“When a Nevada man nicknamed, ‘Forty-dollar Frank’ first purchased his dream vacation home in Tahoe, he gathered his family on the porch for a group hug… and to give thanks to 1 stock.”
That’s what we all want, right? The stock pick that changes our lives and makes life better or more fun?
And that’s what the Motley Fool is hinting at with their “millionaire maker” stock pick that they’re teasing to potential subscribers of Motley Fool Stock Advisor.
They give some other tantalizing hints about past riches made possible, too…
“A New Jersey man spent his time buying and selling model trains while making millions from this same stock.
“A man from Kansas saved his struggling small business thanks to this same stock.
“The Journal estimates over 300 families in Portland Oregon alone became millionaires due to this same stock.”
So that’s actually enough to ID the stock, if you happen to follow the story… but we’ll leave you in suspense for a moment. What else does the Motley Fool say about this one, and why do they think you should buy it now?
More from the pitch:
“Motley Fool CEO, Tom Gardner, is convinced that this stock is not done minting millionaires….
“… he’s issued a rare “triple-down buy alert” on this remarkable company.
“A ‘triple-down’ buy alert is occurs when Tom finds a company that he is so confident in that he pounds the table and recommends it for a third time.”
Apparently those “triple downs” have included a few of the Motley Fool’s biggest winning positions — like Netflix and Amazon starting in 2002, NVIDIA in 2005, Priceline in 2004, etc. Presumably there have been some that didn’t do well, too, but we don’t get any details on those.
And what specific hints does he drop about this stock?
“The balance sheet of Tom’s triple down is an absolute fortress (so you can sleep easily when you invest in this company)… it generated an astounding $22.3 billion in free cash flow over the last 12 months.”
OK, so no surprise that this is going to be a very big company — not many companies are big enough to generate that much cash flow. And one more clue:
“It’s only trading at just 1.4 times book value!
“So there is still time for you to cash in.”
Who is it, then? Well, sadly we have to downgrade that trailing cash flow to $21.5 billion now that we have the numbers from the September quarter (it was indeed $22.3 billion back in June), but this is, as you might have guessed, good ol’ Berkshire Hathaway (BRK-A if you bathe in a solid gold tub, BRK-B if, like me, you’re a bit more modest — each A share equals 1,500 B shares). If it’s any consolation, the quarterly cash flow doesn’t mean much for this company.
And, well, I don’t know what I can add to an understanding of Berkshire Hathaway — it’s by far my largest position, and I’ve owned the shares since 2005… though it hasn’t changed my life dramatically or enabled me to build a huge model train collection, sadly, those stories are about the folks who bought Berkshire shares when Buffett was much less well-known in the 1970s and early 80s. Those stories are pulled from a Wall Street Journal article that ran a few years ago, detailing the many millionaires created by an early “buy and hold” decision on Berkshire shares.
Of course, if you go back earlier it’s not millionaires you’re looking at, but billionaires — some truly massive fortunes are bouncing around Omaha thanks to the folks who joined up with Warren’s partnership in the 1960s. But still, buying in the 70s or 80s was extremely lucrative for the patient (and yes, you would have had to be patient — and sit through a few rough periods, Berkshire badly lagged the market for years in the 90s and the stock lost a third of its value in the tech wreck, then dropped in half from its highs in 2007 when the mortgage mania and financial crisis took down the market).
So what’s the story now? Well, apparently Tom Gardner is “tripling down” on the stock… and, as coincidence would have it, I’ve also added to my Berkshire holdings a couple times in the past few months and it is one of the stocks that I’m most comfortable with in the current market climate, and at current valuations.
That doesn’t mean it’s going to beat the market. In fact, it could easily do worse than the S&P 500 for long chunks of time — the conglomerate is well-insulated by its huge cash position and low-cost leverage from GEICO and their other massive insurance businesses, but they’ll have divisions that do poorly sometimes (they’re quite exposed to housing, banking, railroads, and some major industrial sectors of the economy that could have bad periods, for example), and there could easily be times when investors panic out of all stocks and, for some of them, selling Berkshire Hathaway at a profit will feel better than selling their more volatile stocks that are down 60%.
My expectation with Berkshire Hathaway is that it will continue to institutionalize the leadership qualities that Buffett has shown in investing and hands-off management and speedy acquisitions, so that the folks who follow in Buffett’s footsteps as leaders of the company will be able to keep the culture intact and keep moving the giant machine forward… even if we should expect them to not be quite as unique as Uncle Warren.
And as long as Buffett is at the helm, I expect Berkshire to get the first call during any financial panic because of its fast decisionmaking and ready supply of cash, and, perhaps more importantly, because a big “lifesaving” investment from Berkshire can also spur a huge sentiment swing for a faltering stock and pull them out of a tailspin. I bet he’ll have one more opportunity to make some great bear-market investments for Berkshire shareholders… though you never know.
Berkshire got a lot of press for Warren Buffett’s steadily increasing position in Apple (AAPL) earlier this year (Berkshire is the largest non-index owner of Apple stock, with about a $50 billion stake — by far Berkshire’s biggest publicly traded investment position), but what has been driving Berkshire shares higher in recent months is probably mostly the updated approval from the Board of Directors for buybacks. For a long time Warren was approved to buy back shares whenever the stock fell below 1.2X book value, so that was the floor for the stock for years and they bought back almost no stock, even when the shares were clearly pretty cheap… but over the summer the board approved a much looser standard to give them more freedom to buy back stock and use up some of the surplus cash that they’ve been sitting on for years. Warren and Charlie Munger can make the call to buy back stock whenever they think the shares are trading below “intrinsic value,” which is a non-specific number but is likely to be usually higher than book value — if only because the insurance float (the money they’ve taken in from policyholders but not yet paid out in claims) is held as a liability on the books, but Warren and Charlie consider it an asset (that’s largely because their insurance businesses tend to be profitable and recurring, Berkshire is big enough to have almost all of their insurance contracts renew regularly and effectively roll over or be replaced by new policies and new customers every year, providing the “free loan” of float almost in perpetuity).
I’m quite biased here, since Berkshire is a stock I write and think about a lot and have held for longer than almost any other stock in my Real Money Portfolio (second only to Alphabet (GOOG)), but I’d agree that this is a solid investment — I don’t think it will be a life-changing millionaire-maker for anyone, they’re not going to be able to grow as fast as they did in the 70s and 80s even if Warren Buffett and Charlie Munger come to work tomorrow with the best investment ideas they’ve ever had, not with a market cap of $500 billion, but I do like Berkshire more than I like owning the S&P 500 Index (I own both, to be clear), and I think Berkshire still has a decent chance of beating the market over time, even if that’s because it will likely be better than average during future bear markets.
This isn’t the first time that Tom Gardner has been promoted as having a “triple buy” alert on a “millionaire maker” stock, incidentally — they used a very similar ad earlier this year to talk up one of the Berkshire wannabe companies, Markel (MKL), you can see our earlier article on that here.
How about you, dear friends? What would your “triple down” buy stock be this week? Wanna get on board with Uncle Warren, or is there something smaller and sexier that draws your eye? Think just “buying the market” will do as well or better than buying this gigantor insurance conglomerate that will likely be led by a nonagenarian 21 months from now? Let us know with a comment below. Don’t worry, we don’t bite.
Disclosure: I own shares of Apple, Berkshire Hathaway, Amazon, Alphabet, NVIDIA and Markel among the companies mentioned above. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.