Normally when I write about investing ideas, I hold little back. However, over the past year, I have come across seven companies that offer a high probability of being superior investments. These are companies with long track records of earnings per share growth well over 10% annually, steady management, entrenched moats and other competitive advantages, moderate or conservatively financed balance sheets, and current execution that suggests more wealth will be minted for shareholders in the year ahead.
If I were running General Electric, I would have chosen to spin off GE Capital to the existing General Electric shareholders as a tax-free spinoff rather than sell $150+ billion of the remaining GE Capital to outside buyers (principally Wells Fargo and Blackstone).
Spinoffs are preferable to asset sales because of tax efficiency. General Electric is going to record $16 billion in charges in connection to yesterday’s announced restructuring. Selling appreciated assets to Blackstone and Wells Fargo costs money, with estimates ranging from $4 billion to $6 billion in tax payments alone.
Yesterday was a classic example of why I do not spend anytime whatsoever discussing market timing, defined as the purchase or sale of stocks based on expected short-term price swings rather than conclusions formed by studying the business itself. At the time I am writing this, General Electric—a staple in pensions, trust funds, 529 educating plans, 401(k)’s, IRAs, and taxable accounts around the world—is up over 10.8% on the day, which is a heck of a jump for a company that is valued in the $250 billion range.
If you look up the price of “BHP”, the Australian-based listing of BHP Billiton, you will see a price of $47.03. If you then look up the price of “BBL”, the British-based listing of BHP Billiton that trades on the London Stock Exchange, you will see a price of $44.08 per share. Given that they represent a claim on the exact same mining and resource assets, you may wonder why there is a $3 per share difference for something that tracks the same asset.
The answer has to do with franking tax credits. Australian companies often “frank” their stocks, which means they attach additional money to dividend payments so that shareholders don’t have to pay taxes on their dividend payments. Once a dividend is fully franked (or 100% franked), you can own the Australian stock without having to pay a dividend tax on the dividend payments. However, franking is something that must be done on a per share basis, so BHP Billiton’s Australian shares engage in a policy of franking at the highest possible tax threshold.
Sometime this spring, U.S. Global Investors is going to launch The U.S. Global Jets ETF that is an index fund for airline companies. The ticker symbol will be the cutesy JETS and it’s something you will be able to buy in the next month or two. Of course, if you’ve been reading my work for a while, you already know what I’m going to say: Stay far, far away from this creation.
Famous investors have long pointed out that long-term investing in the airline industry is not a reliable way to make money. Some say it in a matter-of-fact way—when Donald Yacktman was asked what airline stocks he owns, he responded, “Zero. Clients invest with me because they expect me to make money for them.” Even Richard Branson, who started Virgin Airlines, stated that the “fastest way to become a millionaire is to buy a billionaire his own airline.” When Warren Buffett invested $358 million in USAir Group, he had to write off the entire investment as a loss and later said, “If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit.”