Warren Buffett’s highly anticipated annual letter to shareholders was released on Saturday. In it, Buffett reaffirmed our conservative outlook on the market, saying “In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price. That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.”
And Berkshire Hathaway (BRK.B) has continued to be very conservative in its purchases into 2018, with only one major acquisition, Pilot Flying J (PFJ), and holding as much as $116 billion in cash and U.S. Treasuries.
The lesson for individual investors: hold enough cash.
I continue to recommend that you hold BRK as a potential bet to outperform the market, particularly in a market downturn. The company itself is more like an index fund with a number of excellent and diversified underlying businesses. HOLD.
Lowe’s (LOW) In my last weekly update, I said that Home Depot is the clear winner over Lowe’s in terms of management execution and strategy—HD’s comparable-store growth was 7.5%, with a slight increase in operating margin from 14.19% to 14.54%. However, since D.E. Shaw has shown activist interest in Lowe’s, the market has expected an improvement in its fundamentals, causing LOW to rise faster than HD. But Lowe’s fourth-quarter results indicated operating margin contraction from 9.6% to 8.99%, which caused LOW to decline to par with the market sentiments of HD (as shown in the chart below).
I think D.E. Shaw’s activist role could strengthen Lowe’s margin and bring it closer to Home Depot’s in the long-term, and thus I continue to hold Lowe’s. Both Lowe’s and HD are trading close to their fair values, but I recommend holding both the stocks for portfolio diversification. HOLD.
STORE Capital (STOR) released its fourth-quarter results, with revenue of $120 million. Year-end revenue was $452 million with net income of $162 million. STORE Capital has continued to expand with the purchase of 316 properties for $1.37 billion, partly funded by debt and equity. The company is expected to grow with continuous borrowing at a fixed rate coupled with inflation-hedged leases. With a sufficient margin of safety, STORE Capital is a Buy. BUY.
