Hedge fund manager Ted Seides conceded defeat Sept. 8 on his decade-long million-dollar bet with Warren Buffett. At the end of 2007, Buffett bet Seides a million dollars that a low-cost S&P 500 index fund would beat a group of Protege Partners funds over the next decade. With three-and-half months left in the bet, the S&P 500 is up more than 7.0%, 480 basis points better than Seides.
Oddsmakers suggest that Seides has only a 3% chance of winning the bet at this point, so Seides’s concession is the gentlemanly thing to do. The $1 million winnings go to the Girls Inc. charity in Omaha.
Looking forward, I thought it might be interesting to have our own imaginary little bet with the Oracle of Omaha. Only our bet will be seven S&P 500 stocks of my choosing against Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B).
The only caveat being that I can’t pick Berkshire Hathaway as one of my seven stocks, and I must have at least one pick from five different sectors.
May the best man win.
S&P 500 Stocks to Beat Buffett: Michael Kors (KORS)
The recent decision by Michael Kors Holdings Ltd (NYSE:KORS) to become a multi-brand conglomerate is probably going to take at least a decade to truly materialize, so this is a perfect pick for the long haul. Everyone looks at LVMH Moet Hennessy Louis Vuitton SE (ADR) (OTCMKTS:LVMUY) and marvels at what a beautiful luxury conglomerate Bernard Arnault’s built, but the truth is it took years of putting the pieces of the puzzle together, and at 68, he’s still not done.
No, it won’t be easy for Kors CEO John Idol, but the first piece of its puzzle is already in place with the purchase of Jimmy Choo for $1.2 billion. The deal reduces Kors’ exposure to handbags while giving it a platform into the luxury shoe business.
“Kors executives have said they expect to significantly raise the operating margin at Jimmy Choo, and will look for efficiencies in areas such as distribution and information technology,” Bloomberg stated at the end of August. “But they are also committed to Jimmy Choo maintaining a good bit of independence and wouldn’t give much consideration to things like combining sales forces or relying on the same factories.”
Kors currently is valued at 8.5 times free cash flow which means we’re getting in on the ground floor before double-digit multiples push its valuation well beyond $6.5 billion where it is now.
Kors could be the best buy of the bunch.
S&P 500 Stocks to Beat Buffett: Loews (L)
If I can’t have Berkshire Hathaway, I’m going to go with value investor Loews Corporation (NYSE:L), a company that had a nice rebound in 2016, up 22.6%, after a couple of years with disappointing results.
In the first six months of 2017 through June 30, Loews book value per share increased by 2.5% to $56.01. A decade ago it was $31.54. That means the company’s averaged an annualized growth rate in its book value per share of 5.9% over the past ten years.
By comparison, Berkshire Hathaway’s grown its book value per share by 10.1% over the past decade, so it needs to pick up the pace if it hopes to better its returns over the next ten years compared to Buffett’s holdings.
In June I suggested that Loews’ oil-heavy investments might be better off in a private company where the Tisch family could ride out low oil prices. However, it appears that the energy sector has stabilized and oil prices are slowly moving higher.
I don’t know if a barrel of oil will hit $65 by the end of 2018 as CEO James Tisch fearlessly predicted in 2016, but I do think the worst is over. Loews shareholders stand to benefit significantly if he’s right.
Either way, I see good things ahead for Loews.
S&P 500 Stocks to Beat Buffett: Urban Outfitters (URBN)
As long as consumers have disposable income, I’ll never give up on retail, and while the retail industry is undergoing a major transformation, it’s one that was well overdue. What doesn’t kill you, makes you stronger; that applies to Urban Outfitters, Inc. (NASDAQ:URBN).
Although there were some disappointments in the company’s Q2 2018 earnings report in August, investors seemed to view the quarter as successful pushing its stock up 17.5% on the news. Since the big jump, URBN stock’s gained another 13.7% through September 12.
Thanks to a favorable second quarter it’s now up 26.5% in the last month doing a good job reducing the hole it dug in the first half of the year. I expect momentum to continue.
One of the big positives in Q2 2017 that should help keep the stock moving higher is its men’s business at the legacy brand, which saw a 44% increase in new customers.
“Men’s apparel, once again, delivered a strong performance, posting positive, regular price comp sales,” stated the Urban Outfitters brand’s CEO Trish Donnelly during the Q2 2017 conference call. “Strength in both the tops and the bottoms categories drove the increase, with our own brand BDG denim showing impressive results.”
With no debt, lots of cash, a wholesale business delivering great margins, and an overall business that’s still making money, patient investors should be rewarded over the next 12-18 months as the number of brick-and-mortar store closings slows and retail gets back to normal.
S&P 500 Stocks to Beat Buffett: Facebook (FB)
Facebook Inc (NASDAQ:FB) is the latest of the FANG stocks to get involved in original content reportedly spending $1 billion in 2018 on projects that include a reality show called No Script about Oakland Raiders running back Marshawn Lynch. The show is part of the company’s new Watch video service that will also deliver Major League Baseball games and other live sporting events to Facebook customers.
What are a billion dollars to a company that’s generated $14.3 billion in the last 12 months? A drop in the bucket that will deliver more Facebook users. The downside of this is that it will inevitably end up spending more in 2019 and beyond.
“Reportedly, for 2017, peers like Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN) and HBO have budgets of almost $6 billion, $4.5 billion and $2.5 billion, respectively,” according to Zacks Investment Research. “Moreover, for 2018, Netflix has increased its budget for original content by $1 billion to $7 billion.”
InvestorPlace’s Tom Taulli thinks FB stock should be a core holding. He recently discussed three reasons why investors should hold its stock, one of which revolves around its Watch video efforts.
“Over the past couple years, Facebook has been pushing another major transition towards video,” Taulli stated September 13. “This opportunity may be even bigger than mobile. According to Statista, the spending in the U.S. for television advertising is over $70 billion.”
Facebook is a must-own S&P 500 technology stock.
S&P 500 Stocks to Beat Buffett: Snap-on (SNA)
Snap-On Incorporated (NYSE:SNA) has the enviable task of selling tools to automotive repair shops, a business that continues to do well, despite the boom in new car sales the past five years.
“Interestingly, if you look at Q2 2017, you’ll see that two out of three of its operating segments had strong organic sales growth, not surprising given the average age of vehicles on the road is 11.6 years,” I wrote August 22. “As long as cars and trucks need repairs, Snap-on’s business will continue to grow.”
Snap-on is in my estimation the perfect kind of company for Warren Buffett to acquire.
It’s got healthy margins; it operates a simple business, it has a diversified group of revenue streams, it’s consistently paid dividends since 1939, operates in over 130 countries around the world, and has a strong balance sheet.
In the past decade, Snap-on’s earnings per share have grown by 18.5% annually from $1.69 in 2006 to $9.20 at the end of 2016. Not surprisingly, SNA stock rose by 13.5% annually over the same period outperforming the S&P 500 and Berkshire Hathaway by 576 and 495 basis points respectively.
If any stock can beat Warren Buffett over the next decade, it’s Snap-on.
S&P 500 Stocks to Beat Buffett: Apple (AAPL)
While I’m tempted to go with Amazon because of all the great things Jeff Bezos is doing with the company including transforming Whole Foods into an e-commerce powerhouse, I’ve got to go with Tim Cook and Apple Inc. (NASDAQ:AAPL) because of its free cash flow generation. In the latest 12 months, it’s generated $51.2 billion, yet it’s still reasonably cheap trading at 16.2 times FCF compared to 53.6 times FCF for Amazon.
While Apple launched its $999 Apple X smartphone September 12 to mixed reviews, it was the company’s Series 3 smartwatch unveiling that got my attention. The new smartwatch is no longer tethered to the iPhone making the watch actually “smart” sending the share prices of traditional watchmakers spiraling downward.
“The fact the new watch is untethered from the phone has the potential to be a game changer,” said Jon Cox, an analyst at Kepler Cheuvreux. “It is a fight for wrist real estate and superb functionality versus a simple quartz watch. In many cases, the quartz watch is going to lose.”
This move by Apple takes a watch that I never in a million years would have considered to make it a real possibility. What was a fringe category for the company despite its dominant market share could become a real moneymaker with runners and bikers adopting it in a big way. Apple is the company that always delivers unexpected surprises when launching new products. At this year’s special event it was the smartwatch providing the big surprise and not the Apple X.
Long term that’s going to be very good for Apple stock.
S&P 500 Stocks to Beat Buffett: TJX Companies (TJX)
The retail industry continues to transform itself hollowing out the middle ground leaving luxury brands such as Michael Kors and discounters like TJX Companies Inc (NYSE:TJX) as the beneficiaries.
I’ve lost track of how many concepts TJX has on a global basis, but the company continues to lay claim to more of consumers’ discretionary dollars leaving shareholders to count their winnings as its stock moves ever higher.
“Within the apparel sector, there have been major share shifts across retail channels over the last decade, with department stores the biggest share donors and e-commerce and off-price retail (gaining 4pts of share) being the biggest beneficiaries,” Bernstein Research analyst Jamie Merriman wrote September 13. “We believe consumers have sought out off-price retailers for their value credentials and see nothing in the current environment that suggests the chaos or share loss in department stores has or will change in the medium term.”
At the top of Merriman’s list of buys? TJX, of course.
Beyond the usual suspects of T.J. Maxx, Marshalls, and HomeGoods, I see the company’s Sierra Trading Post concept providing excellent growth in the future. With just 18 stores open, the one-time e-commerce apparel business has a lot of potential to deliver for TJX shareholders.
Unless consumers suddenly find themselves with more discretionary income to buy luxury goods, I see TJX doing fine over the next decade.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.