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Stocks George Soros and Warren Buffett Agreed On in 2nd Quarter

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As noted in part one, legendary investors Warren Buffett (TradesPortfolio) and George Soros(TradesPortfolio) have opposing views on how to approach investing. Buffett primarily takes big stakes in quality companies he expects to do well over at least five years’ time and holds them “forever.” Soros instead will speculate on companies based on short-term events and bet on trends.

But sometimes the twain meet. In the first quarter, they held a number of stocks in common, like Goldman Sachs, IBM and MasterCard. In a second-quarter twist, Soros sold out of many of these stocks, keeping a like mind with Buffett on only eight.

The exodus may also suggest a wariness of the markets on the part of Soros. His fund sold nearly 79% of its holding of the S&P 500 (SPY) ETF, which was its biggest chop in two years. Soros invested in the U.S. stock benchmark ETF in the first quarter of 2014 and enjoyed its run up from the low $180s to the mid-$200s today.

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The investor in macroeconomic trends also in the second quarter reduced his exposure to basic materials, consumer defensive, communications services, energy, industrials and technology. Increases in other sectors were marginal.

By contrast, Buffett has held three of his five top holdings – Wells Fargo & Co. (NYSE:WFC), Coca-Cola (NYSE:KO) and American Express (NYSE:AXP) – for more than six years.

Both the investors have unique relationships to their funds. Soros’ $30 billion family office Soros Fund Management is led by Chief Investment Officer Dawn Fitzpatrick. Buffett’s Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) portfolio employs two managers in addition to Buffett, Ted Weschler and Todd Combs. Berkshire rarely discloses which stock buys and sells belong to the two deputy investors.

Some of the stocks Berkshire and Soros Fund Management both retained in the second quarter were: Apple (NASDAQ:AAPL), Mondelez (NASDAQ:MDLZ) and Monsanto (NYSE:MON).

Apple (NASDAQ:AAPL)

Buffett has weighted 12% of his portfolio in Apple, which includes a $123.6 million boost in the second quarter.

Soros has periodically bought and sold Apple over the years at appreciating share prices. He increased his position 21.4% to 1,700 shares or 0.01% of the portfolio in the recent quarter.

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Apple’s Aug. 1 earnings announcement pushed the stock up almost $10 per share in one day. The company saw services revenue hit an all-time record as well as 7% revenue growth overall, marking its third year of revenue increase.

In addition to the iPhone 8, Apple plans release of several new products and services in the back half of the year: an iOS 11 upgrade bringing hundreds of updates to iPhone and iPad, an intelligent home music speaker and an iMac Pro.

For its upcoming fiscal fourth quarter, Apple forecasts revenue in a range of $49 billion and $52 billion with gross margin between 37.5% and 38%. The numbers compare to $46.9 billion in revenue and 38% gross margin in the prior-year quarter.




Mondelez (NASDAQ:MDLZ)

Soros holds 1.4 million shares of Mondelez after a 9.3% increase in the second quarter, which it makes it 1.3% of his portfolio.

Buffett eliminated 92% of his Mondelez holding four years ago and retains 578,000 shares, which amounts to 0.02% of his portfolio.

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Mondelez shares are off 8% year to date after tumbling last week when Buffett announced on CNBC that Kraft Heinz Co. would not acquire the snack food company. Buffett controls the largest percentage of Kraft Heinz shares and shares decision-making with private equity firm 3G Capital.

In the second quarter, Mondelez revenue fell in every geographic segment except Latin America, where it grew 0.6%. North American revenues saw the steepest decline at 8.5%. Net earnings rose 7.3% to $498 million while diluted EPS reached 32 cents with a 10.3% increase. Gross profit margin slid to 38.8%, down 110 basis points.

For the year, it expects non-GAAP organic net revenue to increase at least 1%, with double-digit adjusted EPS growth on a constant-currency basis. It also forecasts around $2 billion in free cash flow.

Monsanto (NYSE:MON)

Like many of his stocks, Soros wove in and out of Monsanto for more than six years. He nearly tripled the position in the June quarter, making it 0.33% of his 186-stock portfolio.

Buffett has a $951.8 million stake in Monsanto that he bought in the fourth quarter, has not changed and that represents 1.8% of his portfolio.

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The fertilizer and seed company’s shares are up 8.9% year to date as the company awaits a merger with Bayer Aktiengesellschaft that will pay $128 per share in cash for Monsanto shareholders. Monsanto’s shareowners approved the deal on Dec. 13, but the company reported on Aug. 22 that the European Commission launched a Phase II investigation into it on concerns that the combination may limit competition in the field of pesticides, seeds and traits.

Bayer said it hopes to work with the commission to obtain approval by the end of the year.




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Investing

Buffett’s Next Acqusition Is…

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Warren Buffett (TradesPortfolio)’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) owns over 38.5 million shares of DaVita Inc. (NYSE:DVA), good for a 20% stake. It is only a matter of time before they buy the whole entity, right? Especially since it is better as another wholly-owned subsidiary producing $2.4 billion in pre-tax income than as a losing stock transaction. Buffett (or his investment team) first bought DaVita back in 2011 and is down slightly on the total position.

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DaVita provides specialized health care services to a growing number of elderly patients, focusing mainly on kidney dialysis. Estimates are that by 2050, 83.7 million people in the U.S. are expected to be 65 years or older, which is nearly double the estimated 43.1 million in 2012. That is good news for an entire class of stocks set to capitalize on these and other multiyear trends.

With our dietary and lifestyle habits, whether or not they are changing, there will be explosive health care demand from this demographic, which DaVita is poised to cater to. DaVita has more than 2,300 outpatient centers. Life expectancy on dialysis is five to 10 years depending on a patient’s medical conditions and ability to follow a treatment plan. The company’s dialysis supplements kidney function and filters out extra salt, waste and fluid to clean the patients blood as it is sent back through their body via a second needle in the arm.

A tough topic to discuss

Kidney disease is the ninth leading cause of death in the U.S. with over 30 million people having chronic kidney disease (CKD). As humans age, the body starts to break down. To prolong life, we have to depend on technology. DaVita is in a dominant position to help.

Kidney dialysis is a secure profit channel. Once a patient begins the program, they typically need these services for life. Of course, health care is a major concern because costs rise faster than inflation despite new advancements in technology. DaVita generates excellent profits in some of its centers to cover massive losses in others. Any legislation Congress passes that affects its ability to do that would likely hurt margins.

Currently, DaVita is a very profitable business with strong margins, high returns on equity and invested capital and trades well below its historic price multiple average. Even with a 15.2 forward price-earnings (P/E) ratio, the company’s long-term prospects look extremely good.

DaVita missed analysts’ expectations in its second quarter due to elevated labor costs and Medicare reimbursement. In addition, the industry is filled with uncertainty as the government continues to debate the future of health care. Hopefully, that will be put to rest soon.

Philosophy on health care aside, owning the stock would be a good idea. Its revenue has tripled in the last decade and should continue to grow faster than the industry. It is buying back stock, boosting shareholder ownership and pounds out cash. No wonder other big name guru investors like Ray Dalio (TradesPortfolio), Jim Simons (TradesPortfolio), Joel Greenblatt (TradesPortfolio), Mario Gabelli (TradesPortfolio) and Steven Cohen (TradesPortfolio) all own the stock, riding Buffett’s coattails.

As for Berkshire, it has 1.5% of its assets in DaVita, but has not added to its position since 2014. Over the last five years, the market value has been flat while the net income and book value continue to grow. The enterprise value is north of $20 billion, which is a number Berkshire can afford to spend. If DaVita is not an acquisition target, owning 20% of the stock makes it harder for Buffett and company to unwind their position, so any changes or big block sells could indicate it is time to run for the exit.

Disclosure: I am not long or short DaVita.





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Economy

Facebook Thinks You Are A Moron – Here Is The Chart Proving It

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Last week we jokingly wrote about a Facebook press release that was apparently an honest effort by the social media giant intended to summarize Russian efforts to undermine the 2016 election using their social media platform. That said, at least to us, it seemed as though Facebook unwittingly proved what a farce the entire ‘Russian collusion’ narrative had become as, after digging through advertising data for the better part of full year, Facebook reported that they found a ‘staggering’ $50,000 worth of ad buys that MAY have been purchased by Russian-linked accounts to run ‘potentially politically related’ ads.

Not surprisingly, after being attacked by the mainstream media and even Hillary for “assisting” the Russians, Zuckerberg is once again in the press today fanning the flames of the ‘Russian collusion’ narrative by saying that Facebook will release to Congress the details of the 3,000 ads that MAY have been purchased by Russian-linked accounts.

And while it seems obvious, please allow us to once again demonstrate why this entire process is so utterly bizarre… 

The chart below demonstrates how the $50,000 worth of ad buys that MAY have been purchased by Russian-linked accounts to run ‘potentially politically related’ ads compares to the $26.8 billion in ad revenue that Facebook generated in the U.S. over the same time period between 3Q 2015 and 2Q 2017….If $50,000 can swing an entire presidential election can you imagine what $26.8 billion can do?

Of course, not all of that $26.8 billion was spent on political advertising so we took a shot at breaking it down further.  While Facebook doesn’t disclose political spending as a percent of their overall advertising revenue, we did a little digging and found that political advertising represented ~5% of the overall ad market in the U.S. in 2016.  We further assumed that political share of the overall ad market is roughly half of that amount in non-election years, or 2.5%.

Using that data, we figure that Facebook may get ~3.5% of their annual revenue from political advertising in an average year, or nearly $1 billion per year…give or take a few million.  Unfortunately, as the chart below once again demonstrates, this still does little to support Zuckerberg’s thesis that the $50,000 he keeps talking about is in any way relevant to the 2016 election.

 

Of course, the pursuit of this ridiculous narrative proves that Zuckerberg has no interest in spreading the truth about how his company impacted (and by “impacted,” we mean “had no impact at all”) the 2016 election, but rather is only interested in shoving his political agenda down the throats of an American public that he presumes is too stupid to question his propaganda. 

That said, if Zuckerberg is really just on a mission for truth, as he says he is, perhaps he can stop patronizing the American public and disclose the full facts surrounding political advertising on Facebook.  We suspect a simple financial disclosure detailing how much political advertising was sold on Facebook from 3Q 2015 – 2Q 2017, broken down by political affiliation, would go a long way toward proving just how meaningless $50,000 is in the grand scheme of things. 

That said, somehow we suspect ‘truth’ is not really Zuckerberg’s end goal, now is it?

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Economy

Today’s Market Looks Like It Did At The Peaks Before Last 13 Bear Markets

The US stock market today looks a lot like it did at the peak before all 13 previous price collapses. That doesn’t mean that a bear market is imminent, but it does amount to a stark warning against complacency.

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h/t ZeroHedge 

The US stock market today looks a lot like it did at the peak before all 13 previous price collapses. That doesn’t mean that a bear market is imminent, but it does amount to a stark warning against complacency.

The U.S. stock market today is characterized by a seemingly unusual combination of very high valuations, following a period of strong earnings growth, and very low volatility.

What do these ostensibly conflicting messages imply about the likelihood that the United States is headed toward a bear market in stocks?

To answer that question, we must look to past bear markets. And that requires us to define precisely what a bear market entails. The media nowadays delineate a “classic” or “traditional” bear market as a 20% decline in stock prices.

That definition does not appear in any media outlet before the 1990s, and there has been no indication of who established it. It may be rooted in the experience of Oct. 19, 1987, when the stock market dropped by just over 20% in a single day. Attempts to tie the term to the “Black Monday” story may have resulted in the 20% definition, which journalists and editors probably simply copied from one another.

Origin of the ‘20%’ figure

In any case, that 20% figure is now widely accepted as an indicator of a bear market. Where there seems to be less overt consensus is on the time period for that decline. Indeed, those past newspaper reports often didn’t mention any time period at all in their definitions of a bear market. Journalists writing on the subject apparently did not think it necessary to be precise.

In assessing America’s past experience with bear markets, I used that traditional 20% figure, and added my own timing rubric. The peak before a bear market, per my definition, was the most recent 12-month high, and there should be some month in the subsequent year that is 20% lower. Whenever there was a contiguous sequence of peak months, I took the last one.

Referring to my compilation of monthly S&P Composite and related data, I found that there have been just 13 bear markets in the U.S. since 1871. The peak months before the bear markets occurred in 1892, 1895, 1902, 1906, 1916, 1929, 1934, 1937, 1946, 1961, 1987, 2000 and 2007. A couple of notorious stock-market collapses — in 1968-70 and in 1973-74 — are not on the list, because they were more protracted and gradual.

CAPE ratio

Once the past bear markets were identified, it was time to assess stock valuations prior to them, using an indicator that my Harvard colleague John Y. Campbell and I developed in 1988 to predict long-term stock-market returns. The cyclically adjusted price-to-earnings (CAPE) ratio is found by dividing the real (inflation-adjusted) stock index by the average of 10 years of earnings, with higher-than-average ratios implying lower-than-average returns. Our research showed that the CAPE ratio is somewhat effective at predicting real returns over a 10-year period, though we did not report how well that ratio predicts bear markets.

This month, the CAPE ratio in the U.S. is just above 30. That is a high ratio. Indeed, between 1881 and today, the average CAPE ratio has stood at just 16.8. Moreover, it has exceeded 30 only twice during that period: in 1929 and in 1997-2002.

But that does not mean that high CAPE ratios aren’t associated with bear markets. On the contrary, in the peak months before past bear markets, the average CAPE ratio was higher than average, at 22.1, suggesting that the CAPE does tend to rise before a bear market.

Moreover, the three times when there was a bear market with a below-average CAPE ratio were after 1916 (during World War I), 1934 (during the Great Depression) and 1946 (during the post-World War II recession). A high CAPE ratio thus implies potential vulnerability to a bear market, though it is by no means a perfect predictor.

Earnings to the rescue?

To be sure, there does seem to be some promising news. According to my data, real S&P Composite stock earnings have grown 1.8% per year, on average, since 1881. From the second quarter of 2016 to the second quarter of 2017, by contrast, real earnings growth was 13.2%, well above the historical annual rate.

But this high growth does not reduce the likelihood of a bear market. In fact, peak months before past bear markets also tended to show high real earnings growth: 13.3% per year, on average, for all 13 episodes. Moreover, at the market peak just before the biggest ever stock-market drop, in 1929-32, 12-month real earnings growth stood at 18.3%.

Another piece of ostensibly good news is that average stock-price volatility — measured by finding the standard deviation of monthly percentage changes in real stock prices for the preceding year — is an extremely low 1.2%. Between 1872 and 2017, volatility was nearly three times as high, at 3.5%.

Low volatility

Yet, again, this does not mean that a bear market isn’t approaching. In fact, stock-price volatility was lower than average in the year leading up to the peak month preceding the 13 previous U.S. bear markets, though today’s level is lower than the 3.1% average for those periods. At the peak month for the stock market before the 1929 crash, volatility was only 2.8%.

In short, the U.S. stock market today looks a lot like it did at the peaks before most of the country’s 13 previous bear markets. This is not to say that a bear market is guaranteed: Such episodes are difficult to anticipate, and the next one may still be a long way off. And even if a bear market does arrive, for anyone who does not buy at the market’s peak and sell at the trough, losses tend to be less than 20%.

But my analysis should serve as a warning against complacency. Investors who allow faulty impressions of history to lead them to assume too much stock-market risk today may be inviting considerable losses.

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