Geico’s former chief investment officer, Lou Simpson, was at one point seriously considered by Warren Buffett as a possible successor to the long-time Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) CEO. Simpson retired in 2010, but he grew bored of life away from the office and set up SQ Advisors, a Naples-based investment advisory firm with his wife Kimberly Querrey.
As of the end of March, it had $2.9 billion in assets under management invested in just 15 companies; one of them being Berkshire Hathaway.
Although Simpson likes a concentrated portfolio of fewer than 20 stocks, it’s the way he evaluates a company that’s made him so successful.
“As Warren used to tell me, ‘You’re better off being approximately right than exactly wrong,” Simpson told a Northwestern University business school audience in 2017. “For example, one thing you need to determine is: Are the company’s leaders honest? Do they have integrity? Do they have huge turnover? Do they treat their people poorly? Does the CEO believe in running the business for the long term, or is he or she focused on the next quarter’s consensus earnings?”
Equally important, Simpson believes, is to hold your winners indefinitely, while selling your losers as fast as you can.
In February, I highlighted seven stocks to buy from Simpson’s portfolio. Now, I’ll recommend seven more.
Warren Buffett’s Former Money Guy Loves: CarMax (KMX)
If you’ve bought a new car recently, you know how expensive they can be, which is a big reason why used-car sales remain strong.
CarMax, Inc (NASDAQ:KMX) is the largest retailer of used cars in the U.S. In fiscal 2018 it sold 721,512 vehicles at retail and another 408,509 vehicles through wholesale auctions at 73 of its 188 stores across the country.
While the number of used vehicles it sold in the fourth quarter was down 3.1% year over year, it still managed to sell 7.5% more vehicles at retail in fiscal 2018 along with a 4.3% annual increase from its wholesale auctions.
In 2018, it made $2,173 per used vehicle at retail, 10.9% higher than a year earlier while its wholesale auctions brought in $961 per vehicle, a 3.9% increase over 2017. Car Max makes more money per car than all of its competitors.
“What makes CarMax such a draw for used car buyers is excellent marketing that espouses a low-stress, hassle-free car buying experience,” wrote Jalopnik’s Tom McParland May 30. “The crux of the CarMax strategy is the “no-haggle” pricing. The price you see is what you pay.”
By providing the biggest inventory and knowing how to price its vehicles, CarMax makes more than anyone else. As wide-moat businesses go, this is a good one.
Warren Buffett’s Former Money Guy Loves: Apple (AAPL)
In February 2017, Apple Inc. (NASDAQ:AAPL) was trading around $129. Apple had just delivered strong first-quarter earnings that included an 18% increase in its services revenues to $7.2 billion.
At the time, I reasoned that the recurring revenue it generates from its services segment deliver really sweet gross margins, suggesting that AAPL stock would hit $200 sometime in the future.
Fifteen months later, Apple is trading within $7 of $200 and Warren Buffett is now its third-largest shareholder.
Recently, Apple CEO Tim Cook has been very upfront about the responsibility it has protecting its customers’ data. While I’m not sure the company’s stance is an altruistic one, but rather a smart reading of which way the privacy winds are blowing, I do think it helps ingratiate itself to its loyal group of customers and that more than anything should help the company continue to grow for years to come.
The fact that Buffett’s bought into Apple in such a big way says everything about Apple stock and why you should own it.
Warren Buffett’s Former Money Guy Loves: Sensata Technologies (ST)
This is one company I honestly didn’t know about and that’s rare in my line of work writing about stocks.
Sensata Technologies Holding PLC (NYSE:ST) is a manufacturer of high-margin sensor products for the automotive and aerospace industries. In Q1 2018, all three of its operating segments had healthy organic revenue growth of 4.5% in its auto segment — the largest generating 60% overall — to 14.5% growth in its heavy vehicle off-road segment.
In the first quarter, it had adjusted net income of $147.0 million on $886.3 million in revenue for a 16.6% net margin, 160 basis points higher than a year earlier.
Importantly, the company converts almost all of its net income into free cash flow. This, along with record margins, suggests a price-to-cash-flow multiple of 16.7 isn’t unreasonable.
Doing well in China and playing in some of the hottest areas in technology today, I can see why Simpson likes Sensata’s stock.
Warren Buffett’s Former Money Guy Loves: Charter Communications (CHTR)
The big question investors consider when it comes to investing in cable companies is the extent to which cord-cutting is hurting sales.
Charter Communications Inc (NASDAQ:CHTR) is no exception. Its stock is down 31% from its one-year high of $408.83 in August 2017 as a result of these concerns.
However, and it’s something I’ve often wondered when are the cable companies going to start raising broadband costs for customers who drop cable?
Apparently, it’s already happening. Accoring to Ars Technica, Comcast Corporation (NASDAQ:CMCSA) is increasing broadband speeds significantly for customers in Houston and Oregon at no extra cost — but only for those customers who also subscribe to TV.
“Cord cutters are not invited to the [speed increase] party,” wrote the Houston Chronicle in April. “Only those who bundle Internet with cable television and other services… will see their speeds go up at no extra charge.”
Charter’s ability to raise prices along with lower capital costs in the future after spending a considerable amount upgrading its network should help its stock move higher in the year ahead.
Warren Buffett’s Former Money Guy Loves: Liberty Broadband (LBRDK)
It’s only natural for Simpson to own Liberty Broadband Corp (NASDAQ:LBRDK) given it owns 23% of Charter Communications stock as well as 100% of Skyhook Holding, which provides a positioning service to find mobile devices as well as a geospatial intelligence service for the real estate and other geography-related industries.
Liberty Broadband was spun-off from Liberty Media in November 2014. It acquired its original $2.6 billion position in Charter in May 2013 at $105.62 a share. Since then it’s added an additional 29.8 million shares at prices slightly less than $200 a share.
Liberty Broadband’s invested around $8 billion in Charter, an investment that’s now worth over $18 billion and growing.
Clearly, Simpson feels it’s worth a lot more, or he wouldn’t be holding either stock.
Warren Buffett’s Former Money Guy Loves: Axalta Coating Systems (AXTA)
It’s not been a good year for Axalta Coating Systems Ltd (NYSE:AXTA).
In November, Axalta and Akzo Nobel N.V. (ADR) (OTCMKTS:AKZOY) called off merger talks between the two companies that would have seen Akzo Nobel’s paints and coatings business merge with Axalta.
Unfortunately, the two parties got stuck on price and decided to move on. Before the talks were canceled, Axalta shares were trading higher than $38. Since then they’ve lost almost 20% of their value.
However, the coatings business remains strong providing a good entry point for investors.
In April, I included Axalta in a group of ten stocks I put together for an all-cap portfolio. One of three mid-cap stocks, here’s my rationale for owning Axalta.
“Berkshire Hathaway owns a little more than 23 million shares of Axalta, which the company has owned since it bought most of them in a private deal in 2015 for $28 a share,” I wrote April 10. “Now finally making money on his investment, it’s possible that Buffett, as the largest shareholder, could buy the entire company to combine with its Benjamin Moore paint business.”
Despite having different investment philosophies, Simpson and Buffett sure own a lot of the same stocks.
Warren Buffett’s Former Money Guy Loves: SBA Communications (SBAC)
SBA Communications Corporation (NASDAQ:SBAC) acquires long-term ground leases around the world so that it can erect cell towers that wireless carriers lease space on to transmit their signals to mobile customers.
The company makes money in several ways, the two primary ones being the construction of the towers and the leasing of the space on those towers. It also makes money helping wireless companies find new leasing opportunities when needed as well as from the sale of ground leases, etc.
It might seem like a simple business but it’s very capital intensive and requires a great deal of manpower to maintain all of the towers, etc. It’s not an easy business to enter without major financial backing.
It’s hard to know exactly why Simpson exited from most of his position in the second quarter. Now the second-smallest holding at just $876,000 as of the end of March; Simpson’s SBA stock was worth almost $200 million at the end of 2017. Buying a year ago for around $139 million, Simpson’s made about 44% on his one-year investment.
My guess is he wanted to reap the quick rewards and redeploy the funds into another stock he liked better.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.