|»5 Minute Wrap Up by Equitymaster|
On This Day - 6 JANUARY 2016
Is It Time for Buffett to Exit Amex and Wal-Mart?
Last week, we spoke about how 2015 was a terrible year for Buffett's Berkshire Hathaway as it underperformed the S&P 500 index.
But rather than the newer purchases, it was some of the older heavyweights that dragged the stock down. As reported in The Street, three of the biggest holdings - American Express, Wells Fargo, and Wal-Mart - contributed a US$1.2 billion hit to the portfolio.
Is it the end of the road then for American Express and Wal-Mart?
Let us first see what made Buffett purchase these stocks in the first place. Buffett started acquiring American Express in the mid 1960s after the stock lost 50% of its value due to the infamous salad oil scandal.
Buffett was then of the view that the brand power and consumer business of American Express was still very much intact and had nothing to do with the scandal. More importantly, since the stock was available at a bargain, Buffett was only too happy to lap it up.
Wal-Mart, on the other hand, has a solid dividend yield and ample free cash flows to boast. Plus, the company has been looking to expand not just in the US but also around the world through various formats. Ultimately, it is a business model that Buffett understands. And given that the company is endowed with deep pockets, it has the leeway to pursue various avenues of growth.
However, 2015 was not a particularly good year for American Express or Wal-Mart, as shares of both fell close to their 52-week lows. Thus, it is not surprising to find many articles analysing the cause and whether Buffett is right to be wedded to these stocks.
The main threat to both companies seems to be the rapid pace of technological innovation and whether they have what it takes to counter it. As reported in The Street, Wal-Mart is facing tough competition. Low prices are no longer its preserve because of the emergence of various low cost retailers. Plus, the company is also investing in ecommerce and looking to shell out higher salaries. So profits could come under pressure in the near term.
American Express is also facing challenges on the payments front from tech start-ups and big tech companies such as Apple. As the future of payments will depend upon innovation and better consumer experiences, American Express will have to find ways to adapt to this change.
So should Buffett sell his stakes in these stocks? Only if the fundamentals of the companies are deteriorating. And we don't think that there is sufficient evidence yet that this is the case. Certainly, it is not something that can be determined by one year of below par performance.
Competition in any industry cannot be entirely eliminated. And American Express and Wal-Mart still have big brands and healthy cash reserves that should enable them to withstand competition and adapt to change in the coming years. But yes, it is important that the management does not get complacent.
Therefore, just as we think that one cannot write off Berkshire Hathaway yet, we believe the same holds true for American Express and Wal-Mart too.
What Modi Should Do In 2016
Love him or hate him...But you just can't ignore him. That seems to be the case with India's current Prime Minister - Narendra Damodardas Modi.
Since the landslide victory in the 2014, the Modi government has stumbled over a series of issues. Some have even questioned Modi's reform credentials.
In the process, the mood in India has swung from extreme optimism to cautious disappointment.
But the question remains whether Modi can turn this ship around and get India back on track?
Well, Vivek Kaul has the answer. And he has put it down along with his deepest thoughts on the challenges India faces, and what Modi can do to get India moving again in a special report titled - Modi 2016 - An Agenda For Revival.
And the best part is that he wants to give you this special report for free!
I have personally read the report and believe it is Vivek's finest work yet. And I recommend you read it right away.
In fact, I hope Modi reads it too because there are some real solutions in there that could really get India going again.
Anyways, Happy Reading...
3:03 Chart of the day
The economy continues to remain afflicted by the slowdown in investments from India Inc. In fact the manufacturing activity in the country has contracted in December for the first time in more than two years as per Nikkei's Manufacturing Purchasing Manager's Index. Resultantly, the bank credit offtake by the industry continues to remain weak. Of the total increase of Rs 2.4 trillion in Non-food credit, during the period 20 March 2015 to 27 November 2015, the personal loan segment had a lion's share of 58.4%. In this segment, loans to housing accounted for nearly one-third of the total increase in bank credit. However, the increase in credit to the industry stood at a mere 5% during the period.
This shows that the retail segment is showing a pick-up in credit demand backed by softening interest rates. However, this alone cannot keep the flag running high as credit growth to industry remains anemic due to lack of investment demand. In order to stimulate the economy, the government wants to keep public spending high in the next financial year as well. With this regard, the government is contemplating to go slow on the fiscal consolidation target of 3.5% for FY17. Therefore, the much awaited economic recovery may still not be around the corner.
Sustainable recovery from industry still eludes
While growth in bank credit has slowed down considerably, the bond market has been on a strong wicket. Bond issuances at Rs 4 trillion in 2015 were a tad lower than the record of Rs 4.1 trillion mopped up in 2014 (Source: Bloomberg). And the good times for bonds are likely to continue in 2016 if the fund arrangers are to be believed.
One of the biggest attractions for bonds by companies is the huge interest differential of 100 basis points between the bank's lending rate and bond yields. Due to the cost savings, bonds have become a preferred route of borrowing for companies. The bond market is also likely to be fuelled by new issuances as 2.12 trillion of bonds are set to mature in 2016. Reportedly, telecommunication companies will also be increasingly utilizing the bond route to refinance existing debt as well as fund network expansion and brace for rising competition.
Thus apart from slowdown, banks also continue to battle competition from the bond market that had a good spell so far.
Indian equity markets had a rather volatile trading session today as they oscillated to either side of yesterday's close. At the time of writing, BSE Sensex was trading higher by 6 points and NSE Nifty was trading up by 7 points. Mid cap and small cap stocks did better and were trading higher by 0.5% each. Gains were largely seen in oil & gas stocks, while FMCG stocks were at the receiving end.
4:55 Today's investment mantra
"You're looking for a mispriced gamble. That's what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing." - Charlie Munger
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