Buffett's Alphabet Stake Fits the "Every Buyer" Portfolio Strategy
Surprising... No... the $4.3 billion stake makes perfect sense in a market structured like this one...
Good Evening:
Warren Buffett’s Berkshire Hathaway (BRK.A) revealed what CNBC called a “surprising” stake in Alphabet Inc. (GOOGL), the company behind Google…
That’s going to be a solid catalyst into next week… all $4.3 billion of the stock.
Writes Yun Li at CNBC, this position was “a surprising move given Buffett’s traditional value investing philosophy and reluctance toward high-growth, tech names.”
To which I ask… why is it surprising?
The company still owns a fortune in Apple (AAPL).
But more importantly… why isn’t it surprising?
The World Has Changed, Portfolios Must Adapt
I’ve been explaining the need for investors to transition toward capital-efficient businesses and assets that fit a combination of Buffett’s and sovereign wealth fund models. In many cases, the concept goes… Beyond Warren Buffett.
Here’s how people really have to think about stocks in the U.S. market…
Especially if they want to be confident and avoid value traps…
I noted the other day that investors would be wise to focus on three types of stocks that align with the three main investor types today…
Value or Securities Analysis Approach: This part of the market participants defines Warren Buffett. Keep it simple and liquid, and emphasize high capital efficiency figures (ROIC, ROA), high F scores, strong Z scores, and businesses with strong moats and monopolistic tendencies. Buffett owns a lot of these…
Passive Investors: What companies are increasing parts of the stocks that dominate passive investment flows in mutual funds and ETFs? This is more than 50% of the flows today… so the more that fit into thematic ETFs, tech ETFs, and index- and sector-replicating ETFs… the better… Some of these tech companies are in well over 1,000 ETFs… which helps provide support to valuations…
Leveraged, Momentum Investors: Finally, our friends who are 30% of the flows today, according to Cross Border Capital. They’re levered up in highly liquid, mega-tech that continue to ebb and flow with market liquidity. They’ll crater when the leverage unwinds (GOOGL lost 30% of its value in the April downturn), but they’ll be the stuff funds lever up and ride momentum returns.
Well…
Wouldn’t you know it…
Alphabet (GOOGL) fits the bill for all three…
It has a high F score… Z score over 16 (there’s virtually no debt)… a Return on Invested Capital (ROIC) of nearly 30%, profit margin above 32%, significant insider ownership, a practical monopoly on search, 1,398 ETFs owning Class A shares… and 1,008 ETFs owning Class C shares… more and more leveraged ETFs adding GOOGL exposure, and Alphabet has exhibited the momentum trade since 2017… following liquidity swings in a predictable manner…
And I haven’t even talked about its moves into AI and its massive balance sheet, loaded with cash, thanks to its accounts payable practices.
There’s really no reason not to own it… and Buffett just reminded everyone about this… as the stock fits squarely into this model…
What else fits the bill?
Altria (MO) and Phillip Morris (PM)…
Gilead Sciences (GILD)…
Taiwan Semiconductor (TSM)… and a ton of other tech names still at somewhat normal valuations…
That’s the subject of the Capital Wave Report… all next week…
If you want access to the other dozen stocks on the screener today…
Join us…
Meanwhile… members can expect more on this Alphabet purchase all next week…
I’m specifically talking not only about companies that meet the bill of the three parts above… but also about those with very liquid option chains that allow their owners to engage in various income strategies, high-probability trades, and more…
You need to be able to get out of these names as fast as you get into them…
I’ll break it down into five parts next week in the morning…
It’s a pretty simple investing model if you learn how the markets really work in the post-2008 environment…
Stay positive,
Garrett Baldwin
Very interesting thanks. I follow points 1 and 2. But on point 3, I thought according to Howell and what you’ve said previously we were late cycle and so to stay clear of tech stocks (and wait for QE / insiders)?
The mention of GILD here is interesting given how its been flying under the radr compared to mega cap tech. Biotech has that capital efficiency profile you talked about, especially with their HIV franchise generating steady cashflows. The pharma names with strong pipelines and actual profitability seem like a much safer bet than chasing overhyped growth stocks right now. What's your take on the biosimilar competiton risk though?