Mike Lipper’s Monday Morning Musings
Is This the Last Hurrah?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Hurrah is both a shout of victory and a political world
about aging politicians, warning that the following election won’t be a happy
one. (BTW it is pronounced Oorah in the Marines and Hoorah by the Army.)
I don’t know whether the reception for the largest IPO of
all time is a sign we will not see larger market enthusiasm in the future. I am
talking about both the size of the SpaceX offering and the further gains generated
after underwriting. What I do know that
it was a record fundraise at a time when many non “AI” stocks are dealing with
mediocre sales. Consumer sentiment is at its lowest on record going back to the
early 1950s
More importantly, I am trying to find investments for the
next “bull” market. My assumption is that we will experience a substantial rise
after a major correction to the present market level.
The Process
The first thing I don’t do is look for clues to a different
future by crunching GAAP numbers found in today’s annual reports or other
regulatory accounting statements. To the extent present sales data may be
useful, they need to be adjusted to match reality. For example, today it looks
like semiconductor companies are doing very well in Taiwan and South Korea.
Truth is, only some of their product sales are produced in their home country, with
increasingly more in other countries. More importantly, I am guessing their ultimate
sales are to US customers. Thus, investors are concerned that many of these
so-labeled international companies are extremely sensitive to what is happening
in the US.
Forward Looking Analysis (Guessing)
The example that I discuss should not be treated as a buy
recommendation and should only be rendered knowing the economic condition,
resources, and personality of the buyer. The case I will discuss shortly is a
long-standing large position with a large unrealized potential tax liability, although
the analytical thinking may also be appropriate for the reader.
The stock is Berkshire Hathaway. The news item is the $8.5 billion
purchase of Taylor-Morrison Homes for cash, including the assumption of some debt.
The initial size is about 1/3rd of Berkshire’s annual net free cash flow,
excluding their large cash reserves.
The decision made by the new CEO of Berkshire was completed in
matter of weeks and was applauded by Warren Buffet. The announced plan is to
create a housing group combining Taylor-Morrison with already owned Clayton Homes,
which manufactures homes at a lower price point. Taylor-Morrison builds
communities of new middle-class houses as well as rental housing. There is a
national need for more housing.
I believe this purchase is very similar to Berkshire buying
See’s Candy, which was initially misunderstood by some as Berkshire going into
the Candy business. They were instead going into the franchising business,
which has been an excellent business for McDonalds. In this case they would be
going into the home mortgage business in a major way, with a controlled
sample. Furthermore, this is a sign that
Greg Able the new CEO of Berkshire, has different talents and proclivities than
Mr. Buffet without the guidance of the late Charlie Munger.
This is an example of how to investigate the future.
Let us know what you think about our views?
Did you miss my blog last week? Click here to read.
Mike
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