1) Berkshire Hathaway (BRK-B) has been in the news over the past few days thanks to two announcements...
First, it's paying $8.5 billion to acquire Taylor Morrison Home (TMHC), America's sixth-largest homebuilder. That amounts to $72.50 per share in cash, a 24% premium to Friday's close price.
In addition, Berkshire is investing $10 billion in Alphabet (GOOGL) via a private placement. Here's my friend Doug Kass's take on it:
Half of Berkshire's investment is common stock, paying $351.81 per share – a $25 discount from the close. The other half is in capital stock, a preferred (fixed income paper). This is a very small investment for Berkshire.
And this is not likely Warren Buffett's imprimatur. It's probably that of new CEO Greg Abel... and that is different (this time).
I like this investment, as Alphabet continues to be one of my favorite stocks. But I sure wish Buffett had listened to me when I begged him to buy the stock in this article on October 31, 2019:
[M]y money – unlike my investing hero, Warren Buffett – is on Alphabet significantly outperforming Apple in the long run because it has a better business model, is growing much faster, and is likely to continue doing so.
To be clear, both are insanely great companies and I think Apple's stock will also do well going forward – just not as well as Alphabet's.
Since then, both Alphabet and Apple have crushed the S&P 500 Index's 150% return. But Alphabet, which soared 498%, has done even better than Apple's 393%, as you can see in this chart:
As for the Taylor Morrison acquisition, my friend Porter Stansberry takes a dim view on it. He believes it's another example of Berkshire's capital misallocation over the past 25 years...
He outlined these concerns in an open letter to the company's board, which I covered at length in my March 4 e-mail. (He has since expanded this letter into a book titled Warren's Mistakes: How America's Greatest Business Became Just Another Failed Conglomerate That Can't Beat the S&P 500 – And Why It Must Be Restructured.)
In an update he posted this morning, Porter argues:
Berkshire's new CEO, Greg Abel, called Taylor Morrison "a best-in-class national homebuilder."
Unfortunately, for Berkshire shareholders, it's not. It isn't even close. And I'd bet long-time readers of my work know what Berkshire should have bought instead.
In November 2007, in the depths of the housing collapse, I explained to investors why there's only one homebuilder in America worth owning – NVR (NVR). Not because the others weren't cheap – they were all cheap, down more than 50% from their highs. But because only one of them is a genuinely great business. I called NVR "not only the best company in the homebuilder sector" but "one of the truly exceptional businesses in the world."
Porter then compares Taylor Morrison with NVR and another homebuilder Buffett bought in 2003, Clayton Homes. And he concludes:
Berkshire's entire genius – the thing that made it the greatest compounding story in the history of American capitalism – was using insurance float to buy wonderful businesses. Float is other people's money: premiums collected today against claims paid years from now. It costs almost nothing, and it grows. Buffett's insight was that you could take that nearly free capital and invest it in the best businesses in the world – Coca-Cola, American Express, GEICO, See's Candies – capital-light compounders that throw off cash.
A naive investor will look at Taylor Morrison trading below book value and call it a bargain. But the book value is the disease, not the cure. You are paying 90 cents on the dollar for $6.5 billion of slow-turning land that earns 9%. Buffett, of all people, taught us that price-to-book is meaningless once a business stops needing the capital.
Strip away the names, and the deal is depressingly familiar. Berkshire passes on the wonderful, capital-light, publicly traded compounder. It pays a premium for the capital-hungry, low-return business. It takes the bad business private, where its poor economics can hide. And it calls the whole thing a long-term commitment to housing.
It is the railroad and the utilities all over again.
As Porter puts it at the end, "don't buy Berkshire Hathaway."
I think he's mostly right that Buffett should have stuck to buying blue-chip stocks rather than wholly owned businesses over the past quarter-century. And, consistent with that, I wish Abel had decided to buy NVR's stock rather than Taylor Morrison (though it would be impossible to buy $8.5 billion of NVR, given that its market cap is only $16.5 billion).
But I disagree with Porter's conclusion not to buy Berkshire's stock. As I concluded in my May 5 e-mail:
[T]he stock is trading at a 14.6% discount to my estimate of intrinsic value.
So, in the past year, Berkshire has swung from being 8.9% overvalued to 14.6% undervalued. That's why it wasn't attractive then – but is today.
I'm especially bullish because in addition to today's discounted stock price, I'm optimistic that Abel can create value via operational improvements and capital allocation.
This combination leads me to believe that Berkshire's stock is highly likely to beat the S&P 500 over the next five years, perhaps by a margin of two to three percentage points. So if the S&P 500 compounds at 5%, I would expect Berkshire to do roughly 7% to 8% – with a bias toward the upside.
2) I forwarded yesterday's update on Willis Lease Finance (WLFC) to my friend, whom I've quoted many times because he's an expert on the company. He replied:
Even before Spirit Airlines shut down, we were hearing of three- to five-year-old aircraft being parted out for the engines. So even with the elevated oil prices and some pressure on travel, there is no improvement in the supply/demand imbalance for engines. And from all we gather, lease rates are as strong as ever.
Further, WLFC's engine portfolio is ideal for this environment in that they focus more on modern fuel-efficient engines that are in even greater demand with high oil prices.
He also thinks the stock will benefit from new, positive coverage from Wall Street analysts:
We've been really surprised that the stock has been stuck in the mud after they did the convertible note offering. We think one thing people are missing is that it was a fairly small offering, yet Morgan Stanley, Deutsche Bank, and Bank of America were all on the deal. Of course there is no guarantee, but we would be shocked if those three companies didn't come out with sell-side research now. Morgan Stanley and Deutsche Bank both follow WLFC's larger peer, FTAI Aviation, and are wildly bullish on the stock and the sector. So we are hopeful we'll finally see some very positive coverage on WLFC.
I share my friend's bullishness on Willis Finance's stock.
3) It's amazing how quickly sentiment – and stocks – can turn...
The beaten-down software sector was crushed by overblown investor fears of a "SaaSpocalypse." But it has rallied strongly in recent weeks – and took off yesterday after Nvidia (NVDA) CEO Jensen Huang expressed bullishness on the sector in his keynote address at the Computex conference in Taipei.
This Wall Street Journal article quotes him as saying:
A lot of people have said, Jensen, AI is coming. Agentic AI is coming. Therefore, all of the software companies are going to go out of business. I said it's exactly the opposite because there are going to be so many agents.
ServiceNow (NOW) is one of my favorites in the software sector, which I wrote about in my April 27, 28, and 29 e-mails. The stock jumped 9.2% yesterday on the news and is now up 67% from its recent 52-week low.
(It's an open recommendation in our flagship newsletter, Stansberry's Investment Advisory. Subscribers can read our full report here. If you'd like to subscribe, click here.)
Tax-software maker Intuit (INTU), which I wrote favorably about in Friday's e-mail, rose 6.7% yesterday. And it's up 18% from its recent 52-week low.
Finally, Salesforce (CRM), which I wrote about on March 18, rose 9.7% yesterday, building on its momentum after reporting strong earnings last Wednesday. And it's up 28% from its 52-week low.
My friend Marcelo Lima of hedge fund Heller House shares my bullishness on Salesforce, posting on X:
What beaten-down sector might be next in staging a big rally?
My bet would be the bombed-out stocks in the consumer and luxury sectors, such as those I've written about in the past couple of months: Campbell's (CPB), Clorox (CLX), Brown-Forman (BF-B), Prada (PRDSF), Diageo (DEO), Lululemon Athletica (LULU), and Nike (NKE).
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.