Dec 132018

I was interviewed in this Smith Brain Trust (University of Maryland) article on the 2019 outlook for the economy and stocks.


Dec 10, 2018

SMITH BRAIN TRUST – Like the big man in the North Pole, Maryland Smith’s David Kass spends the waning weeks of the year making a list and checking it twice. Kass’ nice list is filled with the stocks he thinks are poised for a happy new year.

Kass, a clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business, says he’s feeling a bit more cautious about his list this season. “There is one major headwind – trade policy – that when we spoke a year ago was not yet present,” he says. And it throws into question much of the economic picture for the United States and its major trading partners.

The trade talks, tariffs and counter tariffs being lobbed between Beijing and Washington carry with them substantial unintended consequences, Kass says.

The Trump administration is seeking to end the transfer of technology and reduce or eliminate tariffs imposed on U.S. goods entering China. It is also seeking to abolish a rule from Beijing that requires foreign companies to partner with a Chinese company if it wishes to operate in that country, and to end the forced transfer of technology from United States companies to their Chinese partners.

“Already we have seen collateral economic damage in this country as China has retaliated, imposing and threatening tariffs on our goods,” Kass says. “And this could escalate on both sides, slowing our economy, slowing China’s economy and slowing the world economy.”

Jobs, he says, can and will be lost.

With such a big economic cloud overhanging the economy, Kass says, any economic or stock market predictions have to hinge in large part on how much progress is made on U.S.-China trade.

“If there is major progress made over the course of the year, then I think our economy (GDP) can continue to grow as it has at least 2 percent a year, and I would expect the stock market to rise maybe 10 percent over where it is now,” he says.

However, he adds, if substantial progress isn’t made, a decline in the stock market is quite likely. “This is the main uncertainty.”

Typically, Kass says, the two main determinants of stock performance are interest rates and corporate profits. The Federal Reserve has suggested fewer increases to the federal funds rate in 2019, compared to 2018.

“The economic headwinds that would be created by interest rates for now appear of less a concern,” Kass says. “Unless the economy appears to begin overheating, which I don’t think it will. Or unless inflation takes off, which I don’t think it will.”

However, he adds, a complicating aspect of the ongoing trade dispute is this. Dueling tariffs lead to higher prices for consumers, which will factor into inflation rates. It will be up to the Federal Reserve to consider whether to discount the added price pressures as a temporary phenomenon resulting from the trade dispute (supply driven) or whether to view it as a more permanent price increase (demand driven), which may result in a monetary policy response – higher interest rates.

On his nice list this year are three of the five stocks that made his list last year. Plus, three more.

Berkshire Hathaway. It has actually risen 6 percent, year to date, to outperform the S&P 500 over the same period.

Apple. Even though the stock has recently declined significantly, it’s still up about 5 percent on a year-to-date basis. Apple is Berkshire Hathaway’s largest portfolio holding, worth roughly $50 billion. The Cupertino-based giant recently issued lower estimates on how many iPhones the company would likely sell, but it remains a strong investment, Kass says, with a low price-to-earnings ratio of 15 on a trailing 12-month basis.

Bank of America. Bank of America is Berkshire Hathaway’s second-biggest portfolio holding, worth about $25 billion, notes Kass, who has closely followed the investments and philosophy of Berkshire Hathaway CEO Warren Buffett for more than 35 years. Berkshire added about $6 billion in BofA stock to its portfolio in the third quarter of this year. “It’s trading at a low valuation,” Kass notes, with a price-to-earnings ratio of 12, and has a strong CEO in Brian Moynihan. “He has turned the bank around since the financial crisis,” Kass says. The modestly higher interest rate environment, he adds, would tend to be favorable for banks, delivering higher profit margins.

Microsoft. Fourth on his list is Microsoft, a company that’s not in Berkshire Hathaway’s portfolio holdings. The company has shied away from the tech giant, in part because of Buffett’s close friendship with Microsoft founder Bill Gates. The Redmond, Wash.-based Microsoft recently leapfrogged Apple as the most valuable U.S. company, after an impressive year in the market. “The company is rapidly growing its cloud business and it has its subscription based Office 365, giving it an earnings stream that is recurring and consistent. And unlike Apple, it is not tied to a hardware product cycle. So it has a reliable growth story going forward,” Kass says. The downside? Microsoft is selling at a price-to-earnings ratio of 26, a bit high. “It might not be bargain priced, but it has highly visible growth opportunities.”

Stanley Black and Decker. Stanley Black and Decker made Kass’ list this year in part because of CEO Jim Loree. “He came to campus recently for a CEO At Smith event, and I learned a lot about his company from his talk,” Kass says. “In particular, two points jumped out at me.” The first, he says, is that half of the company’s cash flow is being invested in acquisitions or capital expansion and the other half is being returned to shareholders in the form of dividends and stock buybacks. The second point, he says, was about the company’s recent acquisition of the Craftsman tools division from Sears. Loree noted that Sears had not been investing in marketing the product line, but that his company will and expects significant revenue growth from it. “It sounds like a substantial growth engine to me,” Kass says. Stanley Black and Decker’s price-to-earnings ratio 19.

Stone. Stone is a financial technology company based in Brazil, the fourth-largest payment processor by volume in that country. Brazil is the fourth-largest market for non-cash transaction volumes in the world, which gives the company a lot of scope for growth. The fintech company caught Kass’ eye when Todd Combs of Berkshire Hathaway invested $340 million in the company’s initial public offering, buying about 11 percent of the company at roughly $24 a share. “And Berkshire hasn’t invested in an IPO in decades,” Kass says. The stock was trading recently below $20 a share, which means investors today can get an even better deal than Berkshire did.

 Posted by at 11:43 am
Dec 042018

I am quoted in the Washington Post (December 2, 2018):

“Technology and capitalism take their toll, said David Kass, finance professor at the University of Maryland.

“Of the original 12 stocks in the Dow Jones industrial average in 1896, only General Electric survives today — just barely,” Kass said. And in time, “Apple and Microsoft will also be eclipsed.”

 Posted by at 7:25 pm
Nov 142018

In an SEC 13F filing after the market closed today, Berkshire Hathaway revealed a net increase of $14 billion in its common stock portfolio during the third quarter of 2018.  This is the largest quarterly increase in its common stock investments in many years.

These increases, primarily in the banking sector, were:

(1) Bank of America (BAC)  —     + $6 billion

(2) JP Morgan Chase (JPM)  —  +  $4 billion

(3) Oracle Corp.  (ORCL)   —      +  $2.1 billion

(4) U.S. Bancorp (USB)  —-         +  $1.3 billion

(5) Goldman Sachs (GS) —          +  $1.1 billion

(6) PNC Financial  (PNC) —        +  $830 million

(7) Bank of New York (BK)  —     +  $700 million

(8) Travelers  —                              + $460 million


There was one large decrease:

(1) Phillips 66 (PSX)  —-              – $2 billion


 Posted by at 5:37 pm
Nov 032018

Berkshire Hathaway today released its Form 10-Q for the third quarter of 2018.

Five highlights during the third quarter were:

(1) Berkshire’s operating earnings increased by 100% as compared to the third quarter of 2017.

(2) Berkshire repurchased $928 million of its stock, indicating that both Warren Buffett and Charlie Munger conclude that Berkshire’s current price is below its intrinsic value.  Berkshire bought back its shares at an average price of $312,807 per A share and $207 per B share.

(3) Berkshire purchased approximately $13 billion in equities on a net basis, including approximately $15 billion in equities in “Banks, insurance, and finance”.  Berkshire held $103.6 billion cash as of September 30, down from $111 billion on June 30.

(4) Berkshire added approximately $6 billion, or about 30%, to its stake in Bank of America.

(5) Berkshire’s book value equaled $228,712 per Class A share as of September 30.  At Berkshire’s closing price of $308,411 on November 2, its price to book value ratio equaled 1.35, below its historical average of about 1.58.  This implies that Berkshire is now buying back its shares at prices below 140% of its book value, versus its previous standard of 120%.

 Posted by at 7:43 pm
Nov 022018
I am quoted in “Why GE’s Penny Dividend Signals a Sad Turn for Widow and Orphan Stocks”  that is likely to appear in the Business Section of the Washington Post on Sunday, November 4:
“Widow and orphan stocks were designated as such for their safety and income,” said David Kass, a finance professor at the University of Maryland. “In the past, they included utilities and regulated monopolies, such as AT&T, Con Edison, Exxon, Texaco, General Motors, Eastman Kodak and IBM.”  

That zaps Buffett’s Berkshire Hathaway. Even though the conglomerate has great finances, it does not pay a dividend. Buffett thinks he can increase the company’s stock price by investing the money instead of giving it to shareholders.

“Buffett likes to invest in companies that pay dividends,” Kass said. “His policy is not to pay dividends, but to own companies that do pay them.”

 Posted by at 2:24 pm
Oct 292018

I am quoted in The Wall Street Journal on Berkshire Hathaway investing in Fintech:

“Todd and Ted bring additional expertise to the table,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business and a Berkshire shareholder. “They’re broadening the perspective of Berkshire and broadening the opportunities where they would look to invest.”


 Posted by at 7:54 am
Oct 052018

I am quoted in a Washington Post article: “Larry Culp’s Long To-Do List To Fix GE“.

“Culp will need to decide whether to fix GE’s power division or scrap it. David Kass, a finance professor at the University of Maryland, thinks he should sell it because of its “substantial” underperformance.

“The remainder of GE can then be turned around,” Kass said. “GE should become a smaller company.”

Ten years ago (October 1, 2008), during the peak of the financial crisis, Warren Buffett announced that Berkshire Hathaway was investing $3 billion in an issue of General Electric preferred stock paying an annual dividend of 10%.  These shares were redeemed by General Electric in 2011 for $3.3 billion plus accrued dividends, resulting in a $1.2 billion profit for Berkshire.

 Posted by at 10:11 pm
Sep 152018

In this Jeff Bezos interview (1 hour and 9 minutes) the Amazon CEO quotes from Warren Buffett and explains why he bought the Washington Post which is now profitable and hiring additional staff by becoming a national and global newspaper via the Internet.  Amazon located in Seattle, Washington so they could draw from the talent at Microsoft.  They will announce the location of their second headquarters by the end of 2018.  Amazon Web Services initiated cloud computing and it took seven years before anyone else entered this market resulting in its very large market share.  Bezos was always an A+ student, was his high school’s valedictorian (class of 750 in Miami, Florida), and graduated summa cum laude from Princeton in 1982 where he majored in electrical engineering, physics, and computing.

Bezos is starting charities focusing on pre-school education in poor neighborhoods to minimize the probabilities of children being left behind, and is also donating $2 billion to fight homelessness.

Jeff Bezos owns 16 percent of Amazon which is approximately a $1 trillion company.  He is the richest person in the world, worth $160 billion and “has created $840 billion in wealth for everyone else”.  He gets eight hours of sleep every night, exercises regularly, and has his first meetings everyday with staff at 10:00 a.m.  He is too tired at 5:00 p.m. to make major decisions.  He “putters around” in the morning by reading newspapers and has breakfast with his children before they go to school.  He previously worked for D.E. Shaw (investment management firm) in New York City where he met his wife Mackenzie Bezos who also graduated summa cum laude from Princeton.

Even though he had an excellent job with D.E. Shaw, he wanted to start a business selling books on the Internet.  What people think about late in life are “errors of omission”, what people could have done but did not.  He did not want this to be one opportunity that he did not pursue.

Warren Buffett has previously described Jeff Bezos as the best business person he has ever met.

Jeff Bezos was interviewed by David Rubenstein, co-founder and co-chief executive officer of the Carlyle Group.


 Posted by at 7:35 am