Whitney Tilson’s email to investors discussing his readers’ thoughts and questions; his updated valuation model for Berkshire Hathaway; Doug Kass’ favorite tech and financial stocks; I spoke to U.K. students on Monday; survey; Hempton agrees with Ackman; The counter-arguments; The case for a market bounce.
Q4 2019 hedge fund letters, conferences and more
Updated Valuation Model For Berkshire Hathaway
I just updated my valuation model for Berkshire Hathaway (BRK-B). It's a simple one: take investments per share and add the value of the operating businesses, calculated by placing a reasonable multiple on the company's pretax earnings.
At the end of 2019, Berkshire had $252,000 per A share of investments and $14,464 per share of pretax earnings. To this, I applied a 12 multiple – equal to a 15 after-tax price-to-earnings (P/E) multiple, which is well below market – to arrive at a value of $174,000 per share for the operating businesses. Adding $252,000 and $174,000 yielded intrinsic value of $426,000.
But the world has changed. Berkshire's stock portfolio has taken a beating, earnings will be lower this year (though I think they'll hold up better than most large companies), and multiples have compressed.
So, to arrive at a new valuation, I gave the stock portfolio a 25% haircut from its year-end value (in line with the decline of the S&P 500 Index), trimmed pretax 2019 earnings by 10% (they might be lower, but I'm estimating normalized earnings), and reduced the multiple on those earnings from 12 to 10.
This results in investments of $212,000 per A share and earnings of $12,674 per share (worth $127,000 per share), resulting in intrinsic value of $339,000 per A share (or $226 per B share) – a bit more than 20% lower than my estimate a month ago. That sounds very conservative to me.
And I'm being even more conservative because I'm not factoring in the value Warren Buffett will likely create as he puts his $128 billion cash hoard to work amidst this chaos: buying back his own stock in size, buying other stocks, and negotiating deals with desperate companies.
During the global financial crisis – the last time investors panicked and the market crashed – Buffett made a fortune by quickly putting more than $50 billion to work in preferred stock with warrants (on terms only he could get) in Goldman Sachs ($5 billion), Bank of America ($5 billion in 2011), and General Electric ($3 billion)... snapping up auction rate securities ($6.5 billion)... backing Mars' acquisition of Wrigley ($6.5 billion) and Dow Chemical's acquisition of Rohm and Haas ($3 billion)... and buying 65.4% of Marmon ($4.5 billion).
Valuation Model For Berkshire and why it makes sense for retirees
I continue to believe Berkshire is the "No. 1 Retirement Stock in America." It's the perfect investment for more risk-averse investors who want a stock that is likely to modestly outperform the market, irrespective of its direction.
Importantly for all investors – and especially retirees, particularly in times like these – it's super safe. It's an incredible collection of high-quality businesses... it's run by the greatest investor of all time... and it has the ultimate, Fort Knox-like balance sheet: $128 billion in cash and short-term investments, $19 billion in bonds, and roughly $200 billion in liquid, blue-chip stocks.
And Berkshire's intrinsic value is growing at a healthy rate – rising 17% last year, 10.8% annually over the past five years, and 13.5% compounded over the past decade.
Best of all, the stock is cheap. Berkshire's B shares closed yesterday at $174.68 – a 23% discount to their intrinsic value.
Doug Kass' favorite tech and financial stocks
3) As for other stock ideas, I agree wholeheartedly with my friend Doug Kass of Seabreeze Partners, who wrote this morning:
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In The Great Decession of 2007-09 the banks were the problem – they were leveraged over 35-1, had concentrated and risky portfolios, had irresponsible managements, and distributed financial weapons of mass destruction with gusto.
Today, banks will be part of the solution of resuscitating domestic economic growth. With excess capital, extremely low leverage ratios (10-15:1), diversified loan portfolios, the best management teams (in history), generational low valuations, and with interest rates likely to rise in the years ahead – when combined with the stock price degradation over the last two months – the reward vs. risk is remarkably attractive now.
JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), and Wells Fargo (WFC) are my favorite names.
On Monday afternoon, I spoke via webinar for 38 minutes to Coventry University (in the U.K.) students who are members of the Investment Society. You can watch it here.
After introducing myself, I talked about the coronavirus crisis, what happened in China, why I think the U.S. and Europe will be able to control its spread in the near future, and why therefore I feel that it's a great time to invest. I then answered some questions, and concluded with some life advice on developing good habits and becoming a learning machine.
Hempton Agrees With Ackman
Australian fund manager John Hempton of Bronte Capital is no fan (to say the least) of Pershing Square's Bill Ackman, but he's in agreement with him on taking the strongest possible measures to stop the spread of the coronavirus. Here's what he posted on his blog yesterday: Coronavirus – getting angry.
Not everyone is in agreement with Hempton and Ackman, however. Richard Epstein isn't an epidemiologist – he's a legal scholar at Stanford's Hoover Institution – but he nevertheless makes the best case I've heard for why the coronavirus isn't going to be anywhere near as bad as many fear. Coronavirus Perspective.
The Case For A Market Bounce
9) Value Investors Club is my favorite site, by far, for stock ideas and discussion. I know the founders well, I was one of the first members nearly two decades ago, and I have been telling all of my friends and readers ever since that they should apply and become a member. It's highly selective – a major reason why the ideas and discussion are so good – but even if you're just a guest, you can still get a lot of value. Here's a 2018 Barron's article about it: Even Wall Street Pros Have a Tough Time Getting Into This Club.
Nearly all of the ideas posted on the site are for individual stocks, but occasionally someone posts a market call, as one member did earlier this week, making the case for a turnaround in the S&P 500. I'm reprinting it here, with permission from the site:
[I] want to make the case for [a market bounce].
The first question is how did we all miss this? I think the answer is quite simple: most of us are trained to think Chinese data is fake, so we heavily discount all information out of China – so hearing that China was quarantining tens of millions of people fell on deaf ears. Everyone also assumed the government would act with some basic competence (bad assumption), and they let the problem spiral to the level requiring massive intervention to stave off the extreme bear case (will discuss this more later).
To recap, where are we today is in the sharpest economic decline ever seen in US history – never before has the economy dropped off so sharply, so suddenly. I think this is akin to a consumer confidence crisis – it's essentially the consumer version of the 2008 financial crisis. Many service, leisure, travel, and other consumption businesses are seeing an unheard of drop-off in business – OpenTable data suggests down 50% for some restaurants, others are reporting drops of 90% or more. Data shared on Twitter recently suggests the largest uptick in layoffs since 9/11 – and likely to get worse. I would [liken] what we are experiencing to a National 9/11. It seems likely we see a similar amount of deaths in the U.S. until this hopefully gets under control (I don't say that lightly and pray for a better outcome, but as investors we have to go with the data).
Best regards,
Whitney
