Whitney Tilson has a new teaser pitch out for his entry-level newsletter… the bait to pull you in to read the ad is “America’s #1 Retirement Stock,” and then he also hints at the other four components of the “perfect portfolio” … so I thought I’d dig into that for you and see what we can learn.
If you don’t know Tilson, he’s a busy guy, a great networker and speaker, and used to run a mutual fund and hedge fund in addition to being a pretty prolific writer… he often wrote for the Motley Fool, and put out a couple books.
I usually find his analysis interesting, and have attended a few of his Value Investing Congress conferences over the years, but he recently came to the world of newsletters in a partnership with Stansberry.
The letter he’s selling today, Empire Stock Investor, costs $49/yr… which means it’s the “front end” newsletter that they use to acquire prospects. It may or may not be a great letter, I expect it’s probably at least a good read, but if you sign up do expect to be inundated with ads for Empire Investment Report ($5,000/yr) or Empire Elite Trader ($69/month) and all the Stansberry newsletters and services.
Here’s the intro that caught my attention…
“Right now, Whitney is spending a small fortune to alert the public to what he calls ‘America’s #1 Retirement Stock.’ He’ll reveal the name of this stock and the ticker symbol, right here in this presentation. You can call your broker and put it in your account in a matter of minutes. Whitney believes there is simply no other investment like this in America.”
Well, “spending a small fortune” seems an absurd claim to make. This is an ad, after all, it costs money to distribute ads and they expect to make that up in subscription revenue. Not sure how emailing this ad around costs him “a small fortune,” but we’ll leave that for the moment.
He loads up on the promise of this “#1 Retirement Stock,” too…
“In fact, Whitney is so confident in this investment idea, he says he’d put 50% of his kids’ college fund into this SINGLE investment.”
Which is pretty bold, since his youngest kid is I think maybe one or two years from starting college.
And there’s a bit in there to fan the flames of those who are worried that they have to ‘save their retirement’…
“Baby Boomers in particular haven’t saved enough.
“The median retirement account for folks over the age of 65 is only $58,000.
“And many will live far longer than they expect, which I fear they are unprepared for.
“It has become clear to me that this is possibly the greatest problem of our era…
“Today I’m doing my small part to help out.
“I’m sharing “America’s #1 Retirement Stock” totally free of charge with you today.”
And he does that, to be fair — he doesn’t say it’s “free with a subscription to my Empire Financial newsletter,” he actually does “reveal” it in the pitch… though it’s not a surprise, he’s saying that Berkshire Hathaway (BRK-B) is his “#1 Retirement Stock”, and that’s been a favored investment of Tilson’s and one he’s written about and publicly advocated for at least a decade or two.
It’s one of my favorites, too, so maybe that’s why I generally like Whitney’s analysis and tend to pay attention to his commentary.
Here’s some of what he says about Berkshire, in case you didn’t see the ad:
“I believe it may be the most important opportunity for anyone age 40 and older.”
And as a student of value investing, Tilson has long been a fan of Warren Buffett… and thinks Berkshire is trading at a discount. Here’s a bit more:
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“… his company has the potential for a 37% upside despite having this incredible investor at the helm.
“This is a HUGE opportunity – one I don’t expect to last for long….
“I first bought the stock when I launched my hedge fund on January 1, 1999 and owned it continuously until I closed it in late 2017….
“Since I first bought shares, there have been five great buying opportunities to get in….
“And today we have another one of those buying opportunities…
That’s why I’m trying to get the word out about this ‘back up the truck’ moment….
“It is the cheapest it has been in years, by my calculations.
You simply can’t find any stock as conservative and as low-risk as this with that kind of realistic upside in the short term.”
So… what’s the story with Berkshire’s valuation these days?
Well, the easy shorthand is that buying Berkshire at a small premium to book value, anything under 1.2X or 1.3X book value, has always been a good decision.
A big chunk of Berkshire’s assets are in insurance and the portfolio investments of Berkshire’s insurance companies (GEICO, et al), and the values of those assets are updated each quarter in Berkshire’s financial statements.
A lot of that is in bonds and in publicly traded stock, so those have clear market values, but a big chunk is also in private investments that are very likely undervalued on a book value basis, like Berkshire’s major investments in private industrial companies, the Burlington Northern railroad, and utilities.
Beyond that foundation of investments, Berkshire also has its consistently profitable insurance operations, and is also required to list its insurance float as a liability on the books. That “float” money, the premiums that insurance customers have paid in but that Berkshire has not yet had to pay out in claims, acts more like an interest-free loan in most cases (because Berkshire’s ability to sell new policies is effectively perpetual), and is considered by Buffett and Munger to be more like an asset than a liability.
So there are limitations to that book value assessment, and book value almost certainly understates what Buffett considers to be “intrinsic value” for the company, but over time Berkshire has certainly been a worthy buy whenever it falls below 1.3X book value, and they could almost certainly increase long-term shareholder value if they were to buy back a lot of shares at a valuation near where it is today.
Buffett’s favored valuation metric has most often been to set aside the investment portfolio at Berkshire, and value that based on the current asset value, and then for the rest of the valuation just look at the current operating earnings of the businesses in aggregate and decide what multiple you want to pay for those earnings. Do that math, and you get a rational value for Berkshire’s market cap — all you have to do is compare it to the current share price to see whether it’s close enough to that value (or below) that you want to buy.
Tilson follows that guidance and has posted his free analysis of Berkshire many times over the years, the last public version I saw was back in August when the stock was right around 1.3X book value — that’s still up here if you want to check it out. He did the math as of the second quarter and determined that Berkshire had cash and investments of $220,223 per A share (about $360 billion total) and pre-tax earnings per share of $14,331, excluding investment income, which puts his assessment of “intrinsic value” at $392,194 per A share (using a PE multiple of 12 for those pre-tax non-investment earnings).
The value of the portfolio has gone up some in the time since the second quarter, largely because Apple shares (Berkshire’s biggest investment) have soared 40% higher and Berkshire’s big collection of bank stocks has done well. Even Kraft Heinz, Buffett’s biggest mistake in recent years, has recovered from its lows earlier in the year.
The stock is trading right around $338,000 at the moment, roughly a 14% discount to Tilson’s Q2 intrinsic value and currently just a whisker away from all-time highs. I assume that his calculation of intrinsic value would rise by probably about 3-5% from Q2 to now, mostly because the investment portfolio did well (earnings growth tends to be slow and steady in Berkshire’s non-insurance businesses over the very long term), but you never know — some of the major businesses are probably suffering a little bit at the moment, too, like Precision Castparts because it’s a major Boeing supplier, or the railroad because of trade disputes and lower oil prices.
I’d still buy Berkshire here, but would wait for little dips before going in big — buying below 1.3X book value is a very easy call if you’re looking for a shortcut valuation, buying at 1.4X book, which is roughly where it trades today, is very likely to be reasonable but increases the risk a little bit.
If you’re curious about the dual-share structure, all you really need to know is that A shares can currently be broken up into 1,500 B shares each, and A shareholders get more votes (Buffett is the largest shareholder with more than 15% of the equity, but controls ~30% of the vote) — but your vote doesn’t really matter at Berkshire, anyway, and the two classes almost always trade exactly in line with each other, neither is at much of a premium or discount. B shares were created originally to give some access to smaller investors and sidestep the people who were creating closed-end funds to just buy Berkshire and sell smaller chunks to small investors (at high fees), and then the B shares themselves got up to $4,000 or so and were split when Berkshire acquired Burlington Northern Santa Fe railroad because they were required to use some stock in that transaction (for tax purposes, if I recall correctly). Being a normal person and not a tycoon, I own the B shares, which now trade around $225 each, not the A shares at about $340,000 each.
The main reason to think of Berkshire as a “fortress” is their massive cash pile — Warren Buffett and Charlie Munger deployed a lot of money investing in Apple and other equities a year or so ago, but they haven’t been putting as much money to work lately, there haven’t been many appealing acquisitions for Buffett to make (and no very large ones, which he calls “elephants,” in years), and the cash has piled up. That’s certainly a drag on performance, and perhaps that will send sentiment lower at some point and let you buy Berkshire at a dramatic discount, but it’s equally possible that Buffett will announce a large $20-50 billion acquisition of some kind over a weekend that gets everyone excited again.
I don’t think Berkshire will beat the S&P 500 dramatically in a bull market, though it tends to keep up just fine… I hold it because I expect it to have periods of significant outperformance in the next bear market, and I don’t know when that’s coming. I expect that Buffett has one more good bear market left in him, and that he’ll be presented with some great opportunities to add value for Berkshire shareholders the next time the markets panic in a meaningful way.
I can’t promise that’s how it will play out, of course, but that’s why I hold and nibble a bit from time to time to increase my position… I’ve held Berkshire shares for almost 15 years, steadily adding more when opportunities presented themselves, and I’m very unlikely to sell the stock. I wouldn’t put 50% of my kids college fund or my retirement in Berkshire shares, but if I were forced to make that call with one individual stock, Berkshire is the one I would choose — not because of the huge gain potential, but because of the very low risk of a major loss. It is more than 10% of my equity portfolio (and has been my largest individual holding for a very long time). So that’s your fair notice: you might have to find your skepticism elsewhere when it comes to Berkshire.
And then we get to the “secret” stuff…
“So, after I reveal the name of “America’s #1 Retirement Stock,” I’m then going to tell you about the other four retirement stocks that should make up the rest of my perfect retirement portfolio.”
He says that this perfect portfolio would be divided among just a few “high-conviction” ideas, and that the strongest ideas he has right now are in technology… so what are they?
“So three of my favorite companies are technology giants that seem to be literally printing money for their investors.
“They are so dominant and are changing the world so fast, I believe it would be a tremendous mistake not to have them in your portfolio…”
And then, on to the hints…
“Tech Titan #1: The Company That Could Soon Revolutionize How Americans Take Care of Their Health
“While we can have nearly everything in our lives delivered straight to our front door today, 85% of Americans still go to the pharmacy to buy their prescription drugs.
“But this company is going to quickly change that…
“Mail order prescriptions isn’t a new thing… but as Americans expect everything from food to household staples to clothing delivered to their front doors, they are going to demand that their medication is delivered that way too.”
Have a guess ready yet? We get a few more clues…
“It has already filed patents that would allow your mobile device to identify when you are developing a cold or cough….
“Last year alone, operating income more than doubled.
“And I conservatively estimate that profits will continue to grow by 70% per year for the next several years. That level of success could mean hundreds of percent gains for you as an investor over that time.”
That’s Amazon (AMZN), certainly a titan… though that earnings growth still doesn’t help them to look much like a “value” given their long-term focus on growth over current income, going just by the basic PE ratio AMZN is currently trading at about 70X earnings, and almost 46X 2021’s forecasted earnings.
Amazon was generating operating income growth of over 100% earlier this year, at least for one quarter though that has dropped off considerably because of their major increases in spending to improve the service, particularly their adoption of one-day delivery for a lot of Prime orders. That’s been the pattern with Amazon, as soon as earnings growth starts to pick up and we begin to think of it as a company that can be valued based on earnings and profits, Jeff Bezos decides to conquer another part of the world or lap the competition in some other new way and they spend those expected earnings on that next wave of growth.
Still, it’s hard to find a more dominant company in any aspect of American life than Amazon, and I’ve generally found that I can talk myself into buying the stock when it gets down to the 3X sales neighborhood, even if I can’t ever really call it “cheap” with a straight face. It’s back down there now, so it’s arguably a rational buy — just be prepared for the fact that if investors someday decide as a group that we’re all going to value Amazon based on real earnings, the stock could easily fall by 40%. It has done so before, and Jeff Bezos hasn’t missed a beat — he doesn’t care what the stock price is, it appears, he just wants to build the largest and best company in the world, and provide service that overwhelms his competitors and thrills customers.
Try not to get too hung up on the past when it comes to Amazon — the daydreams of “what if I had bought Amazon in 1998 and never sold” don’t do us any good — but do pay a little attention to that historical volatility… AMZN shares lost 95% of their value in the dot com crash, and have had a couple drawdowns since then in the 30-60% neighborhood, so going along with “Relentless” Jeff Bezos is not guaranteed to be easy.
And if you love Amazon and Berkshire, well, you can also rest assured that almost 5% of your retirement portfolio is probably in those stocks already (that’s just assuming your portfolio mimics the S&P 500, as most do — Amazon is about 2.8% of the S&P 500, Berkshire about 1.7%… the only larger allocations are to Apple, Microsoft and Facebook).
So what’s next?
“Tech Titan #2: The Company Dominating the Business Behind Artificial Intelligence….
“The AI marketplace is accelerating quickly. Forbes estimates that it will quickly become a MASSIVE business with the potential to create $3.9 trillion in new value to businesses by 2022.
And a massive $15.7 trillion to the global economy by 2030.
“Which is why the second technology company I recommend you invest in right now is one I predict will become the dominant player in AI.”
OK, that could be Amazon or any of the other mega-tech companies as well… what other clues do we get?
“Wired even recently said that, ‘The race to dominate the personal AI space… is closer to being over than most people realize.’ And that this innovative tech company ‘is poised to win.’
“The company is using it to make it easier for Americans to do things every day, whether it is typing emails on the go… searching for photos… or even communicating with people who speak different languages.
“The Economist says this firm is winning the battle ‘to dominate artificial intelligence.'”
Well geez, I guess we’re really just buying up the few largest companies in the world today, eh? This one is Alphabet (GOOG), which is also one of my largest and longest-term holdings, and is the one tech stock that I can argue has been clearly undervalued at times over the past year (though it’s getting pretty close to fair value lately).
That Economist article is a couple years old, but interesting. And the Wired article is also a bit of a reminder of the risk in these big tech companies — the title is “Google Must be Stopped Before It becomes an AI Monopoly.”
I don’t see much of a real backlash against these global monopolies, though regulatory attention is certainly rising and Europe is leading the way in trying to crack down on privacy violations and monopolistic tendencies — much of big tech is really a “natural monopoly” business thanks in large part to the network effect and the cost any competitor would incur in trying to ‘catch up,’ and they’re growing faster than the regulators can think, it appears. We are all addicted to the (often free) services and incredible convenience that these big tech stocks provide, and I’m guessing that we’ll see them continue to grow and dominate… and Alphabet is my favorite stock in that bunch at these prices, and another one that I’m very unlikely to sell (it’s the only stock that I’ve held longer than Berkshire Hathaway), but you never know.
So… is anyone getting a sinking feeling about what this next one might be? Me, too, but let’s dot the i’s and cross the t’s — at this point one has to guess that it’s either Microsoft, Apple or Facebook, right? Clues, please!
“Tech Titan #3: The Only Augmented Reality Company on the Path to a Billion Users
“The third tech company I believe you should buy today is the gorilla of the augmented reality world…
“You see, this company has not ignored what is arguably the biggest pot of gold of the augmented reality space: e-sports and video games.
“As you may know, recent e-sports events, like the League of Legends championship, had higher viewership than the NBA finals and the World Series.”
Jeez, that could be anyone, too — though Amazon and Google are still bigger in eSports than anyone else (not because of games or events, but because they own Twitch and YouTube, respectively, the two largest distribution networks for gaming video).
“It is building an entire universe where people can escape to, socialize, watch e-sports, and even partake in them.
“It’s already generated more than $100 million in sales from its virtual content.
“And I believe we are at the very beginning of this major shift in how the next generation will consume media…”
So yep, this one is Facebook (FB). Ugh. Facebook is an insanely dominant company in social media, of course, with both Facebook and Instagram, and touches about a third of humanity in any given month. I also own shares of this one, though I’ve sold down my position over the years and it’s the one that I like least as a citizen. Facebook and Instagram are the ultimate contradiction — they provide amazing connection for us as human beings, but also make us stupid and depressed.
I often consider selling off the remainder of my Facebook position, mostly just because I really don’t like the company, but if you just look at the financials it’s a pretty easy buy — huge cash flow generation, 20%+ earnings growth despite massive investments in new people to try to fix what ails their core platform (sometimes “good” AI can’t fight “bad” AI, you need actual human beings to look at all the awful things that people post and try to filter it), and it trades at only 23X next year’s estimated earnings… with the likelihood, I’d say, that those estimates are too low.
I am not as optimistic as Tilson about Facebook’s AI efforts — they do have a promising product in the Oculus, though Oculus still offers just a virtual reality (not augmented reality) product lineup, and it may be that Oculus remains a leader, or that they can turn Facebook Watch into an immersive eSports viewing platform… but I wouldn’t bet on Facebook when it comes to designing and selling augmented reality devices, not when they’re going up against Apple and Microsoft.
And one more… Tilson finishes up his five-stock portfolio with “The Dividend Machine” — so what is it?
“… this company is a well-established blue-chip brand.
“And most importantly, it has shown a fierce loyalty to rewarding shareholders with a history of raising dividends for over 50 years.
“Over the last 30 years, the company has delivered a total return of more than 5,400% for investors, compared to just 1,511% from the S&P 500 index.”
OK, most of the big dividend aristocrat companies have actually traded at pretty pricey valuations so far this year… which one is Tilson talking up?
“But today, by some measures, shares are the cheapest they’ve been in the last decade.
“Even better, it has one of the highest yields of any blue-chip company in America today.
“Right now you’ll receive a nearly 8% dividend just for owning it.”
OK, that really narrows it down. Why is it trading at a 8% dividend? That generally means the stock price is beaten down and something is wrong.
More from Tilson…
“… this company could have dramatic upside over the next six months.
“You see, this firm has received some bad press recently… which is why you have the opportunity to get shares at a cheaper valuation than any other time in the last decade.
“But the ironic thing is that is has been catching bad press for acquisitions that could be the growth engine for this iconic American brand.”
So he thinks that disliked acquisition might help the company to recover and keep paying big dividends even if their core business is “disrupted” by technology. So what is it?
Well, there are a bunch of large companies that are “sort of” matches… Occidental Petroleum (OXY), Ford (F), British American Tobacco (BAT), Royal Dutch Shell (RDS-B), Altria (MO), Daimler (DMLRY) all might make the short list.
Occidental is the most obvious match currently, with a dividend yield that actually is at 8%, and with all the nasty press they’ve gotten for their acquisition of Anadarko this year (which was partially financed by Berkshire Hathaway, to Carl Icahn’s chagrin)… OXY ha