What you can learn from Buffett's Heinz buy?

Feb 15, 2013

In this issue:
» Headline inflation falls to 38-month low
» Banking licenses to corporates not a great idea!
» Investors must never ignore corporate governance
» How much did the financial crisis cost the US?
» ...and more!

How a group of investors made a small fortune, and then nearly lost it all...

Small Caps have the potential to deliver 1,000% returns.

And they also have a tendency of going all the way back to Zero.

This is an undeniable fact.

Today, we want to share with you our experience with small caps.

The highs we experienced. And the lows too...

...What we have learned in the process, and how we are putting that learning into practice to pick stocks (which incidentally are already starting to deliver).

Interested? Click here for full details...

00:00
 
Legendary investor Warren Buffett has built a massive fortune simply by making intelligent investments. His key to such phenomenal success has been nothing but applying simple value investing principles in a disciplined manner. No wonder the investments of Mr Buffett are very closely tracked by investors across the globe.

In his latest move, the ace investor has teamed up with Brazil's richest man Jorge Lemann and cracked the biggest ever acquisition deal in the food industry. Interestingly, most of us are quite familiar with this company and even regularly use its products. The name is H J Heinz Co, the famous ketchup-maker. Yesterday it was announced that Berkshire Hathaway Inc and 3G Capital Management LLC have agreed to acquire the company for US$ 23.3 billion.

The Oracle of Omaha is known to have said, "Heinz is our kind of company with fantastic brands. It's my kind of deal and it's my kind of partner." What does "my kind of deal" really mean? What could be Buffett's rationale behind this investment?

A brief look at Heinz will tell you that this is a classic 'Buffett stock'. Heinz has been in existence for 144 years! It is one of the most familiar brands in the US and enjoys bestselling status in over 50 countries. Imagine the kind of long term competitive advantage such a company would enjoy. Heinz has an impressive track record of steady growth. It endured the recession without any bruises. The company pays out more than US$ 600 m as annual dividends.

So far so good! But all this is past success. What about the future earnings potential, you may ask? Buffett is not the one to ignore this aspect. He sees great potential in Asian markets where the company is fast penetrating. About a quarter of the company's sales are expected from the emerging markets.

So here's a leading global packaged foods company with a robust track record, impressive household brand names, great management, a history of excellent returns to shareholders and solid visibility of future earnings growth. That's the recipe of a classic Buffett stock. And that's the reason why he calls it "my kind of deal".

However when it comes to valuations of this purchase, things are still not very clear because it is a complicated deal involving purchase of debt along with an equity component. As such, we would rather wait to see how the valuations play out before reckoning this deal amongst Buffett's legendary ones. Nonetheless, investors have a lot of important lessons to take away from Buffett's choice of company.

According to you, which Indian stocks would Buffett like to buy? Share your comments or post them on our Facebook page / Google+ page

01:30
 Chart of the day
 
Over the last few years, inflation has been one of the biggest spokes in the wheel of India's growth story. As such, the recent inflation figures may provide some respite. As per data released, the wholesale price index-based inflation declined to 6.62% in January 2013. It must be noted that this is the lowest in the last 38 months. This may probably provide a cue to the Reserve Bank of India (RBI) to cut interest rates lower.

However, the dip in inflation rings an alarm on the growth front. The fall in inflation has been attributed to the decline in fuel prices and in the prices of manufactured products. A dip in product prices usually indicates dropping demand in the economy. This, in turn, would impact job creation and economic growth. The other worrying matter is that consumer price inflation still remains high, driven by food inflation. It stood at 10.8% in January 2013 against 10.56% in December 2012. This dichotomy of falling prices of industrial goods and rising prices of essential goods has put policymakers in a fix.

Data source: The Economic Times

02:08
 
No one denies that the impact of the financial crisis on the global economy has been severe. Not only are the developed countries sunk into recession, but the developing ones have also slowed down a bit. What is more, house prices have fallen, unemployment has risen and most governments have racked so much debt that they are on the brink of bankruptcy. Can a number be attached to the loss from the financial crisis? The Government Accountability Office (GAO) has attempted to do just that. GAO is of the view that the 2008 financial crisis cost the US economy more than US$ 22 trillion. The objective is to come out with the finance reform law that will prevent another crisis from taking place. Detractors of this law will highlight the huge costs involved in implementing it. But if the costs for implementing preventive measures is going to be a fraction of the cost of any future crisis had these measures not been implemented, then it makes every sense in having such laws.

We are glad to inform you that Mr Bill Bonner, founder of Agora Inc and author of renowned financial column 'The Daily Reckoning' is visiting us in India very soon. Mr Bonner has been a long time 'gold bug' and is known for his unconventional and hard-hitting views on the global economy.

If you would like to hear Mr Bonner's views on any of your queries, please send in your comments or post them on our Facebook page / Google+ page

03:00
 
The RBI does not see eye to eye with the Finance Ministry on several issues. That it is one of the most conservative central banks in emerging markets explains this discord. But on one issue, RBI's discomfort is shared by several other agencies as well. This concerns issuing new bank licenses to corporates. From the International Monetary Fund to Nobel laureate Joseph Stiglitz, several entities and experts have supported RBI's cautious stand in this regard.

RBI's dilemma stems from the fact that industrial groups, if allowed, could undermine the independence of banks. Plus, this concern is not without taking into account global experience. Several corporate-owned banks in Brazil appeared vulnerable in the mid-1990s. Nearly 40% of the banks operating in Brazil in December 1988 did not survive until 2000. Korea, on the other hand, decided to ban industrial houses from promoting banks after the Asian crisis.

Most importantly, the very logic of issuing more bank licenses instead of consolidating the sector is questionable. Is the need for funds the case of low financial inclusion in India? Or is it the deep pockets of large corporate groups that Indian policy-makers crave? Whatever it might be, the RBI can draw comfort from the fact that it has been fairly successful in regulating Indian financial system. And we are confident that it will ensure that the sector remains relatively unscathed in the future as well.

03:43
 
The need for investors to keep corporate governance as a criterion for selecting investments is getting more and more prominent by the day. Governance standards in India are not too high. Though it would be wrong to call every corporate house a crook, nevertheless, poor corporate governance is an undeniable truth in India. In the past a lot of promoters and corporate managed to get away with dubious practices. But in recent times the noose has been tightened by the regulators. One such group facing the regulators' music is the mighty Sahara group. Recently SEBI had attached the accounts of two of the group's firms as well as its promoters. This move was related to the group's questionable issue of OFCD (Optionally Fully Convertible Debentures). The total amount issued was Rs 240 bn. The dispute was that it was apparently issued without the necessary approvals and prospectus. Moreover, it is also alleged that this amount was sent outside the country through dubious means and was used to buy a hotel in London.

The group has naturally denied all of the charges and has also filed a plea with the Supreme Court to release its accounts. So that it can pay back the amount to its investors. Unfortunately for the Group, their troubles are far from over. As reported by The Financial Express, the group is not just in trouble with SEBI but with other regulators too. This includes the foreign financial intelligence unit among others. There are legal hassles too. The SEBI order is just a start.

04:35
 
In the meanwhile, the Indian equity markets continued to trade below the dotted line. At the time of writing, the BSE-Sensex was down by 69 points (0.4%). Among the stocks leading the losses were Cipla and Dr Reddy's Laboratories. Barring Japan, all major Asian stock markets were trading mixed with stock markets in Indonesia and Hong Kong trading firm, while markets in Japan and Singapore were facing selling pressure.

04:50
 Today's investing mantra
"It's the nature of things that most small businesses will never be big businesses. It is the nature of things that most big businesses fall into mediocrity or worse. Most players have to die." - Charlie Munger

Charlie Munger - Investing Lessons

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8 Responses to "What you can learn from Buffett's Heinz buy?"

Manoj

Feb 17, 2013

Indian corporate governance is almost an oxymoron. Neither Ministry of Corporate Affairs nor regulators do anything to improve such an important aspect, despite the shocking frauds at Satyam - where the founders only had a minority stake. The situation where promoters hold large stakes is worse. To change something, it is not enough to write more rules, but monitoring, incentives for change and disincentives for violation. Since the government continues to sleep over vital issues, several more corporate frauds and adverse impact on investors, economy and global reputation before the slumber is interrupted.

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SWAPNIL

Feb 16, 2013

As it comes to find out a company with strong track record and strong fundamentals and more than this about to everlasting need for its produce like justification given for Coca cola and now again Heinz so taking another Indian household, loving Brand serving Indians since so many years and proudly relates to core need of an individual Parle Agro company into beverages, foods, water and PET business with its quality and innovative range of produces.

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sunilkumar tejwani

Feb 15, 2013

agreed, he is a maverick investor, but value investing doesn't mean investing in a good company at sky high valuations. Only time will tell weather this investment is worthwhile!

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Manoj

Feb 15, 2013

The issue of industrial houses opening their banks clearly is a problem areas. So far, corporates were even not being issues a license easily for a finance & investment wing. In such a scenario, to allow a full fledged bank is nothing but Chidambaram's greed which will be paid for by the country deeply. How did we get such a bunch of crooks for our government only shows the immaturity of voters

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Srini

Feb 15, 2013

Tata

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satyam pandya

Feb 15, 2013

THE COMPANY IN WHICH BUFFET MAY TAKE INTEREST IN INDIA IS ITC.MAY BE AIA ENGINEERING.

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Abdul Khadeer Khaleefa

Feb 15, 2013

Dear Sir,
In India there is one company growing to be on a world scale by taking a huge risk of acquiring on lease 1 lakh hector of land called Karuturi Global. May be not in the life time of Warrent Buffet but his company future management would become part of this Indian company if Karuturi Chairman's dream become reality. This company could make Indian proud of taking such a huge risk against all odds to enter into Africa and face tough challenges. Please keep an eye on this company and may be in the next few years it would achieve wonderful results. I appreciate great risk takers and have seen most of them succeeding in life. Let us wish Sri Ramkrishna Karuturi tons of best of luck. Regards.

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vijay dalal

Feb 15, 2013

Buffet will never invest in any indian company. The corrupt govts in the states and at the centre alongwith poor work culture of the indians will further ensure this decision of Mr Buffet.

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