StreetAuthority is calling a recent buy of Warren Buffett’s “The little stock that could make you rich” — it’s apparently a retailer that Buffett “recently” bought, to the tune of 14 million shares (I’m afraid I can’t sing along at that volume, but I do always like to know what Buffett’s buying).
The wise and all-knowing Gumshoe readers know, of course, that most Berkshire picks could simply be sleuthed out by reading the Berkshire annual report … or, for smaller holdings, the quarterly filings they’re required to make about their investments with the SEC.
Perhaps that’s why Paul Tracy at Street Authority is asking for only forty bucks — a $39.95 subscription to their Market Advisor will get you the “special report” about Buffett’s favorite retailer and some other favorites (that $39.95 is for one quarter, not a year, just FYI).
So what clues and tantalizing tidbits do we get for our sleuthing pleasure?
“With just 2% of the U.S. market under its control, this innovative little retailer has an unprecedented growth opportunity ahead of it.
“The company virtually looms over its predominantly “mom and pop” competition, with approximately 90 superstores clustered in and around some 40 metropolitan areas.
“Aside from being way bigger than their smaller rivals, these superstores also bring a completely unique format to their industry. Designed to feel like a big-box style discount retail chain, they’re obviously trying to emulate the blueprint used by mega-retailers Wal-Mart, Home Depot and Target, to name just a few.”
That’s enough to identify these guys, but here’s just a bit more to get your juices flowing:
“And did I mention the basket of financing options this company has available right on the premise of each facility? It not only provides a full-ray of choices through its own internal finance unit, this firm has also partnered with multiple, big-name third-party lenders, enabling customers to choose from a virtual smorgasbord of finance packages, while at the same time reducing its own credit risk.
“Given this type of savvy business acumen it’s easy to see why market share is expected to approach 20% in the coming years.
“Plus, with locations currently in only about half of all U.S. states, this company can simply grow by opening up new superstores in under-served markets. And that doesn’t even take into account the organic growth that will likely continue by stealing market share from smaller rivals, who can’t even come close to matching the superstore shopping experience.”
OK, so that’s quite enough to feed into the all-knowing Thinkolator, which quickly spits out our answer:
I haven’t looked at this one for a while, so I took a quick gander this morning: It ain’t cheap, with both forward and trailing PEs in the 20s. I guess this shouldn’t be much of a surprise — Buffett, regardless of his reputation as a “value” investor, doesn’t generally buy really beaten down stocks. He’s more interested in a “great company at a good price” than a “decent company at a rock bottom price.” He appears to care much more about sustainable competitive advantage (the “moat” concept you’ve probably heard of), and a company that’s easy to evaluate that spins off a lot of cash and doesn’t need to borrow money from him.
Recent earnings took a bit of a hit, so they didn’t grow last quarter, and sales growth is in the mid-single digits, so this is one you’ll probably need to dig into to find the value — and I expect that value would be in continued consolidation of a fragmented industry, since there aren’t really any more big used car chains with national ambitions these days (there were a few ten years ago, but Carmax seems to have outlated them).
What really makes this smell like a value pick is its industry — used cars. What on earth could be a simpler and more easily understood business? It might even be recession-resistant to some degree, since maybe folks are more likely to buy a used car than a new one if incomes are down a bit. And who knows, they might pick up a lot of inventory on the cheap if the car financing business sees the same upticks in bad loans and reposessions that we’ve seen in housing. Pundits are predicting that other areas of financing will fall soon — credit cards, auto loans, commercial mortgages, etc., so I don’t know enough to predict whether that would be a good thing or a bad thing for KMX. The company doesn’t really carry any corporate debt, but I don’t know how much of their business is the finance arm, and what kind of exposure they might have there.
Interestingly enough, car retailing might have gotten a little boost by Barron’s over the weekend — they spoke glowingly of Asbury Automotive because of its high dividend and reasonable valuation, and did a quick once-over for many of the others in this space (AutoNation, etc.). These are all primarily new car dealers, but it’s interesting to note that they’re all significantly cheaper than Carmax if you use most of the more common valuation metrics (PE ratio and the like). The article’s here if you’re interested (subscribers only).
So … maybe one that’s worth some research, if you’re a fan of simple, expanding businesses or of retailers building into national exposure, or even if you’re just a fan of Warren Buffett. There are some other compelling institutional investors on board, too, including the Dodge and Cox funds and Davis Advisors, though Berkshire Hathaway is at the top of the list with nearly a 10% stake. As best I can tell, this one hasn’t reached a level of importance that it’s even individually mentioned in Berkshire’s annual reports — at least not recently — but I imagine our friend Mr. Buffett must be a Gumshoe reader (right?), so perhaps he can add his detailed rationale below.
OK, well then, anyone else interested in or disgusted by Carmax? Feel free to opine away. And toss in an answer to the poll below, if you don’t mind.
full disclosure: I own my own tiny piece of Berkshire Hathaway, and have money in two Dodge and Cox mutual funds.