Image Source: Berkshire Hathaway
By Brian Nelson, CFA
I’m putting together something for you…
…an annotated commentary of Berkshire Hathaway’s (BRK.A, BRK.B) recently-released 2015 annual report, and specifically Warren Buffett’s letter to shareholders. Why does my opinion on this topic matter? Well, having trained hundreds of equity and credit analysts on the concept of “economic moats” (or competitive advantages) across continents for one of the largest independent investment research firms and its clients and beyond, I believe that my opinion is at least worth hearing on the topic, if only for thought-generation, conceptual understanding, and debate. Given some of the recent technical strength at Berkshire, we are also considering taking a bite out of shares should markets remain strong, but we’ll talk more about this in the annotated commentary, to be published soon.
We put together something similar on Berkshire’s 2014 annual report in the April 2015 edition of the Best Ideas Newsletter, “,” and we plan to do so this year in the March edition of the newsletter, but I’d like to get more of my thoughts to you sooner than later. Please do have a read of the April 2015 edition of the Best Ideas Newsletter this weekend because it will provide a foundation for my thoughts regarding this year’s report. The archived newsletters are a great resource of the evolution of our thinking over time, and I can only encourage you to read through them (see here). By the way, since the April 2015 edition, the Best Ideas Newsletter portfolio has added nearly 10 percentage points of relative outperformance — that’s a rather large incremental spread in just a number of months, would you say?
The fast-casual restaurant that we’re talking about is Chipotle (CMG). We’ve been following the company’s fall from grace for some time, “Chipotle…Yikes!” (Feb 2016),” “Chipotle Fourth Quarter Comps Suffer Greatly (Jan 8),” “Getting Excited About Potentially Adding Chipotle (Dec 2015),” and while the troubles are hardly behind it, the company’s stock has been acting quite well, and we think it may be a precursor to some comparable-store sales stabilization. At the core, Chipotle’s shares aren’t necessarily cheap and its technicals aren’t fantastic, but there’s something appealing about considering the purchase of a fantastic franchise at nearly a “fair price.” On very few occasions, especially in this overheated market, have we been able to find brand new ideas that are trading at vast discounts to intrinsic value that would augment the existing composition of the newsletter portfolios. This is partly why we continue to watch “fairly-valued” Chipotle with tremendous interest. The equity could also serve as a nice “beta” addition to the Best Ideas Newsletter portfolio in the event broader equity markets “test” new highs again.
As many of you are aware, we’ve been watching shares of Netflix (NFLX) closely the past few weeks, “Alert: 5 Reasons Why We Think Netflix’s Shares Will Collapse (Feb 2016)”, “Netflix Shareholders Need to Get Real (Feb 2016).” We haven’t yet pulled the trigger on this “put option” idea, but the company’s valuation won’t stand up over the long haul, in our view, but that won’t stop aggressive growth investors from piling into the stock. Trust me, when growth metrics at the company break down, shares will collapse in a heartbeat. Though we may be spectators for some time yet, the best opportunity for our consideration of Netflix put options in the Best Ideas Newsletter portfolio may rest in the back half of the year, once the excitement surrounding Making a Murderer dies down. The market will soon start looking at difficult year-over-year comparisons, the likelihood of it creating more blockbuster original content, and why economics of its international growth prospects may not live up to profit expectations over the long haul. As easy money continues to “slosh” around, Netflix’s business model continues to be quite replicable for the next “big idea,” in our view, and given its somewhat sparse digital content film library, Netflix doesn’t have much that others can’t replicate with marketing dollars.
We haven’t forgotten about our open letter to Yahoo (YHOO), but anybody that knows this business knows that Yahoo is essentially an asset management firm and that Starboard wants the company for the financial flexibility that is offered via Alibaba (BABA) shares, at least from our perspective. In our open letter, we gave CEO Marissa Mayer a clear path to allow Yahoo to thrive in its current form, grow jobs, generate gobs of free cash flow and generate tremendous economic value via a combination with eBay (EBAY). We think Yahoo should do the deal and grow the combined entity into an Internet powerhouse. It can’t be a holder of Alibaba shares forever, and building an e-commerce giant may be the path forward for yet another combination in coming years. In good conscience, we continue to believe this is the right thing to do for all stakeholders, “VALUENTUM ISSUES OPEN LETTER TO MARISSA MAYER, CHIEF EXECUTIVE OFFICER OF YAHOO!” Don’t break up the company Marissa.