- Here a 100-bagger, there a 100-bagger…
- … the story the media are not telling about today’s big buyout
- Gleaming high-tech success story: Byron King writes from Singapore
- Jim Rickards on why one emerging-market powerhouse has hit the skids
- Dovish Fed talk… “quarterly capitalism” and “quadrennial government”… reader takes issue with Rickards’ gutsy no-rate-hike call… and more!
The buzz on Wall Street this morning is about one 100-bagger buying another 100-bagger — although that’s not how the mainstream is describing it.
Warren Buffett’s Berkshire Hathaway (BRK) is buying Precision Castparts (PCP) — maker of specialty aircraft and engine parts for the likes of Boeing and GE — in a $37.2 billion deal.
In Chris Mayer’s exhaustive study of stocks that have turned $1 invested into at least $100 — now available in handy book form — Berkshire comes out on top among 365 stocks going back the last 50 years. Every $1 invested in Berkshire in 1965 turned into $18,261 by 2014. “And BRK has done it largely by skillfully acquiring other companies,” Chris reminds us by email this morning.
It all comes down to “capital allocation” — a fancy way of saying how a company invests.
“There are really only five things you can do,” says Chris: “pay a dividend, buy back stock, acquire another company, reinvest in your business or pay down debt.”
Buffett’s acquisitions have been masterly. PCP is his biggest yet. His acquisitions have to be big to move the growth needle nowadays because BRK itself is gigantic.
It’s PCP that’s the more interesting story this morning — not least because of the parallels to BRK.
First the numbers. “In my study,” Chris explains, “it was a 653-bagger from 1981-2014. If you bought it at the bottom in 1981, you would have had a 100-to-1 return by 1995. And if you had bought it then — after it already went up 100x — you still would have made 100x by 2007.”
Impressive.
How did they do it? “PCP, like BRK, has grown by making dozens of deals. The CEO is Mark Donegan, only the third in PCP’s history (which dates to 1953). He took on the role in 2002, though he’s been working at PCP in some capacity for 30 years.”
The firm generates industry-leading profit margins — 25.7% in the most recent quarter.
“PCP has two key features of 100-baggers in my study: You want lots of growth and a high return on capital. Then you sit and watch your wealth grow over time.”
Chris aims to find more like it — but earlier in the story — in Mayer’s 100x Club. You can get a one-month trial of the newsletter and a FREE copy of his book 100 Baggers: Stocks That Return 100-to-1 and How to Find Them. All it’ll cost you is shipping and handling for the book. Enter the password “100x” for access to this offer for Agora Financial readers only.
Click here and enter the code “100x” to get your FREE copy.
Stocks are on a tear this morning. As we write, every major index is up about 1% — although that’s still not quite enough to heft the S&P 500 past 2,100.
The PCP buyout is lifting trader spirits, and so is a TV appearance by Stanley Fischer — vice chairman of the Federal Reserve and, depending on whom you believe, the real power behind Janet Yellen’s throne.
Asked whether the Fed will raise the fed funds rate in September, he told Bloomberg TV, “The interesting situation in which we are is that employment has been rising pretty fast relative to previous performance and yet inflation is very low. And the concern about the situation is not to move before we see inflation as well as employment returning to more normal levels.”
So much for those slam-dunk forecasts of a September rate increase.
Gold has recovered the $1,100 level, if barely. The dollar index has weakened a bit, to 97.5. Crude is up more than 1%, at $44.43.
“If Asia’s long-term economic ‘boom’ is ending, it’s not evident here,” writes Byron King from Singapore.
The city-state marked 50 years of independence from Great Britain over the weekend. Thirty years ago — when Byron was last there on liberty during his hitch with the Navy — his impression of the place was a “Hong Kong Lite.”
Today? “Singapore is plugged into the globe — wired for everything,” says Byron. “The landscape is a vast expanse of stunning, massive buildings, to include near-endless arrays of housing and office towers. The architecture is mind-bending in some respects.
The Marina Bay Sands: That’s a “ship” perched atop three 55-story skyscrapers
[Photo by Wikimedia Commons user Someformofhuman]
“Singapore boasts a deep, national-level focus on intellectual property and high-end services,” Byron goes on.
“I visited a material science laboratory where researchers are coming up with new forms of… let’s call them ‘coatings.’ These substances will, for example, keep cardiac stents from ever again clogging up, while a slight variation on the exact same materials can be used to make paints for ship hulls that eliminate fouling and decrease resistance as the vessel moves through water. ‘Kind of a super-Teflon,’ said one researcher. ‘We’ve defeated friction.’”
Another stop: Chevron’s Asian headquarters — where the focus is on two massive natural gas liquefaction (NGL) projects in Western Australia and offshore.
“The overall capital expense is over $70 billion,” says Byron, “for a project that — by 2018 — will begin to supply energy to Japan and South Korea (among others) under long-term contracts. Thus is Chevron now a strategic energy supplier to Japan and South Korea for the rest of this century.” To say nothing of a $1 trillion boost to the Australian economy for the next 35 years.
Byron is still vetting investment ideas from the trip. Readers of Outstanding Investments will hear about them first.
The story is not as sunny for the nation that lies just north of Singapore — where Jim Rickards paid a recent call.
Jim was in Malaysia at the invitation of Mahathir Mohamad, who was prime minister from 1981-2003. Joining them, says Jim, were “a select group of current and former ministers, central bankers, academics and business people in a closed-door dialogue.
“Dr. Mahathir is counted alongside others such as Lee Kuan Yew of Singapore as among the leaders of the Asian economic miracle of the 1960s to 1990s.”
But times have changed: “Malaysia is facing powerful head winds from two sources that will stand in the way of its growth and development for the time being,” Jim tells us.
“The first head wind is called the ‘middle-income trap.’ This is a common problem in emerging markets that have moved from poverty levels (say, annual income below $2,000 per capita) to middle income (say, annual income of $10,000 per capita). In Asia, only two nations have pulled it off, and only with higher-tech innovation — semiconductors in Taiwan, autos and electronics in South Korea. Even if Malaysia explores new high-value added technology, it may take a decade or more before results appear on a sufficient scale to move the needle on GDP growth.
“The second head wind is more immediate. Recently, credible reports have emerged in The Wall Street Journal and Bloomberg that the current prime minister of Malaysia, Najib Razak, and his cronies have looted almost $1 billion from Malaysia’s sovereign wealth fund, called 1MDB, using unauthorized loans, sweetheart asset purchases, front companies and hidden bank accounts.
“The current prime minister has responded by closing newspapers, dismissing his deputy and the chief prosecutor and threatening others with arrest. In the weeks ahead, observers expect street demonstrations and more turmoil inside the ruling Umno party.” A military coup can’t be ruled out.
“Investors are highly averse to political uncertainty,” says Jim, “and will keep away from Malaysia until the situation is resolved.”
Bad news for anyone invested in EWM — the big Malaysia ETF.
We’re a touch late acknowledging the outcome of the 18th annual Wacky Warning Labels contest.
The event is the brainchild of Bob Dorigo Jones, senior fellow at the nonprofit Center for America. “The point of the contest is to reveal that absurd and silly labels surround us because of America’s lawsuit-happy culture.”
This year’s winner is found on a bag of frozen catfish pieces.
Mr. James Andrews of College Station, Texas, collects $1,000 for the winning entry.
Second place goes to Jacob Eckberg of Hopewell, Virginia. He spotted a water-absorbent grow toy that looks like the Easter Bunny. “Warning: This toy is in no way intended to represent living people. Any resemblance is purely coincidental and not intended to harm anyone.”
The toy is one inch tall. Oy…
“Maybe we should coin a new phrase,” a reader writes after we noted Hillary Clinton slamming “quarterly capitalism” recently.
“Call it ‘quadrennial government’ — for politicians that promise something for everyone with no idea how to pay for it!”
“With all due respect — and this from someone who has read all his books — Jim Rickards is a silly goose!” a reader writes.
[“Silly goose” applied to one of our editors? This is surely a 5 first.]
“The bar to forestall a Fed rate hike this year is high, indeed, and yet Mr. Rickards insists there will be no rate hike in 2015. I don’t get it. What happens if/when a rate hike comes? Will Jim ‘walk back’ his remarks?
“It could certainly go either way, but unless there’s a genuine cataclysm in the next five weeks to give the Fed cover, a measly quarter percent rate hike is probably in the cards.
“This disagreement with Mr. Rickards, mind you, dims my passion for The 5‘s and Mr. Rickards’ work not one whit. Keep up the great work!”
The 5: We hear ya. The longer this goes on, the more Jim is sticking his neck out there.
His initial call of no rate increase during 2015 came last November. He’s managed to outlast the cast of thousands predicting an increase last March… and the thousands more predicting an increase in June. Assuming he’s proven right again in September, we’ll have two more Fed meetings — late October and mid-December — in which to play the parlor game all over again. Good times…
But it was Jim’s willingness to put his rear end on the line — so unlike the mealy-mouthed, have-it-both-ways drivel you hear from most Wall Streeters — that made us want to bring him on board in the first place. Stay tuned!
Best regards,
Dave Gonigam
The 5 Min. Forecast
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