Warren Buffett Bought a Gas Pipeline and an U.S. Judge may have made it a Winning Investment

    Since March, 2020 when the COVID-19 pandemic drove the U.S. and the globe into a recession and tanked markets worldwide, there has been speculation about what Warren Buffet would be buying given the bargains. In March the Dow Jones Industrial Average (DJIA) dropped from an all-time high of 29,551 to 18,591. Many stock watchers and TV pundits speculated that this is the time when Warren Buffett would see value in stocks and put his company's sizeable cash to work.

Exhibit: Dow Jones Industrial Average (DJIA) One-Year Performance

(Source: Google Finance)

    It has now become clear that Warren Buffett and his partner Charlie Munger were looking to strike a few deals at bargain prices, but the intervention by the U.S. Federal Reserve in March made it very easy for companies in all sorts of fiscal shape could easily raise billions of dollars.

    Finally in July 2020 Warren and Charlie did strike a deal. They invested $10 billion in buying the natural gas pipeline assets of Dominion Energy. When almost every investor is shying away from investing in fossil fuel assets, Berkshire Hathaway sees value in it. It's going to take a long time for the world to move away from fossil fuels.

    The past week has produced some stark headlines about the energy business. The Financial Times reported that BP was marking down the value of its oil and natural gas assets by $17.5 billion. Under the shadows of the stress that the oil business is in, Berkshire Hathaway makes a contrarian bet. Then came another headline, this time from a Federal District court. The court ruled that work on the Dakota Access Pipeline will have to stop until a comprehensive environmental review is completed.

    Even before this decision, building anything related to the oil and gas industry in the U.S was an herculean task. This decision makes it harder. It is now assured that the work on this pipeline will not proceed until after the U.S. election. If Joe Biden is elected president then this pipeline may never get built.  So, any oil and gas asset already in existence in the U.S. have just been elevated in value. This deal by Berkshire Hathaway has the potential to offer profitable returns for the company. 

Disclosure: I own shares in Berkshire Hathaway and BP.       

                   

            

How McCormick Rules the Spice Market?

    If there was any year in which companies could get a pass for booking a loss or for poor sales, 2020 would be it. There are very few companies that have gone unscathed by the economic turmoil unleashed by the COVID-19 pandemic. McCormick (MKC) has not only gone unscathed but is thriving in the midst of this crisis. 

Exhibit: McCormick - The Global Leader in Spices

(Source: McCormick Website)

Exhibit: McCormick YTD Stock Chart Shows The Company Is Thriving

(Source: Google Finance)

    The company saw sales increase dramatically for the quarter ending May 31, 2020. It registered sales of $1.4 billion in this quarter compared to $1.3 billion in 2019. Its consumer business saw robust growth while its restaurant business suffered. The consumer business saw a net sales increase of 26% while its Flavor Solutions division, that serves its commercial customers, saw a revenue decline of 18%.

Exhibit: McCormick's Q2, 2020 Sales Results

(Source: SeekingAlpha.com - McCormick Investor Presentation)

    The Americas region performed exceedingly well with a 35.8% growth in net sales for its consumer business. The EMEA region had good performance too with a 22% increase in sales for its consumer business. But the Asia region saw a decline in sales of -17.9% in its consumer business.

    The company also expanded both its gross margins and operating margins by 230 bps and 240 bps respectively. This may be a sign that the company has good pricing power in the market and does not have to resort to discounting to move its products.   

    The company could be gaining competitive strengths from its powerful brand name. Especially in the U.S., McCormick brand is associated with spices and flavorings. That is translating to strong growth especially during this pandemic when people are avoiding restaurants and cooking more at home. Its wide array of spices and flavoring may be adding to its domination. Its wide product offerings helps the company to garner vast square footage in the spice aisle in supermarkets and grocery stores.

    Spices are usually packaged in small sizes for the consumer market, this could be a competitive advantage in itself. When the consumer sees these small packages they know they will get a lot of use and value out of it. The small bottles of McCormick last a very long time. This could be allowing the company to put a premium price on their product without seeing a consumer revolt. It would be interesting to see how store branded spices capture market share from McCormick. But for now McCormick still rules the spice market.

    Currently, the company's stock has had a huge run. It's trading at near all-time highs with an earnings multiple of over 30. This volatile stock market may present better and cheaper entry points for this stock.

Disclosure: At the time of this publication, I do not own McCormick.                  

        

 

Among DJIA Stocks Procter & Gamble had a Stellar Quarter, Yet its Stock Underperformed others on the DJIA

    As of July 2, 2020 the median year-over-year (YoY) EPS growth (March, 2020 Quarter) for a stock in the Dow Jones Industrial Average (DJIA) was a negative 3.39%. But the median gain for a stock on the DJIA from its 52-week low was 43%.

Exhibit: Procter & Gamble Brands

(Source: P&G Website)

    Procter & Gamble (PG) a member of the DJIA had a stellar March quarter. Its EPS grew by 10.3% YoY. This put Procter & Gamble's performance in the fourth quartile. Yet, its gain from 52-week low was just 28% as of July 2, 2020 putting it in the first quartile of gains. Why is there such a disparity in stock performance for a proven stellar company?

  

Exhibit: Dow Jone Industrial Average (DJIA) March, 2020 Quarter EPS Growth & Gains from 52-Week Low

(Source: SECURFII.COM - Data as of July 3, 2020)

    In this era of extreme uncertainty in the economy due to the pandemic, Procter & Gamble is one of the very few companies still providing annual earnings guidance. They are also a rare company that is still maintaining and increasing their dividends and continuing their share repurchase. I am not a fan of share repurchases since it seems to mostly benefit a company's management to achieve its EPS goals rather than being a true return of money to the shareholders. But, if share repurchases are done at the right (lower) price compared to the fair market valuation of the company, it could be a huge boost to the shareholders. 

    The company is expecting to pay over $7.5 billion in dividends and repurchase $7 billion to $8 billion in shares in fiscal 2020. Over the three quarters in fiscal 2020, Procter & Gamble has seen organic sales growth averaging about 6% when the GDP growth for the world has turned negative the first-half of 2020.

    The company is richly valued at about 24x earnings. That may be the reason why its stock gains are not in par with the rest of the stocks in the DJIA. But some of the companies, like Boeing, have had a disastrous fall in sales. Boeing will continue to hurt for multiple quarters or even years to come as airline traffic recovers slowly. If there's a pull back in the stock, Procter & Gamble would a great addition to a portfolio.   

Disclosure: At the time of this publication, I do not own PG stock. 

                  

Surprise! Bank of America's US 1 List Includes L Brands

The Bank of America's US 1 list is a collection of best investment ideas from the list of buy-rated, US-listed stocks. It came as a surprise to me that L Brands is included in the US 1 list for Q3, 2020.
Victoria's Secret, which is a division of L Brands, has been in trouble for a very long time. Sales at this division have been declining for years. For example, in the fiscal year 2019, Victoria's Secret reported sales of $5.1 billion. This was down from $5.6 billion in the fiscal year 2018. That's a change of about -9% from 2018.

Exhibit: L Brands Net Sales in Fiscal Years 2018 and 2019

 

(Source: SEC.gov) 

A similar decline in sales was seen between 2017 and 2018. In 2018, sales declined by 4% compared to 2017.

Exhibit: L Brands Net Sales in Fiscal Years 2017 and 2018

(Source: SEC.gov)

As a result of this decline in sales over multiple years, L Brands had struck a deal with a private equity firm - Sycamore Partners - to take Victoria's Secret private. But, due to the COVID-19 pandemic, Sycamore Partners backed-off from the deal. So, given all those problems with the Victoria's Secret brand, why is Bank of America including L Brands in its influential US 1 list? 

L Brands' inclusion may have more to do with the other division called Bath & Body Works.  

Overall sales did take a huge hit to the downside during the pandemic-driven closure of its stores. But, Bath & Body Works saw an increase of 85% in its direct-to-consumer business. This business recorded $288.9 million in sales in Q1 2020 compared to $156.4 million in Q1 2019. 

Bank of America sees the stock as undervalued given that it may be expecting this outperformance to continue for the Bath & Body Works division and that is why this was a surprise addition to the US 1 list.     

Disclosure: At the time of this publication, I do not own L Brands.     

      

         


   

How did the U.S. Markets have the Best Quarter in Decades?

    The quarter that ended on Tuesday, June 30th was the best quarter for the market in two decades. How did the U.S. stock market end with such a statistic in the midst of a global pandemic and record unemployment?

    On February 12th, 2020, the Dow Jones Industrial Average (DJIA) had hit an all-time high of 29,551. But by February 21st, 2020, the fear that the COVID-19 virus is going to bring life to a standstill in the U.S was taking hold in the market. The markets were in free-fall from around that time until March 23, 2020. On this date the Dow Jones Industrial Average was at 18,591. It was a drop of about 37% from the top.

                             Exhibit: Dow Jones Industrial Average hit bottom on March 23, 2020

                                            (Source: Google Finance)

    March 23 would end-up being a monumental date for the country as a whole and a one for the history books. This was the date on which the Federal Reserve made an announcement that they are "committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time."

    This announcement was interpreted by the markets that the U.S. Federal Reserve is going to provide a backstop to the losses mounting across companies of all different sizes. The demand for products and services provided by airlines, restaurants, cruises, and malls vanished overnight. Most of these companies did not have a plan or funds in place for such a dramatic drop-off in demand. The Federal Reserve did not want to see problems in one sector of the economy, mainly in discretionary spending, spillover into other sectors. For example, when fear of COVID-19 took over and many states instituted lock downs or quarantine orders, malls and restaurants were forced to close their doors. That in turn led to these companies not generating any revenues that could be used to pay their bills, such as paying their rent or their suppliers. This cascading effect would lead to companies, cities, and states all across the U.S. laying off millions of people and plunging the U.S. into another great depression. 

    The Federal Reserve started buying high-quality assets in the open market along with making billions of dollars of loans available to companies of all sizes. Even though millions of people still lost their jobs, an argument could be made that this move by the Federal Reserve did prevent a great catastrophe. Without the bold intervention of the Federal Reserve, a worldwide health crisis could have easily grown exponentially larger when a worldwide economic crisis is unleashed at the same time.

    So, it turns out March 23 was the day the U.S. markets hits bottom. An epic stock market rally started that day and by June 30, 2020, the Dow Jones Industrial Average had gained about 38% from its bottom of 18,591. The DJIA stood at 25,812 on June 30, 2020.