Berkshire Hathaway is sitting on an overwhelming amount of cash. It overshadows just about every other company I study in terms of raw, untapped earnings power. As of last quarter, Warren Buffett had $62 billion in cash sitting on Berkshire’s balance sheet. The market capitalization of the stock is $360 billion, meaning 17.2% of your purchase price is sitting in cash alone. If you buy a share of Berkshire for $145, your look-through portion of cash is $24.94 per share. The only other companies in similar situations are tech giants like Microsoft and Apple where the long-term business model is subject to rapid changes in technology in a way that Berkshire Hathaway is … Read the rest of this article!
As recently as 2015, Macy’s traded at a price of $76 per share while having trailing annual profits of $1.6 billion. It had almost $2 billion in cash, a fully funded pension, online sales growing at a clip of 15% annualized, and appeared to have recovered from the worst of the Great Recession when the price of the stock was punished down to $7 per share.
However, Macy’s management observed that nearly all of its peers were repurchasing large chunks of stock with its cash flows, even borrowing money at low-interest rates to do so. As Warren Buffett said during his 1992 speech at Notre Dame’s business school, the dumbest reason to undertake … Read the rest of this article!
In Grinding It Out, the story of McDonald’s, Ray Kroc explained the financial engineering that drove the company to prosperity in its early days: “The formation of Franchise Realty Corporation, was to my mind, a stroke of financial genius. Franchise Realty was the supreme example of a guy putting his money where his mouth is. We started Franchise Realty Corporation with $1,000 paid-in capital, and Harry parlayed that cash investment into something like $170 million worth of real estate. His idea, simply put, was that we would induce a property owner to lease us his land on a subordinated basis. That is, he would take back a second mortgage so that we … Read the rest of this article!
Even though the price of the S&P 500 Index has fallen from the 3,300 level just a few months ago to 2,472 at the time of writing, for a 25% decline since the outbreak of COVID-19 has gripped the global economy, I do not believe that investors can conclude that the S&P 500 is now “on sale.”
When someone buys a share in an S&P 500 Index fund, paying $24.72 (or 247.20, or even $2,472 depending on the scaling), they are buying an asset that consists of America’s largest publicly traded companies that earns $1.33 per share. In other words, the S&P 500 is trading at 18.5x the most recent twelve months of … Read the rest of this article!
In a sign of the times, a few readers have contacted me over the past months asking what you’re supposed to do when your brokerage account balance exceeds $500,000 and the amount of your account is no longer covered by SIPC insurance.
As many of you know, the federal government is the first backstop against institutional failure. You got $75,000 in a bank account, and the bank goes under? No problem. You’re covered up to at least $250,000. Got $125,000 sitting in a credit union somewhere? No problem. NCUA insurance has you covered for at least $250,000. And because credit unions have no shareholders, the risk of institutional failure is minimal because the … Read the rest of this article!