Market Performance
[Index | Last week ==> This week | % change]
S&P 500 | 3235 ==> 3265 | +0.9%
Dow Jones | 28635 ==> 28824 | +0.7%
Russell 2000 | 1661 ==> 1658 | -0.2%
Russell Microcap | 616 ==> 615 | -0.2%
10-Year | 1.80% ==> 1.82% | +2bps
Gold | 1552 ==> 1560 | +0.5%
Oil | 63 ==> 59 | -6.3%
VIX | 14 ==> 13 | -7.1%
Market Stats
Seems I’m not the only one touting the overdone run-up in stock prices…
However, it’s important to remember that just because things are expensive does not mean they need to decline in price. Valuations can always get crazier before they seem normal again. One data point I come back to every now and then is the Fed Stock Valuation Model:
It can be dangerous to blindly compare stock earnings yield to treasury yields but it is a good data point considering they are primary investment options (other than cash).
The model essentially indicates that stocks are NOT expensive:
Just a reminder that despite the “gut feelings” of markets moving up quickly and feeling expensive, things can always get “more expensive.”
Quick Value
Berkshire Hathaway ($BRK.B)
Yet another punt-on-third-down idea… just feels like where we are in the markets…
Why consider Warren Buffett’s Berkshire Hathaway now?
This is a stock that hasn’t really participated (as much) in the recent stock market run-up. Class B shares at $226 are up 16.5% over the past year compared to 28%+ for the S&P 500. That’s not a great reason to own something so another factor is the valuation (measured as price-to-book ratio) is in-line with historic levels. At a current 1.4x P/B, Berkshire trades at its average 3, 5, and 10-year P/B valuation.
I enjoy a good checklist, so here are a few items that make Berkshire a reasonable investment:
This is a business that generates great cash flow — over $26bn through 9 months of 2019…
Cash on hand is large and growing — over $120bn
Revenue / earnings growing at-or-better than the S&P 500
Capital returns — it hasn’t been much ($2.8bn through 3Q19) but Buffett has begun to loosen the purse strings on stock buybacks
BRK is a collection of many good / great businesses — one could argue that BRK is essentially an index fund with low costs and a more conservative balance sheet than the overall index
Some optionality in a post-Buffett world — who knows whether the company will be broken up, if a large buyback or dividend takes place, or if they continue along the same course once Buffett is no longer at the helm…
Again, nothing overly special about this idea, but possibly a conservative idea in a world where conservative ideas are hard to find…