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.
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.
Amazon.com 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%)