Whitney Tilson: Berkshire Hathaway Worth $267,000 A Share

Whitney Tilson: Berkshire Hathaway Worth $267,000 A Share

Excerpted from an email which Whitney Tilson sent to investors

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1) Below is a spot-on cover story in this weekend’s Barron’s about how attractive Berkshire Hathaway is today:

“In effect, the world is Berkshire’s oyster,” Buffett wrote, noting that it “is perfectly positioned to allocate capital rationally and at minimal cost.” Jain’s catastrophe-reinsurance operation, for instance, is doing less business now because alternative sources of coverage, notably catastrophe bonds, are undercutting traditional reinsurance. Berkshire is putting its money elsewhere. The company is investing heavily in both Burlington Northern ($6 billion of capital expenditures this year) and utilities ($6 billion).

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…Berkshire can’t possibly replicate its 20%-plus annualized performance of the past 50 years, but the next half-century should still be impressive. With its ample earnings power and strong balance sheet, it’s likely to remain an above-average company capable of high single-digit annual shareholder returns for the foreseeable future. With or without Buffett, Berkshire probably deserves a place in investors’ portfolios.

I added to it last month for the first time in quite a while and presented an update at the 12th Annual Value Investing Seminar in Italy earlier this month – see attached. As you can see on page 19, I peg intrinsic value today at $267,000/A share, or 27% above today’s close of $210,725. Full presentation below.


2) It’s remarkable (and troubling) how narrow this market is becoming. Here’s an analysis from a D.A. Davidson report, with figures through 7/17:


I recreated this chart with figures through today’s close:



market-gains-by-stockSo, five stocks plus the biotech sector account for all of the S&P 500’s YTD returns (with dividends reinvested; without them, the S&P is up 0.42% YTD) and then some – ex this, the S&P 500 would be down 0.8%.


Below is an article in today’s WSJ on the same theme, with similar stocks:

Just a few companies are driving the gains in major U.S. stock indexes this year, raising fresh concerns about the health of the market’s advance.

Six firms— Amazon.com Inc., Google Inc., Apple Inc., Facebook Inc., Netflix Inc. and Gilead Sciences Inc. —now account for more than half of the $664 billion in value added this year to the Nasdaq Composite Index, according to data compiled by brokerage firm JonesTrading.

Amazon, Google, Apple, Facebook, Gilead and Walt Disney Co. account for more than all of the $199 billion in market-capitalization gains in the S&P 500.

The concentrated gains are spurring concerns that soft trading in much of the market could presage a pullback in the indexes. Many investors see echoes of prior market tops—including the 2007 peak and the late 1990s frenzy—when fewer and fewer stocks lifted the broader market. The S&P 500 is up 1% this year while the Nasdaq has gained 7.4%.

Other indicators are also flashing yellow. In the Nasdaq, falling stocks have outnumbered rising stocks this year, sending the “advance-decline line” into negative territory, a phenomenon that has come before market downturns in the past, investors and analysts said.

Last Monday, as the S&P approached a record, nearly as many stocks hit one-year lows as one-year highs, according to Ned Davis Research, another sometime precursor to rocky times and a flip from 2014 and 2013 when the market rose more broadly.


3) If you are looking for proof that there is a massive bubble in tech startups in Silicon Valley, read this. This has to rank up there as one of the dumbest ideas I’ve ever heard. Amazon is going to CRUSH them! In fact, Amazon is already taking steps to do so – when I went to order some stuff on Amazon today, it offered free shipping on orders over $35 – exactly matching Jet.com:

Online marketplace Jet.com Inc. has almost no revenue, years of likely losses in its future and a strategy that includes underpricing mighty Amazon.com Inc. on millions of items. Jet also has perhaps the highest valuation ever among e-commerce startups before their official launch.

That is no contradiction in Silicon Valley, where investors keep pouring money into audacious business experiments filled with big-splash potential. Jet is the buzziest e-commerce arrival of the current boom, with $225 million in capital raised in the past year and a timer on its website counting down the seconds to Tuesday’s opening of Jet to the public.

More than just about any other current startup, Jet seems reminiscent of the dot-com boom era, when e-commerce companies assumed giant losses before breaking into the black.

Anticipation runs so high that Jet’s founder and chief executive, Marc Lore, is in talks with investors about raising hundreds of millions of dollars in additional capital by year end, according to people briefed on the discussions. The infusion could increase the online retailer’s value to $3 billion from $600 million.

“People want to put money to work,” says Mr. Lore, 44 years old. “I get a call and people say: ‘Hey, can we talk?’ Yeah, I’ll listen.”

Yet ambition is already colliding with reality at Jet, which promises members-only “club price savings on pretty much everything you buy” for a fee of $49.99 a year.

5) An interesting puzzle that tests confirmation bias: http://www.nytimes.com/interactive/2015/07/03/upshot/a-quick-puzzle-to-test-your-problem-solving.html


6) A wise article by Jason Zweig:

Combing through my archives the other day, I came across a speech I gave in October 1999 to the Foundation Financial Officers Group, an organization of portfolio managers and other executives at some of the largest private charitable foundations.

In the speech, given in the midst of a raging bull market, I looked back at the worst bear market in memory and urged the audience to ponder whether something similar might happen again.

That kind of thought experiment might not be a bad idea for investors to try nowadays, too…

…And that’s why I was delighted when Bruce Madding and Larry Siegel asked me to compare 1974 with 1999.  I think these two times are polar opposites.

  • Then, risk meant losing money.

o    Today, it means underperforming the average.

  • Then, stocks were terrifyingly risky.

o    Today, they have no risk at all.

  • Then, history showed that a 100% stock portfolio was an asinine idea.

o    Today, history shows that anything less than a 100% stock portfolio is an asinine idea.

  • Then, broad asset diversification was considered a matter of life and death.

o    Today, and I am quoting the treasurer of a state pension plan with more than $25 billion under management, “Asset allocation is crap.  It doesn’t make any sense for anyone to have any money in a bond fund.”  Close quote.

  • Then, a price/earnings ratio for the stock market of 7 to 10 seemed generous.

o    Today, a P/E somewhere between, say, 31 and 100 seems about right.

  • Then, oil prices were headed sky-high, while stocks were doomed to drift through purgatory for decades.

o    Today, inflation is legally dead—and the manager of an Internet stock fund said in a recent interview that he expects to achieve a compound annual return of 35% for the next twenty years.  And today, the Dow belongs at 36,000—or is it 40,000?—or is it 100,000?

7) Regulators let all the real criminals go scott free (in the past months, I’ve read (actually, listened to) The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History, Broke, USA: From Pawnshops to Poverty, Inc. How the Working Poor Became Big Business and The Divide: American Injustice in the Age of the Wealth Gap – all completely infuriating), and then one rogue prosecutor (Cyrus Vance) decides to go after a good (and microscopic) bank that made almost no loans that defaulted and, when it discovered one bad employee, did exactly the right things?! What a total disgrace!

On Jan. 15, 2010, the bank filed a report of its findings with financial regulators. In April, it notified Fannie Mae, which began its own investigation.

None of this carried any weight with prosecutors, who first contacted the bank in late January or early February that year. “We thought they were going to help us resolve a crime against the bank,” Vera Sung said. “We did not have an attorney early on. We cooperated with them, not realizing we were the target.”

About a year later, Mr. Sung and his daughters saw that the bank was in prosecutors’ cross hairs. They hired counsel.

The day the indictment was announced, the Abacus employees who declined to plead guilty were handcuffed together and led down a hallway in the Criminal Courts Building. Photographers were there to record the proceedings.

In news reports, Mr. Vance said the fraud at the bank reached to its management and justified the indictment, saying the bank’s cooperation was “too little, too late.” He also said the Abacus indictment was his office’s first against a bank since the famed 1991 prosecution of Bank of Credit and Commerce International, or B.C.C.I., under Robert M. Morgenthau, the former Manhattan district attorney.

After the indictment, Jill Sung said, the district attorney’s office told the bank it would seek a temporary restraining order along with a forfeiture action, essentially freezing the bank’s assets. Then the prosecutors demanded that the bank put $6 million into an escrow account.

“We negotiated it down to $2 million,” Jill Sung recalled. “But in the end, we determined not to go through with the escrow agreement as we found out that the funds would be put into an account controlled by the D.A. and commingled with other persons’ funds.” She feared the bank would never get the funds back even if the bank officials won their case.

I asked Ms. Vollero, Mr. Vance’s spokeswoman, why his office pursued a case in which the buyer of the fraudulent loans — Fannie Mae — lost no money.

“Whether the loans performed was never in dispute,” she responded in an email. “This case was about an infected loan department.”

Mr. Vance, through his spokeswoman, declined to comment.

8) What an incredible turnaround story!

In July of 2013–less than four months after Metropoulos and Apollo took over operations–the Twinkie was back. Just like its death, news of Hostess’ rebirth blew up the Internet, social networks and television. Twinkies were on Jimmy Fallon and the Ellen show. During the Today show Al Roker shot a three–minute spot riding shotgun in a Hostess truck and then tossing Twinkies to screaming fans. “When we saw Al Roker eating Twinkies on national television, we knew we had something special,” says Evan Metropoulos. “The free exposure we got from the media was incredible–they started pitching us stories.”

To feed the fire, Evan and Daren Metropoulos tapped celebrity friends like Will Farrell, Snoop Dogg and Howard Stern to hawk Hostess. They built a giant countdown clock in Times Square. Marketing teams flooded college campuses, throwing parties with Twinkies and Pabst beer, creating a ton of viral content for social networks. And Hostess’ brief earlier demise was the best marketing tool of all. Says Dean Metropoulos: “My suspicion is that if Hostess hadn’t gone out of business, if we had just taken it over while it was still running, we wouldn’t have gotten this reception.”

Fans flocked to stores. Demand was so high that large retailers waived the slotting fees they usually charge brands for shelf space. The Metropoulos and Apollo business plan had predicted $100 million worth of Ebitda for 2014–instead they hit $178 million. Those numbers make Hostess’ $410 million price tag look dirt cheap–2.3 times Ebitda in an industry where companies get 12 times. Hostess is on track to top $200 million in Ebitda this year–which, looking at comparable businesses like Flowers Foods, values Hostess north of $2.5 billion. Take out what’s left of the $500 million they borrowed to buy the company and Metropoulos and Apollo–if all goes according to plan–could make $2 billion on a $180 million equity investment in just two years. “What they’ve done at Hostess should be a Harvard Business School case study on how to turn around a business,” says Gatto, the Perella banker.

Update on Berkshire Hathaway-Whitney Tilson-Kase Capital-Italy-7-9-15

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