Author: Charles Sizemore
Covestor models: Sizemore Investment Letter and Tactical ETF
Disclosure: Long DTV, V, INTC
I’ll spare readers another Warren Buffett lovefest article. Yes, Buffett is a living legend, and yes he is arguably the best investor of all time. But this is nothing new, and there have already been more articles than I can count about the man and his methods over the years. Buffett has been elevated to something akin to a demigod in the minds of many value investors, and the art of “investing like Buffett” has been thoroughly beaten to death by the financial press.
With this as a caveat, I’ll acknowledge that I too like to keep tabs on what Buffett is buying and selling.
It is never a good idea to blindly ape the trades of another investor—even one with a track record like Buffett’s. Due to the time lag in reporting with the SEC, an investor you follow may very well have sold the position you are copying by the time you buy it. And what makes sense in that investor’s portfolio might make no sense at all in yours.
Still, given Buffett’s penchant for long investment time horizons, he’s a little easier to follow than most. And again, his track record over the years make him a man worth watching. Imagine my pleasure this afternoon when I saw Berkshire Hathaway’s updated portfolio holdings for the third quarter of 2011 (see Warren Buffett’s portfolio). Three out of Buffett’s five new additions were Sizemore Investment Letter recommendations (see Covestor portfolio based on SIL). Buffett initiated positions in SIL recommendations DirecTV (DTV), Intel (INTC), and Visa (V). His other two additions were pharmacy chain CVS (CVS) and defense contractor General Dynamics (GD).
While I was not invited to Buffett and partner Charlie Munger’s strategy sessions before these purchases were made (I’m sure my invitation was lost in the mail), I have a pretty good idea of what Buffett sees in DirecTV, Intel, and Visa. Each is a leader in its respective industry, and all three benefit from durable, long-term macro trends.
Let’s start with DirecTV, the world’s largest provider of paid satellite television. Given that TV-over-internet options like Netflix (NFLX) and Hulu are increasingly crowding the turf of traditional paid TV—and given that the paid TV market in the United States is already saturated—Buffett’s choice here might raise a few eyebrows. I can assume that Mr. Buffett’s rationale was the same as my own: DirecTV is a direct play on rising living standards in the fast-growing markets of Latin America, where it already has 11.1 million subscribers (vs. 19.8 million in the United States). Latin American revenues were up 46 percent in the 3rd quarter, due primarily to subscriber growth. But even in the United States—where everyone already has paid TV service in one form or another—revenues were up 8 percent. Not bad, given the precarious financial situation of the average American. DirecTV is also very reasonably priced at just 10 times expected 2012 earnings.
Moving on to Intel, my only question to Buffett is “What took you so long?” Intel absolutely dominates the market for computer processor chips. But this very strength is what has caused investors to shun Intel. Everyone knows the PC is dead. Smart phones and the iPad killed it. And given that Intel is still quite weak in the mobile market, the company is resigned to be a slow-growth behemoth. Who wants to own a dinosaur like Intel? That story would seem to make sense at first.
The problem is that it’s simply not true.
The PC is far from dead. Smart phones and tablet computers are growing at a much faster rate, of course. And the PC market does depend more heavily on the corporate and enterprise market, which is not in the best of shape in this economy. But tablets and smart phones do not replace a computer for most users. And in most emerging markets, PCs are still very much a growth industry. Intel’s revenues and earnings are growing at 28 percent and 17 percent year over year, respectively. And that is in near recessionary conditions. Meanwhile, the stock trades at just 9 times expected 2012 earnings and yields 3.4% as of 11/14. At current prices, I consider Intel a safer investment than most AAA-rated bonds.
Finally, we come to Visa. Visa and rival MasterCard (MA)—also a Berkshire holding—have become somewhat trendy of late, but it wasn’t like that for most of the year. Regulatory uncertainty cast a pall over credit card stocks, as did fears of a consumer slowdown. Yet investors who were, in Buffett’s words, greedy when others were fearful did quite well in Visa and MasterCard. Both are among the best-performing stocks so far in 2011.
Visa and MasterCard benefit from two powerful macro trends—the transition to a global cashless society and the rise of the emerging-market middle class. As electronic payments become a larger share of commerce, credit and debit cards—as well as newer payment methods such as PayPal—will increasingly replace cash and checks. And while this process is well on its way in the United States and other developed markets, it is only just beginning in most emerging markets. This is a trend that will be with us for a while.
Visa trades for 14 times expected 2012 earnings, which is a bargain for a company with Visa’s brand, financial strength and growth prospects. DirecTV, Intel, and Visa are all long-term holdings of the Sizemore Investment Letter. And while Buffett’s reasons for purchasing may have been very different from our own, we’re glad to see the Oracle of Omaha sharing our enthusiasm.
