.
Interestingly the portfolio have a few strong adds – or buys.
Phillips 66 (NYSE: PSX), the midstream energy refiner and chemicals giant was an INCREASED STAKE to 78.782 million shares as of June 30. As of March 31, it was a 75.55 million share stake and this has risen steadily.
Apple Inc. (NASDAQ: AAPL) – the maker of everything “i” was an INCREASED STAKE to 15.227 million shares as of June 30, worth some $1.455 billion. The stake in Apple was a new position back in the March quarter, listed as 9,811,747 shares worth some $1.069 billion at that time. This was a significant purchase! This purchase makes sense for Buffet – it is a great brand, with a great balance sheet and great cash generation and a relatively long-term track record of success and others are counting its best days behind it.
Notable decreased positions or positions Buffett has recently sold shares in;
Procter & Gamble Co. (NYSE: PG) is still a much lower stake of just 315,400 shares, same as in March. This had previously been listed as almost 52.8 million shares . P&G had once peaked at 96.3 million shares in the Buffett stocks. So the stock has been almost sold entirely from a historical perspective.
Suncor Energy Inc. (NYSE: SU) was a lower stake at 22.275 million shares. This had been up to 30 million shares previously, but this used to be a smaller stake at 22.35 million last June.
Wal-Mart Stores Inc. (NYSE: WMT) was a stake was taken down by more than 15 million shares to 40.226 million by the end of June. That was decreased by 949,430 in March to some 55,235,863 shares. That stake was 56.185 million shares at the end of 2015 and was down from 60.385 million shares at the end of last June and after having been raised prior to 2015.
The takeaway – he has sold more shares than bought over the recent past …but the other takeaway is that of the 40 plus companies the vast majority held the same position – in other words he is a long-term investor who does not change a ton from quarter to quarter.
Other notable and recognizable positions include; Costco Wholesale Corp. (NASDAQ: COST) was the same stake at 4,333,363 shares.
Redflags – companies that try to grow too fast?
Sounds curious – particularly from an analyst that specializes in finding great growth stocks – how can we penalize a company for growing too fast? Sounds counter intuitive…
Perhaps I should clarify –
First there are different ways for a company to growth – the 2 primary ways are organic growth and inorganic growth. Growth-by-acquisition.
Organic Growth – is increased output from your existing business – essentially selling more of your own widgets or creating new widgets in house to sell or in the case of a service business – expanding your customer base. – this growth, while tougher to come by, is great and, in most cases, if managed well, the higher rate the better.
Inorganic Growth – is essentially growth by merger or acquisition. In principal, we do not have a problem with this strategy, again if it well thought out, executed well, and over a reasonable period of time. We have actually seen it executed very well in a number of our long-term BUYs – in fact two of the longest standing positions in our Canadian Focus BUY Portfolio have used this strategy with staggering success. Aaron will talk about one of these companies as our Star of the week later in this podcast.
But we have also seen it executed staggering poorly, with disastrous results in individual portfolios.
Large caps – Concordia, Valeant, and small-caps such as the highly promoted Patient Home Monitoring and Loyalist.
We are in a low growth environment and true organic growth is scarce –
Due partly to the lack of organic growth, we witnessed a great deal of financial engineering to create “growth stocks”. Resulting in some very poorly constructed investments
- Canadian banks and brokerages have historically made their dollars financing the mining and energy sectors. Over the past five years, mining revenues had ground to a halt and energy related financings almost completely dried up in 2014-2015. Bay Street is nothing if not clever, however.
- In an effort to generate more investment banking dollars, a number of “roll-up” or growth-by-acquisition companies were created notably in the healthcare, pharmaceutical, infrastructure, and gaming sectors.
Bay Street is trying financially engineer “growth stocks”.
- Unfortunately, most of these companies have been built hastily with the goal of enriching management and Bay Street promoters, who clip of millions with each new financing to buy top-line growth.
- These management teams issue countless shares to buy new companies, reporting higher revenues with a promise of unending growth, only to hit a wall when it is revealed “per share growth” is non-existent.
We have seen it play out with large-caps like Valeant Pharmaceuticals International Inc. (VRX:TSX) and small-caps like the highly promoted Patient Home Monitoring (PHM:TSX-V) .
Both initially had strong share price gains as revenues grew but the unsustainability of the model was proven as shares in each company have crashed this past year.
Now, the quote/unquote Growth-By-Acquisition strategy – When done poorly – we typically see multiple large acquisitions (relative to the acquiring company) over a short period of time – say 4 acquisitions in 6-months or 5-6 in a year…this is a huge red flag for us.
Three issues –
Number 1: In these cases it is typically done by issuing shares to pay for the acquisition – there is no discipline to generate cash flow or a lack of a track record to issue debt to pay for the acquisition opportunity – this strategy is tough – you rely on a high valuation in the public markets and a lower valuation in the private market and need the businesses to integrate relatively seamlessly to generate a high rate of return on the captial employed to justify the dilution from the shares issued to make the transaction what we call accretive or a net positive in terms of profitability – this is far tougher than what is seems – note the implosions of the Concordia, Valeant, Patient Home Monitoring and Loyalist over the past year for great examples.
When making this many company changing acquisitions over a short period we find that the due diligence on the acquisition suffers – companies do not take long enough to look under the hood and make poor acquisitions.
Number 2 – it is incredibly difficult to successfully integrate new employees and a new culture affectively. From personal experience, it is tough to integrate a 10 staff operation with a 5 staff organization – and sometimes it does not work. In many cases we see companies trying to add 100’s of staff or more.
Growth-by-Acquisition
Difficult strategy and must be executed with patience.
Cash used to execute this strategy should at least partially come from internally generated cash flow rather than via dilutive share issuances.
This strategy takes time – Enghouse and Boyd built their growth stories over 5 and 10 years, not 5 or 10 months.
In the end, the greater size of the company did not lead to higher per share profits.
When executed with patience and the use of cash flow, the returns have been 550% and 2,500% and counting via success stories like Boyd and Enghouse.
When executed with short-term greed and the use of countless dilutive share financings, the results can turn out negative fast with stocks we have avoided like Valeant and Patient Home.
