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Stocks will be volatile. Remember – they are driven by people, and people act emotionally, irrationally at times. This dynamic has hammered Apple (AAPL) as of late.
Though we’ve engaged in risk mitigation in recent months in trimming our position in Apple in both newsletter portfolios, “Valuentum’s Exclusive Weekly Recap (August 2015),” we’ve done all that we can to explain to our membership the tremendous valuation opportunity presented by shares, “Quantifying Apple’s Tremendous Investment Case (September 2015), while acknowledging that market “spirits” could pressure the company in the near term, “Apple Will Go Lower… (January 2016).” The transparency of our writing is enough to make our reader’s heads spin sometimes, perhaps to make them think we’re talking out of both sides of our mouth? We’re not. We’re trying to explain how broader market sentiment and generally irrational behavior by those playing the “quarterly earnings game” could hurt shares in the short term, but that on a fundamental, financial-analysis based perspective, Apple is on a very, very firm foundation. The company remains in both newsletter portfolios.
Enter the Oracle of Omaha. It was released in Berkshire Hathaway’s (BRK.A, BRK.B) 13-F May 16 that Mr. Buffett and team opened up a 9.8 million share stake in the iPhone maker, good enough for nearly a $1.07 billion position. Clearly, Uncle Warren is seeing a lot of what we’re seeing in shares, and maybe it was the concept of the following, “Apple Owns the ‘Sixth Source’ of an Economic Moat (October 2015)” that finally pushed him into shares. We find the timing interesting as another high-profile money manager Carl Icahn has been moving out of shares of Apple as of late. In fact, the activist investor no longer holds a position, “China (May 2016),” after just a couple years of championing CEO Tim Cook’s cause. The contrast between the two investors is on display — Icahn has a much shorter holding period than that of the Oracle whose self-proclaimed favorite holding period is forever. Why might he be selling AT&T (T) and Procter & Gamble (PG) then? We’re sure the former’s debt load, “Cord Cutting and the New Age Consumer (May 2016),” and the latter’s transformation, “Torn on Procter & Gamble (April 2015)” have something to do with it. Of course Mr. Buffett sells out of positions.
A Reuters report noted that Berkshire Hathaway may be backing a bid from Quicken Loans’ founder Dan Gilbert for Yahoo!, challenging Verizon’s (VZ) interest in combining Yahoo! with recently-acquired AOL. Frankly, we thought it was somewhat peculiar that Yahoo! (YHOO) Finance would be live-streaming the Berkshire Hathaway shareholder meeting, and if that wasn’t enough to alert that something was brewing with respect to Berkshire Hathaway and Yahoo!, we got the sense from Mr. Buffett’s comments in recent months that he hasn’t been all-too pleased with the short-term thinking and activism prevalent in Silicon Valley. We almost knew something was up, but it might have been absurd to speculate – just like when we said that we started to like hearing what Kinder Morgan’s (KMI) management was saying earlier this year regarding dividend policy, “Valuentum: Time to Load Up on Kinder Morgan (January 2016),” shortly before we found out Berkshire Hathaway had taken a stake in the midstream pipeline giant, “We Like the News! Buffett Scoops Up Kinder Morgan; FVE $20 (February 2016).” Mr. Buffett tends to have an influential impact on those he reaches out to – and for some reason, we’ve been picking up on subtle changes in executive teams across some of the companies we’ve been following the closest.
Though who are we to ask Mr. Buffett to reconsider, but we maintain our view that a tie-up of Yahoo! and eBay (EBAY) may be the best long-term picture. Mr. Buffett, please have your team do an IRR-analysis on a potential Yahoo!-eBay leveraged deal. eBay’s expected traditional free cash flow generation alone can pave the way for significant economic value creation as debt of the combined transaction is repaid. There’s no reason to break up Yahoo! for a quick sale (and management can stay). eBay’s traditional free cash flow advanced 19% year-over-year in the first quarter, the company “firmed up” its full-year revenue outlook, and it is targeting traditional free cash flow of $2.2-$2.4 billion in fiscal 2016 (page 17), in-line with the marks of each of the past three years. At the high end of the free cash flow guidance range for 2016, that’s a free cash flow yield of ~8.5%. Can you imagine the revenue and cost synergies to be extracted in a Yahoo-eBay tie-up? Mr. Buffett – make this deal happen. The long term is bright at Yahoo!.
Here is our open letter to Yahoo!: VALUENTUM ISSUES OPEN LETTER TO MARISSA MAYER, CHIEF EXECUTIVE OFFICER OF YAHOO! FOR IMMEDIATE RELEASE…