What Can We Learn From Berkshire Hathaway's First 13F Filing of 2021?

In this episode of MarketFoolery, Chris Hill is joined by analyst Bill Barker to discuss January retail numbers surprising Wall Street. Also, Tractor Supply (TSCO 2.67%) buys some growth and Shopify (SHOP -1.85%) shares fall despite strong fourth-quarter results. Hilton Worldwide (HLT -0.10%) treads water as it wraps up its fiscal year, and Berkshire Hathaway's (BRK.A -0.37%) (BRK.B -0.36%) latest investments are Chevron (CVX 0.62%) and Verizon (VZ -0.92%).

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This video was recorded on February 17, 2021.

Chris Hill: It's on Wednesday, February 17th. Welcome to MarketFoolery. I'm Chris Hill. With me today, Mr. Bill Barker.

Bill Barker: Good to see you. Good to be here.

Hill: We've got hotel earnings. Warren Buffett and his team have gone shopping. We'll see what they've been buying. The shopping spree that they've gone on leads nicely into the consumer spending numbers from January that came out this morning. Retail sales in January up more than 5%. Particularly nice numbers for home furnishings, home improvement, electronics. It's only one data point, but it's a pretty bullish data point for the U.S. economy.

Barker: It is. I don't know how much there is to add onto the data, except it's something that points to good times, maybe not ahead. In January as a result, in part of the checks that went out and some people who got the $600 check from the government. To call that good times is an unfortunate choice of words we're trying to take back. But spending times, there are many people who had money to spend in January that they didn't previously have and they spent it. There has been a question about how these checks were getting used, whether they're being put into savings, whether they're being put into trading stocks in some cases. These numbers reveal that to a large extent, what they have been used for is exactly what they're designed for. That is people buying things they need.

Hill: Definitely a data point to keep watching particularly, you think back to nine, 10 months ago when in the early days of the pandemic, the personal savings rates in the United States shot up to the low 30s. As you said, nice to see that the checks are being put to use. Sticking with the spending theme, we've got shares of Tractor Supply hitting an all-time high today, not based on their earnings which came out in late January, but Tractor Supply is buying Orscheln Farm and Home. They're spending just under $300 million to do it. This is a retailer with 167 locations across the mid-West and Tractor Supply is buying growth, and the market appears to be applauding this move.

Barker: Yeah, they're getting about 180 stores there. Tractor Supply under the Tractor Supply brand has about 1,900 and change stores. It's about 10% store count growth on that side of the business. They've also got about 160 stores in Petsense, which is a smaller competitor to Petco and others in the pet market. Really, they're growing stores at between 80 and 90 stores a year, roughly right now. So they are buying about two years of growth. They're buying that for slightly under $300 million. They say that it's going to be immediately [...] to earnings so that once the deal is approved and goes through, they'll be earning more money per share. That is one indication of a good use of money, and it's one that makes complete sense since the business is largely the same, and has largely the same clientele. It's a little bit more of a mid-West location for Orscheln and it allows Tractor Supply to not compete head to head in those markets in the places that it wants to grow and to just acquire all those sales instead and with its larger scale and more developed online operations to actually achieve the synergies which are always pointed out in a merger, but don't always happen.

Hill: Thank you for reminding me and the fact that under the Tractor Supply umbrella is that Petsense brand, because I almost always forget that it exists. With this acquisition, the namesake side of the business becomes just that much bigger. At some point, do they start to look at spending off the pet business? Because it just becomes smaller and smaller. Should they just focus on the namesake brand? Because that seems to be doing pretty well.

Barker: They pretty much do focus on the namesake brand. Petsense was an acquisition a couple of years ago. They just took a write-off in the last earnings report for recognition that the Petsense acquisition was not as valuable as it was being carried on the books. There was some amortization, some issues that they're rectifying in their numbers now as to the attractiveness of that brand. It's an overlapping business, Petsense there, there's a very large pet business within Tractor Supply as themselves. It's an overlap and it's a good time to be in the pet business, but it really is a brand that doesn't have anywhere near the power that Tractor Supply itself has. Petsense is really a very small part of the operations. I would say a smaller part than this acquisition is going to turn out to be. It raises the question about the company's abilities in these acquisitions. It had a more successful one with Del's, and basically, those operations have all been rebranded to Tractor Supply, whether that happens with Orscheln is unknown right now. But I would doubt that it happens in a rebranding capacity quickly.

Hill: Let's move on to Shopify. Fourth quarter profits and revenue came in higher than expected, and yet, shares of Shopify down 7% this morning. I get that this is a stock that even with the drop today is up about 150% over the past year. The valuation might be a tad frothy, but it seems like when you look at the results of this quarter, Shopify has moved into that realm of businesses where if you put up great numbers but not amazing numbers, your stock's price is going to get dimmed.

Barker: Yeah, dimmed off of what was an all-time high yesterday stock that's been between $300 a share and just within a few pennies of $1,500 a share going yesterday, off 6%, 7%. That gets it back. It's just purely talking about the stock for about eight more seconds, which is the stock is back to where it was last week. If you're a business owner and what you're focused on is what the business is doing, you're turning cartwheels again over this earnings report, 94% revenue growth, and for the quarter, which is actually an acceleration for the full-year, which itself was up 86%. A company which has doubled its sales in the year from an already very nice level, is extremely hard. Hyper-growth of this type is just very hard for the stock market to value. It's valued it very generously. One would have to say at this point, and if it takes a couple of dollars off the price today, that's inconsequential to the longer-term story.

Hill: Hilton Worldwide reported a loss in the fourth-quarter. Revenue was light, and yet somehow shares of Hilton are flat today. This is the reverse of Shopify. On the surface, you should look at the numbers they've put up, particularly relative to a year prior. Maybe I'm missing something on the guidance they offered because this was not a great quarter.

Barker: I know and not a great year. The market is taking the instructions, I suppose, of the company, which is more or less than the tune of, nothing to see here, move along, keep going. The stocks are at an all-time high, basically. Despite the year that it has had, which has been one of losses but the market is a forward-looking mechanism and the future, both in the medium-term and the long-term looks good. The short-term, obviously, if we're talking about right now, looking at the last quarter occupancy rates around the world, we're 40%, which was down 31% from the year before. Room rates themselves were down more than that, down about 60%. Yes, we all know people aren't leaving home, they're not going to hotels and they want to. That's what the market is looking at today is that the knowledge that this is a service which people want to use next year and in the years ahead.

Hill: What should people be looking for in terms of an industry metric, to get a sense of travel bouncing back. Is it airline bookings, is it hotel bookings? Is one a better indicator of the other?

Barker: I think hotel bookings are better because I think people are going to err on the side of caution where they can and get in a car. There's a way to travel safely and to stay in hotels and Airbnb is safer than other ways. If you take the people's fear of flying, the airlines, I think have gotten the word out on how safe it is regarding COVID to fly, but I don't think that that word has been fully accepted yet. If you've got a car and you can get to a place by driving instead of flying, a lot of people are going to make that choice. I think hotel is going to bounce back earlier. Additionally, I think the business travel for airlines, there's a long-term impact on that part of the business.

Hill: Berkshire Hathaway has filed their latest 13-F with the good people at the SEC and Warren Buffett and his team have gone shopping and people have noticed as they tend to do. Because when Warren Buffett and his team goes shopping, the numbers tend to get pretty large. Berkshire Hathaway has taken a $4 billion stake in Chevron and $8.5 billion stake in Verizon. They've sold off some of the stakes in Pfizer, JPMorgan Chase and Wells Fargo. I don't know of those $2-$4 billion in Chevron, $8.5 billion in Verizon, is one of those more surprising than the other?

Barker: I suppose Chevron is more surprising because I have a harder time getting excited about Chevron's long term. If you're taking a Buffett quote of the best time to sell a stock is never and being a buy and hold investor, I don't see Chevron's fortunes as being ones which will improve over the next two decades let's say. I think that there is reason to look at, particularly a couple of months ago, to look at things in the energy sector and discover a valuable price for something in market overreaction perhaps. Nevertheless, I think that there are pressures on oil that are undeniable and that this is likely to be more of a short-term than a long-term victory in terms of the stock price.

Hill: If this 13-F came out last April when Chevron's stock price fell below $60 a share, Berkshire Hathaway picked up $4 billion worth. That would be like, "Okay, I get that." That's the classic value investor moving there. I get that it's up a little, but it's back above $90 now. You and I were talking this morning and you reminded me of something which I think it's always important to point out whenever we're talking about Berkshire Hathaway. The natural inclination is that Buffett and Charlie Munger are the ones making these decisions and you pointed out, "Well, look, this could've been Ted or Todd. This could have been someone else." I agree with that. That being the case, do you think Buffett holds some vital power [laughs] over the other people on his team? He's giving them a wide berth and saying, "Look I want you to manage your portfolio." But if one of those guys came out and said, "Just a heads-up, going to be plucking some money down in bitcoin." Do you think Buffett would say, "Wait, what?"

Barker: [laughs] I think it would have to be something that you are ready to explain to Warren Buffett as to why you're making that investment. I'm not sure that I would want to put him on the spot. As much as one might believe in bitcoin, when it comes out that Berkshire Hathaway owns a bit of bitcoin, Warren Buffett, who has said things that are not complimentary toward investment in bitcoin would be put on the spot. That as an example, I think is not something that I would be comfortable making if I were working for him.

Hill: Yeah, that's another good reminder that even if it is one of the other people on the team making the purchase at the annual meeting or the next time he goes on CNBC to talk to Becky Quick, Buffett is the one who's going to be getting asked the questions. Do you suppose they've had a meeting about bitcoin? Not perfect, but at any point, has anyone at Berkshire Hathaway, in an investing manager role said to another person, I want 20 minutes of your time, I just want to talk through Bitcoin. Do you suppose that meeting has happened at Berkshire Hathaway?

Barker: I would bet plenty that Warren Buffett has had people explain in detail and has probed bitcoin and could tell you quite a bit about it. Because it's hard to believe that something that has been this front and center in the investment world for as many years now as it has would not have attracted his intellectual curiosity at the very least. Now, I don't think it fits into his investment style, and I don't think that he at this point is likely to change his investment style to the degree necessary to incorporate an investment in bitcoin. He's gotten pretty far doing what he does best. I think it's outside of his circle of confidence and it's going to remain there. But I'll bet he can tell you quite a few things about it.

Hill: I can't wait for the headline, Motley Fool calling Buffett has been modeling Bitcoin investment and you get quoted. It's like, Bill Barker from Motley Fool Asset Management said the following.

Barker: You do that just to make me apologize in public for the most horrific line that I ever used in a Motley Fool article, aren't you?

Hill: I don't think it's the most terrific title [laughs] I've ever used in an article. I'm not giving it that title.

Barker: Now those are the ones that I actually did use many, many years ago.

Hill: Remind people of the line. I know the line [...]. I don't think it's the worst thing you've ever written.

Barker: The title of the article was Warren Buffett issue's death threat. I'm here. I'm apologizing for that right now. It was an article where let's call click bait what it is, how could you not click on that? It referred to a line that he had in his annual letter about what he was considering buying and he said, "I could tell you, but then I'd have to kill you," which is an old standard joke. The rest of the article contained what I hoped was useful information for investors, but the headline itself, although effective at attracting clicks is one that I regret to this day. If anybody could probably Google it, it is probably out there somewhere.

Hill: Now I'm just wondering what I'm going to title this episode, but I'll think [...]. [laughs]

Barker: Let me bear this one, I've brought it up, it'll work for those that have suffered through the entire broadcast and have gotten to the end. Don't go following my lead and do click bait headlines for your podcast, be the better man. [laughs]

Hill: All right, but just this once. [laughs] Bill Barker, great talking to you as always.

Barker: Thanks.

Hill: As always, people on the program may have interest 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 tomorrow.