Dec 262019

At today’s closing price of $289.91 for Apple, Berkshire’s 5.4% stake in the company is valued at $72 billion, double its $36 billion investment.  One of Berkshire’s portfolio managers, Ted Weschler or Todd Combs, made Berkshire’s initial purchases in Apple during the first quarter of 2016. Since then, however, the vast majority of additional purchases were made by Warren Buffett.  Apple is the largest holding in Berkshire’s common stock portfolio, representing about 30% of its total value.

 Posted by at 8:35 pm
Dec 252019

On December 23, Berkshire Hathaway announced that Todd Combs, one of Warren Buffett’s portfolio managers, will become CEO of its Geico automobile insurance business on January 1, 2020.  Todd Combs will likely be reporting to Ajit Jain,  who heads up all of Berkshire’s insurance operations.

This appointment represents a major increase in responsibility for Combs (48) and raises the possibility of his being considered as an eventual successor to Warren Buffett (89) as CEO of Berkshire.  Until now, it has been widely believed that Greg Abel (58) was the most likely candidate to succeed Buffett, with Ajit Jain (68) also under consideration.

Combs will continue in his role of portfolio manager for Berkshire, along with Ted Weschler (57), where each is currently managing $14 billion. Warren Buffett on many occasions has praised the performance of both Combs and Weschler.  Combs, a former hedge-fund manager, was hired by Buffett in 2010.

Combs has also led Berkshire’s involvement in its venture, along with its partners Amazon and JPMorgan Chase. to lower health-care costs for their employees. He also played a major role in Berkshire’s acquisitions of Precision Castparts Corp. and Duracell.  More recently, he made investments in financial-technology companies in emerging markets, StoneCo Ltd (Brazil) and Paytm (India).

Combs has previous experience in automobile insurance. He worked at Progressive Corp., a Geico competitor, earlier in his career.  Combs also sits on the board of directors of JPMorgan Chase.

Geico is the second largest U.S. personal car insurer by premium volume, behind only State Farm. The company wrote $26.49 billion in premiums, and reported $1.54 billion in pretax underwriting earnings in the first nine months of 2019 vs. $ 1.98 billion in 2018. This 22% decline in pretax underwriting earnings was attributed to increases in losses from claims and increases in advertising expenses, insurance premium taxes and employee-related costs, which reflected wage and staffing increases.

Although Greg Abel is currently considered to be the front runner to succeed Warren Buffett, another internal candidate such as Combs may emerge over time as his eventual successor.  If Buffett (89) can match Charlie Munger’s (95) longevity, and Combs succeeds in his additional responsibilities, then his relative youth as compared to the other current candidates would become a large advantage.  Charlie Munger will turn 96 on January 1.




 Posted by at 11:24 pm
Dec 232019

55% of Americans own stocks, directly or through 401(k)s, individual retirement accounts, mutual funds, or other means.

Gallup found 55% of Americans reporting they own stock in April 2019, similar to the average of 54% Gallup has measured since 2010. This is based on a question asking respondents about any individual stocks they may own, as well as stocks included in mutual funds or retirement savings accounts, like a 401(k) or IRA.

Stock ownership was more common from 2001 to 2008 when an average 62% of U.S. adults said they own stock, but this fell toward the end of the 2007-2009 recession and has not fully rebounded.

 Posted by at 8:53 am
Dec 142019

Berkshire Hathaway hit an all-time high Thursday of 339,769.60. That tops the previous high set in the fall of 2018. It closed Friday at 338,080. The current market value of the company is more than $552 billion. Its Class B shares also hit a new high of 226.52.

I disagree with those who argue that Berkshire has too much cash on its balance sheet.  Although Berkshire has underperformed the S&P 500 in 2019, its performance over the past four years has closely matched that benchmark. Berkshire will consider acquiring a privately owned, or a publicly traded, company only if it is well managed, its management agrees to stay in place, and it is offered at the right price. What distinguishes Warren Buffett from others is both his skills as a CEO as well as a portfolio manager. His patience permitted Berkshire to be the investor of last resort during the Great Recession, resulting in lucrative investments in several companies including Goldman Sachs (2008) and Bank of America (2011).  Although the current record economic expansion has exceeded 10 years and a recession in 2020 is unlikely, the economic cycle has not been repealed. Eventually the economy will experience another recession. Buffett’s war chest of over $100 billion could then be deployed at very attractive prices.  Perhaps Buffett’s most attractive purchase at that time would be a large buyback of the shares of Berkshire Hathaway.

 Posted by at 8:20 am
Dec 112019

I am interviewed in this University of Maryland, Robert H. Smith School of Business article (Smith Brain Trust).


Dec 11, 2019

SMITH BRAIN TRUST – As far as stock picking goes, you could do a lot worse than simply following the advice of Maryland Smith’s David Kass.

A year ago, Kass, a clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business, sat down with Smith Brain Trust and offered up a list of six stocks to watch for the year. “I did quite well,” Kass says, recently surveying the performance of those six equities.

Those six stocks were Berkshire Hathaway (+10.5%, over 12 months), Apple (+72.9%), Bank of America (+37%), Microsoft (+42.6%), Stanley Black & Decker (+33%), StoneCo (+114.1%). He’s keeping them all on his list for 2020.

All six netted a positive return on the year, with five of the stocks substantially outperforming the market. On an equally weighted basis, six equities he recommended in late 2018 have gained 52%, double the 26% return over the same period for the broader S&P 500.

“They did well. In smaller print – buried on page 26 or something – I might mention my four picks for second half of the year. Although they had a positive return on average, collectively, they didn’t do as well,” he adds. and Progressive insurance company were on that midyear list, and each saw their share prices dip slightly. Meanwhile, the D.C.-based manufacturing conglomerate Danaher rose a modest 3.7%. (They’re off the list for 2020.)

However, one of Kass’s midyear picks – JPMorgan Chase – substantially outperformed the market, tripling the benchmark return over the six-month period, rising 21%.

Kass says he’s keeping JPMorgan in his 2020 list, along with the six original equities. ”As I learned some time ago, you cut your losses and let your winners run.”

Kass says his outlook for the U.S. economy and the stock market is fairly optimistic. There are two key risks, he says. There’s the risk that ongoing U.S.-China trade war will be prolonged and will have a significant negative impact on the U.S. economy. And there’s political risk, ahead of the 2020 U.S. presidential election.

“A year ago at this time, the stock market was plunging. People were pessimistic and many were predicting that a recession was just around the corner, and I said that things were fine and the market was going to go up by 10%,” he says. “And since then, it has gone up 25%, but part of that 25% was that the market went down 15% and now it’s come back up.”

For 2020, he’s forecasting another 10% gain. And he’s adding three new stocks to his watch list. They are:

Occidental Petroleum. About six months ago famed value investor and Berkshire Hathaway CEO Warren Buffett assisted Occidental in its takeover of Anadarko Petroleum by investing $10 billion in preferred stock that was specially issued for him at an 8% dividend along with warrants to purchase 80 million shares at $62.50 per share ($5 billion) expiring in 11 years. At the time, Kass recalls, Occidental was selling at about $58.50 and the common shares were paying “a nice dividend of $3.16, which at that price was a little bit more than a 5% dividend.” Kass has closely followed Buffett’s investments for more than 35 years.

Recently, in a 13-F filing for Berkshire Hathaway, for the quarter ending Sept. 30, Berkshire revealed that, for the first time, it had acquired some Occidental common stock – about $300 million worth. “I took a look at what Occidental’s common stock was trading for in the third quarter, and the lowest price they could have paid in this quarter was $42 a share.”

Occidental has been trading recently around $37.60, Kass notes. “That’s $4 less than Buffett and Berkshire – at best – could have paid. And with a $3.16 dividend, that now pays an 8% dividend. Whoo! I can get the same dividend Buffett is getting at a lower price than Berkshire paid in the third quarter.”

Company insiders, Kass adds, have recently been buying, but not selling, its shares.

Discovery. “Whereas Netflix and Disney specialize in fiction, Discovery specializes in non-fiction. It’s a non-fiction content provider,” Kass says. Discovery’s properties include HGTV, Food Network, the Oprah Winfrey Network, Science Channel, Discovery Kids, and Animal Planet.

“Why am I recommending it? Because John Malone is recommending it,” Kass says. “And John Malone, I consider to be the Warren Buffett of communications stocks.”

Recently, Kass says, Malone was on CNBC being interviewed about the increasingly crowded field of streaming entertainment. “And he says that with all the players in streaming, there will be two likely survivors – Netflix and Disney. However, he’s got another favorite: Discovery.”

The company, Malone says, is generating about $3 billion in free cash flow every year. He sees it making acquisitions, growing and securing a place among the streaming rivals. Malone has been a long-time large shareholder of Discovery and recently added $75 million to his stake at $28. Its current price is $30.

Parker-Hannifin: “I like stocks that are under the radar,” Kass says. That’s why billionaire investor Ken Langone’s recent comments about Parker-Hannifin piqued Kass’ interest.

Langone was recently on CNBC’s morning news program, Squawk Box, and mentioned that he had added to his holdings of Parker-Hannifin. The Cleveland-based industrial company makes engineering components and technologies used in aerospace, electronics and power generation.

“Then he said something that was really interesting – he said Parker-Hannifin has increased its dividend every year for 63 years. Wow,” Kass says, recalling his reaction. “Not too many companies have done that.”

Shares of Parker-Hannifin were recently trading up 33% year to date. Its dividend was 13% higher than the year-earlier period.

The other seven stocks on the 2020 list are Berkshire Hathaway (+10.5%, over 12 months), Apple (+72.9%), Bank of America (+37%), Microsoft (+42.6%), Stanley Black & Decker (+33%), StoneCo (+114.1%), and JPMorgan Chase (+33.5%)

 Posted by at 8:29 am
Dec 022019

I am quoted on the impact of the trade war on U.S. industrial companies in InvestorPlace:

And, of course, it’s nearly impossible to overstate the effect of the ongoing trade war on many U.S. industrials stocks. In an e-mail interview with InvestorPlaceDavid Kass, Clinical Professor of Finance at the University of Maryland’s Robert H. Smith School of Business, pointed out how badly the tariffs have hurt these companies:

“U.S. industrial companies are being adversely affected by the uncertainty of the existence and levels of tariffs between the U.S. and China over the next year or two or longer. These tariffs could impact their supply chains of inputs to their production processes as well as to the sale of the goods they produce. It is very difficult to make long-run investment decisions when the economic environment is being made more precarious by the ongoing trade war, which is also weakening the world economy. Both international and domestic demand for U.S. industrial companies is being suppressed by both actual and threatened tariffs.”


 Posted by at 6:55 pm