In this Market Foolery podcast, host Chris Hill is joined by Million Dollar Portfolio's Jason Moser, and Stock Advisor Canada's Taylor Muckerman to weigh in on a pair of timely topics. First, they consider the highlights of one of the investing world's most-anticipated annual arrivals: Warren Buffett's letter to Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) shareholders.
Then they look to the complexities around Federal Express' decision to maintain its relationship with the National Rifle Association. Given the current social climate, what might that choice mean for the shipping giant's profitability, its investment thesis, and more? And finally, they answer a slightly unusual listener question: How many stocks should investors keep in reserve on their watch lists?
A full transcript follows the video.
This video was recorded on Feb. 26, 2018.
Chris Hill: It's Monday, Feb. 26. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, from Million Dollar Portfolio, Jason Moser, and from Stock Advisor Canada, Taylor Muckerman. Happy Monday, gents!
Taylor Muckerman: What's happening?
Jason Moser: Happy Monday! Three more days and this month's over. It seems like 2018 just started and we're flying right through it.
Hill: We're flying right through it.
Muckerman: A sixth of the way there.
Hill: Nice math. See? That's the kind of skill we bring to this podcast. I don't know what they're doing over at Bloomberg, but we have math skills on this podcast.
Moser: Not just a hat rack, my friend.
Muckerman: Don't ask me to turn that into a percentage.
Hill: We're going to talk ratios later. We are going to dip into the Fool mailbag in a little bit, but we're going to start with what just got so many investing nerds excited Saturday morning, which was the annual release of the Berkshire Hathaway letter. There's a couple of things I want to get to. Jason, I'll start with you. All kidding aside, this is something that, investors of any age would do well to go to berkshirehathaway.com for two reasons. One, because I don't think they've updated that website since 1997.
Muckerman: [laughs] I was going to say, you might think you came to the archived version of it.
Hill: Yeah, no, it's not the archived version. They have the most basic website imaginable. Two, the collection of annual letters from Buffett and his team are just fantastic. I'm curious of anything in particular stood out to you in this one.
Moser: I've read all of them, and I think your point is very well taken. They do a very good job of making them not redundant. You would think they would be sort of repetitive after a while, but they really keep it fresh every year. I think, with this year's letter, if you read nothing else in the letter, read pages 11 and 12, where he talks about the bet he made back in 2007, where ultimately he was going up against five funds picked from the experts, and he was going to use a cost-free unmanaged S&P Index Fund, basically put that S&P Index Fund against those other five experts, let's let 10 years go by and see which fund performs best.
And to no surprise, I mean, spoiler alert here, the S&P Index Fund was by far and away the best performer, and that's for a number of reasons. But ultimately, he shines a light on the fact that there are real costs and fees that these hedge funds -- the costs that they rake in whether the fund performs, out-performs, under-performs, no matter what, those costs are there. And really, we always talk about this investing for the long haul, taking a long-term approach. We don't say that lightly, that's really how we feel about it. And this was proof that it works. And he closed it out with, "Performance comes, performance goes, fees never falter." I think that really sums it up nicely.
Muckerman: I think one of those funds didn't even make it the full decade, they closed up shop.
Hill: Taylor, anything stand out to you, whether it was from the letter or this morning, he sat down with our friend Becky Quick at CNBC. They covered a whole range of topics. I'm curious if anything caught your attention.
Muckerman: He's feeling good about the tax reform, and everything's expensive out there.
Hill: We'll get to the tax reform in just a second, because what that meant for Berkshire Hathaway --
Muckerman: [laughs] That was a nice little payday.
Hill: -- was even more cash for Buffett's elephant gun.
Hill: We'll get to that in a second. One of the things that came up in the interview this morning that caught my attention was when he was asked about Wells Fargo (NYSE:WFC). I was saying right before we started taping, Jason, Wells Fargo is one of the big four holdings at Berkshire Hathaway. I think it's No. 3 overall. It's up there with IBM, and I don't know if American Express is still in that top --
Muckerman: I think it's still $50 billion, yeah.
Hill: But, he really seems to cut the current management at Wells Fargo a lot of slack when you consider that the current CEO, who hasn't been in the CEO chair that long, was there the whole time when they went through their whole fake accounts scandal.
Moser: Yeah, looking at this, Wells Fargo, according to the letter here, may very well still be the largest holding in value today.
Muckerman: No. 1, yeah.
Moser: And the returns on the investment, it's been basically a three-bagger or so, close to it, at least. That's what makes you think, "Man, these guys are giving them a lot of slack for that." I feel like Wells Fargo just continues to step in it, it seems like, month after month, quarter after quarter. And given that they focus so much on leadership and incentives, it does seem kind of like they're getting kind of a pass on it.
But by the same token, they've been in this investment for a long time, so maybe they see this as a dark period for that holding, but they believe things will get better. I think I've said more than once, we give Wells Fargo a hard time and they deserve it, but I think we're going to look back five years from now and this will probably prove to be a good time to have invested in the bank, because no matter which way you cut it, it's still a very, very large bank that I don't see going away, ever.
Muckerman: And who knows what they're saying to them behind closed doors? Because they're on speed dial, no doubt. So, maybe you don't want to talk too negatively publicly about your No. 1 public stock holding, but I'm sure there's some conversations that have been had and will be had.
Hill: Do you think Sloan looks down at his phone and sees that Buffett is calling? Yeah, he probably picks up.
Muckerman: "Oh no, that's the Omaha zip code there again."
Moser: I tweeted the old #AskWarren thing this morning, I never heard any answers. I was kind of disappointed.
Hill: What was your question? CNBC was doing that this morning, "Send us your questions #AskWarren."
Moser: Yeah. I mean, they took some trader questions, which was kind of killing me. Some Teva question, it was stupid. Anyway, they were talking about the healthcare stuff was, so my question was, as they get the ball rolling helping to reshape our healthcare system, I was wondering if he had a perspective or an opinion on telehealth or virtual healthcare, because we're seeing it more and more becoming a central offering to a lot of healthcare plans, included UnitedHealth Group. And I think Berkshire used to own UnitedHealth Group. They may not anymore. Regardless, given their status in trying to help reshape healthcare, learning more about how he sees technology disrupting it, that would be interesting.
Hill: And that's very well a topic that could come up at the annual meeting in late April, early May, whenever the annual meeting is, when Warren Buffett and Charlie Munger have their marathon six-hour Q&A session.
Before we get to their cash, I want to give a shout out to Huda Mares, who's one of our listeners who we met in San Francisco. She tweeted out highlighting this line from Buffett's letter. "What investors need is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period, or even to look foolish, is also essential."
Muckerman: Hey now!
Hill: Small-f foolish, but --
Muckerman: We know what you meant.
Hill: We feel like we have the simpatico with Buffett. More cash than ever before is at Buffett's disposal, and holy cow, as you indicated, Taylor, he really seems like he's itching to buy something. But he's a value guy at heart, he looks across the market and he doesn't see the bargains that he wants to see. But, come on! Do we really think 2018 is going to end and Berkshire hasn't made an acquisition? I don't know. I feel like --
Moser: Pretty early in the year, I feel like he'll probably find something.
Hill: And it's the amount of money that they have. Don't they have over $100 billion in cash and short-term equivalents?
Hill: Give me -- and when I say "me," I mean Warren. Give Warren Buffett your recommendation. He comes to you and says, "Look, this money is burning a hole in my pocket. I have to buy something."
Moser: [laughs] That's a nice problem to have. I don't know. What do you think, Taylor?
Muckerman: One company I've been looking at quite closely, Waste Connections, it's a Canadian company but it trades in the U.S. after they purchased Progressive Waste Solutions back in 2016. Phenomenal performer, in the same group as Waste Management and Republic Services. They're basically hauling your trash away, your recycling. They also dabble a little bit in exploration production waste on the oil and gas side. They've been a nice acquirer of smaller businesses in the secondary markets that maybe their two larger peers don't really concentrate on. Their returns are phenomenal. Free cash flow generation is through the roof right now. I think they turned almost 16% of revenue last year into free cash flow. Good margins, better returns than their peers.
It's obviously not cheap at the moment, but the multiples have come down over the last few quarters, and it's one that I'm looking at closely. It checks the moat box, the return box, it's very easy to understand. They pick up your trash and they take it to where you can no longer see it and they recycle it. I'm a big fan of this business. It's just been a little pricey for me in the last year or so, but it's coming back down to earth. I like this business a lot.
Hill: What's the ticker?
Hill: Jason, what about you?
Moser: I have a couple of ideas really quick. He talked about the four building blocks that add value to Berkshire. Acquisitions served as two of those building blocks. Acquisitions in one way that they can stand on their own, or acquisitions that are maybe bolt-on or complements to businesses they already have.
One that could stand on its own and serve as complementary to holdings they already have, and I've said this probably since I've been here at The Fool, is McCormick (NYSE:MKC). Ticker is MKC. This is the spice king. They generate healthy returns on equity, which is a metric he cares about. Again, I think it's very complementary to what they already have in their Kraft Heinz (NASDAQ:KHC) holding. I mean, hey, you have the ketchup and you have the mustard, you basically get the whole hot dog now. Everything that goes on a hot dog, you basically own that. French's, Frank's, the big acquisition --
Hill: And by the way, as a selling point to Buffett, that line just might seal the deal. Given what we know about Warren Buffett's diet --
Moser: It very well may! [laughs]
Hill: "What if I told you you could have the whole hot dog?"
Moser: "You like hot dogs, don't you? Everybody likes them."
Muckerman: "All the seasoning in your burger, too."
Moser: And, listen, their value proposition, I think, is the best of any public company I've ever seen in that they say their products are responsible for 10% of the cost and yet 90% of the flavor. I mean, that's the most compelling thesis I think I've ever seen. So, for me, I think that McCormick seems like a very Berkshire-like business, where they could buy it and let those guys keep doing what they're doing.
Another one, I think is, Ellie Mae (NYSE:ELLI). Very small company, much smaller than McCormick. Ticker is ELLI. But given their exposure to housing, Ellie Mae is known for its Encompass software platform, which basically helps power much of the lending that goes on in the housing market today. I think either one of those companies could serve them very well.
Hill: If they went with Ellie Mae, don't you think they rebrand it Berkshire Hathaway? Because a lot of their acquisitions they just leave alone, but there have been some, particularly in the housing market, where they have rebranded them with Berkshire Hathaway.
Moser: It's certainly possible. It's funny, whenever we talk about Ellie Mae, I think people immediately start thinking Fannie Mae, Freddie Mac, what's the relationship there, Sallie Mae with the student lending. It's certainly one where they could probably rebrand it under the Berkshire Hathaway brand and not lose one bit of the growth in the business.
Hill: Interesting weekend, and coming into this week, I think FedEx (NYSE:FDX) becomes a company to watch, because one of the things we saw over the weekend in terms of businesses, and certainly, if you're on Twitter, you probably saw this playing out, it has to do with, in the wake of the shootings at the high school in Florida and the backlash that the National Rifle Association is getting. There were a number of businesses, particularly when it came to airlines and rental car companies who offer discounts to NRA members in the same way that AARP gets discounts. Actually, that's a reminder that I need to join the AARP, because I am of a certain age. I'm not retiring anytime soon, but I do need to join AARP and start getting some of those discounts.
Anyway, some of these companies looked at the backlash and decided, "This isn't worth it to us anymore, the pressure that we're getting from other customers who are not involved with the NRA." And the largest company, to my knowledge, that is still offering that discount, is FedEx. And I'm wondering, Jason, if you think this now becomes something, if not necessarily a part of the thesis for investing in FedEx or perhaps a competitor like UPS, or if nothing else, it just becomes one more factor to watch? Because it really does seem like, in the same way that Home Depot and Lowe's have kind of tracked each other as stocks when it comes to home improvement, and for years, however Home Depot does, you can look at Lowe's and go, "They're probably going to do about the same but not quite as good," that's kind of been the story with FedEx and UPS, certainly over the last few years. But I'm wondering if FedEx now has an added risk factor here.
Moser: I think it could. I tweeted a few days back that, just looking at the Bezos-Buffett-Dimon healthcare initiative, for example, I think this is a sign of things to come. Given the dysfunction in Washington D.C. today, and the fact that really, it's almost impossible for politicians to make anything happen anymore, I think that our brightest business leaders can. And I think we're starting to see more and more that they're trying to impart change, or at least throw some ideas on how to do things, perhaps, differently. And once you get that ball rolling, you don't have the red tape and the lobbies that you ultimately have to deal with in the political side of things. That can certainly bring change down the line. I think, when you look at this particular situation, there are far more people who are not members of the NRA than are. And I'd be willing to bet that there are a lot of people out there who are proponents of the Second Amendment but not members of the NRA.
Now, with that said, because there is a Pepsi to FedEx's Coke, I think it could be something that makes a difference. You have a very good alternative out there. And for people who really care about this, and we know there are a lot of them that do, I think that's a situation where it certainly could play out and affect FedEx's business. That's going to be something that, their leadership is going to have to make that decision on their own, what they stand for.
As investors, we talk about it all the time, you kind of have to dictate that line, what matters the most to you. If you looked at it from the perspective of something like Google, people are going to use Google no matter what. You use it sort of unconsciously. You don't even think you're doing it. But I think in the case of a lot of these businesses, they're making this decision because it's ultimately in line with how they want to approach the world, it's sort of their worldview. And I think we're going to see more and more of this type of stuff, not just NRA but in all sorts of issues. So, I think FedEx is going to have to think about this long and hard, because there's a very good alternative out there that does the same exact thing they do, and they do it pretty darn well.
Muckerman: I would just worry, maybe it'll affect them from an individual user, an individual shipper. But if you're a small, medium-sized business or a large business that already has a relationship with FedEx, it would be pretty sticky to change that. You might already be getting your own discounts from being such a loyal customer and shipping X amount of volume. So, there could be some issue there on the individual shipper side of things, but I don't know if it's going to make the biggest dent in the world.
If you look at, a lot of times, when these PR fiascos come out, and the companies come under fire for something that they didn't necessarily have anything to do with, but there's the opinion out there that you want to fall in line, it kind of blows over after a little while. So, I don't know if it's necessarily an investing thesis, but it's certainly something that the company is going to continue to have to consider internally.
Hill: And just as companies that have large accounts are more meaningful than individual customers are, it's the same for investing, institutional investors vs. individual investors. And that was one of the stories I saw over the weekend, I think in the Journal about BlackRock --
Moser: BlackRock, yeah. I read the same thing.
Hill: -- which owns, I think it's maybe the largest institutional shareholder of a couple of the gun manufacturers. And the comment out of BlackRock was, "Yeah, we have some questions for them, and we're going to have those conversations and we're going to proceed accordingly." So, same sort of thing. Individual investors who say, "I don't want to own cigarette maker stock, I don't want to own gun manufacturers," and that's totally fine. You can do that. That's one of the great things about investing, it can be a reflection of who you are. But it means a whole lot more when it's an institution like BlackRock that owns millions of shares.
Moser: And you have to be careful how granular you want to go with this. There are people, I'm sure, who owned shares in companies that had relationships with the NRA before and now they don't. It's very easy to get on your soapbox because it's convenient. As an investor, you have to be able to determine that line. You have to recognize how far you're willing to go with any of these issues that happen to come up.
Muckerman: I think, even, someone discovered that the Florida teachers' pension plan owned shares of gun manufacturers when this happened. I think they've since sold. It was a small stake, but still, it's just a broad market portfolio, you get caught up in it.
Moser: Yeah, a lot of times, we talk about the direct ownership vs. the indirect. If you have a 401(K), you probably don't, really, know what most of those dollars are invested in. But chances are, you probably have some exposure to companies that you might not be necessarily in line with.
Hill: I remember, and this is going back on last 20 years, doing an interview with a student newspaper, the student newspaper at Yale University. And at the time, the big issue on campus was the Yale endowment's ownership of cigarettes stocks, in particular Philip Morris, now Altria, then Philip Morris. And I was talking with the student reporter and trying to get across the point that -- because, students were pushing for the endowment to ditch the cigarette stocks, and the point I was trying to get across this guy was, "Look, you can do that, you can push for that. But what's going to be more meaningful, if you're trying to hurt Philip Morris, the move you want to make here is to find out what's being sold on campus."
And at the time, Philip Morris owned consumer goods like foods, packaged foods, all this sort of thing. And I said, "Let me ask you a few questions," and I ticked off a few of the items, which included, I think, beer, as well, and I just said, "Are these sold on campus? Can I go into a Yale cafeteria and buy these things?" And he said, "Yeah." And I said, "OK, well, then, you can sell the stock. Someone else is going to buy it. That's not really going to hurt Philip Morris' bottom line. If you really want to affect some change, get the school to stop selling those products."
Moser: Yeah. And your owning their stock doesn't really benefit that company whatsoever. You have a little ownership in them, but you bought that share of stock from someone else, not the company itself. You have to take an inventory of how far you're willing to go with this, because the one thing that we've seen with social media, it's just the high horse generation, man. It gives everybody the ability, you just get up on your high horse and say what you think. And that's fine. But there's always going to be someone out there who can counter it with something fairly compelling as well. It's a different time now, for sure.
Hill: Our email address at this show is email@example.com. From John Lombard in New York. John writers, "I'm a very long-term investor. I almost never have occasion to sell, so I was caught off-guard over the weekend when one of my investments no longer seemed to fit into my investing thesis. I realized that I don't really have much of a backup list, or a watch list, if you will. I focus a lot on the stocks I already own, but since I almost never sell, I've never given much thought to what I would replace one with, should it go sideways. I know people ask constantly about what the right number of stocks to own is, but I'm wondering, how many stocks do you guys typically keep waiting in the wings? Thanks, and I hope you can come back to New York City soon." I do, too. That was a great trip that we took up to New York. I'll just speak for myself. Taylor, not many. My waiting list is usually single digits, and it's usually low single-digits, just because I don't make that many transactions, so at any given time, I'll have maybe three to five stocks that I have on a watch list. What about you?
Muckerman: I don't know. I think mine right now is probably anywhere from 15 to 20. But half of those probably aren't really serious, they're just companies I'm interested in, and maybe one day down the road they strike my fancy enough to join the portfolio. But, probably the core watch list is 10 or so.
Moser: Yeah, looking through the Million Dollar Portfolio, the way we're running things there, we have a portfolio with 34 holdings today. Now, one of those is a dual-class with Google, or Alphabet, so we actually have 33 companies in there. We have a watch list with 32 ideas. Now, we also have three analysts on the team.
Hill: I was going to say, you're on a team.
Moser: So, break that up, and maybe you have 10 to 11 names per analyst that we're covering and watching. And I would say that's on the high side. My personal watch list, I think, is around six businesses right now that I don't currently own. But the point that he alluded to there earlier, I think, was that a lot of times, the best idea is a stock you already own, and adding a little bit to a position in a stock that you already own. I know that I look at my portfolio often, and rather than looking at my watch list, I'm looking at some of those companies that I've held for long periods of time. I've gotten to know them better, they're good performers. You like adding to businesses that are winning. So, often times, really, the best idea is when you already own. But, I think keeping a watch list with something like five names seems manageable.
Muckerman: And sometimes I'll even throw a company I do own on my watch list. If you hold it for a couple of years, your return is going to be different than, maybe, if you started watching it six months ago. That way, you can see different fluctuations in the stock price. And maybe in your portfolio, if you've had a long run, a 10% move down isn't going to be a noticeable reflection there. But if you just added it to your watch list and all of the sudden it's down 10%, you're like, "Oh, maybe I should take a closer look to add to this position."
Hill: Taylor Muckerman, Jason Moser. Thanks for being here, guys.
Muckerman: You got it!
Moser: Thank you!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you next time!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill has no position in any of the stocks mentioned. Jason Moser owns shares of Berkshire Hathaway (B shares), Ellie Mae, and Twitter. Taylor Muckerman owns shares of Alphabet (C shares), Home Depot, and Twitter. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Berkshire Hathaway (B shares), Ellie Mae, and Twitter. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends American Express, FedEx, Home Depot, Lowe's, McCormick, Republic Services, and UnitedHealth Group. The Motley Fool has a disclosure policy.