Monthly Round Up: February
This month I discuss: Capital One, British American Tobacco, Alico, superinvestors, Berkshire shareholder letter
Portfolio Changes and News
It was recently announced that Discover Financial has agreed to be acquired by Capital One in an all stock deal. The deal is a 26% premium to Discover’s stock price prior to the announcement. I think Capital One and Discover’s credit card portfolios will be complimentary since both focus on the consumer towards the lower end of the the credit rating scale. Discover also has a payments network, albeit the smallest one. Visa and Mastercard have a dominant position in the card network space, but joining with Capital One could make Discover’s network more competitive. I feel like Capital One is acquiring Discover around fair value, so it appears like a good deal, even though large deals like this make me nervous.
British American Tobacco’s revenue was down 1.3% in 2023, however their non-combustible products saw 21% increase in sales and now make up 16.5% of total revenues. Cigarette volumes in the US declined by 11.4%, which is significant, but overall cigarette revenue was not down too much due to price increases and other global regions showing less volume decline. BTI announced a couple of months ago a non-cash $35B write down in goodwill, which caused to the company to report negative earnings. Without counting for this write down, earnings per share were up 5% over the year.
Alico reported results for their fiscal Q1, with sales up compared to the prior year quarter. Despite the the increase in revenue, the company saw a loss in operating income due to higher expenses, and a $11M write down of inventory due to lingering effects of hurricane Ian. As mentioned a couple of months ago, Alico sold their remaining ranch land to the state of Florida for $77.6M. Part of the sale proceeds were used to pay down debt.
No stocks were bought or sold during the month.
Superinvestors
Each quarter I like to check Dataroma to see portfolio updates of some of my favorite investors. In the table below, I included the largest buy and sell actions from Pabrai, Klarman, Nygren, and some extra attention to Berkshire.
Some of my thoughts are:
Buffett has been selling out of HPQ lately, with heavy selling this quarter
The Chevron position increased, which is odd because Buffett has been trimming CVX in favor of Occidental
I’m sure it was either Ted or Todd who sold out of the homebuilder D.R. Horton since it was a small position
Pabrai has diversified his coal holdings, trimming AMR to build positions in HCC and ARCH
Interesting to see Klarman sell out of GOOGL and TDG, which are known to be quality companies
2023 Berkshire Hathaway Shareholders Letter
Last Saturday, Warren Buffett published his famous shareholder letter for 2023 and it did not disappoint. The first page was a nice tribute to Charlie Munger who passed away last November. Buffett described Munger as the architect of Berkshire, while Warren described himself as the general contractor putting the vision into reality. Further along in the letter, Buffett mentions that Berkshire’s net worth is the largest of any American business. Because of that, it will be impossible for Berkshire to grow at high rates, but that the businesses within Berkshire are probably better than other companies in the S&P 500. Later, Warren makes this statement on Berkshire’s fortress balance sheet:
“I believe Berkshire can handle financial disasters of a magnitude beyond any heretofore experienced. This ability is one we will not relinquish. When economic upsets occur, as they will, Berkshire’s goal will be to function as an asset to the country – just as it was in a very minor way in 2008-9 – and to help extinguish the financial fire rather than to be among the many companies that, inadvertently or otherwise, ignited the conflagration.”
A decent chunk of the letter was dedicated to the stocks and businesses that have done well (Coke Cola, American Express, Occidental Petroleum, Berkshire’s insurance business were mentioned), and the business that may face headwinds (railroads and utilities). Unlike many CEOs, Buffett is not shy about discussing bad news. In the letter he describes the increasing labor costs in the railroad industry, and the soft rate increases allowed by regulators in the utility business. Overall, I think this annual letter is best that Warren has wrote in past few years.
Idea List
Here are the stocks I have covered in my Idea List series with my estimated fair value and the current stock price.
Berkshire Annual Meeting
I’ll be in Omaha this year for the annual meeting. If anyone wants to meet up, feel free to send me a message!