Two Places Where Warren Buffett and We Agree

Dave Gilbert here, Editor of Smart Money.

Warren Buffett’s investing philosophy can be summed up in this famous quote from him:

            Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.

The temptation is to say, “That’s it?” But it is a lot harder to do than it is to say, and who’s to argue with someone who is worth nearly $100 billion?

Just one Class A share of Buffett’s investment holding company, Berkshire Hathaway Inc. (BRK-A), trades for $415,000.

The man clearly knows what he’s doing, so investors follow his every move closely. His annual letters to Berkshire Hathaway shareholders are viewed as masterclasses in investing. His speeches, media appearances, and interactive sessions at shareholder meetings give us additional insight into the thinking of the man called “The Oracle of Omaha.”

So do the quarterly filings of Berkshire Hathaway. These statements to the U.S. Securities and Exchange Commission show the company’s buys and sells from the prior quarter, giving investors a look at the specifics instead of the generalities.

In its most recent report, Berkshire Hathaway increased its holdings in some big-name companies and sold the last of its shares in another.

Eric Fry’s own recent recommendations line up – at least in part – with both of these moves from Buffett.

To me, when one of the world’s greatest investors and our own “guiding star” agree, that means we need to pay attention…


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Adding Apple, Selling Verizon

The fact that Berkshire Hathaway bought nearly $4 billion worth of stock shares in the second quarter is a sign that Buffet and his partner, Charlie Munger, see at least some value out there. That follows $41 billion spent in the first quarter, which came on the heels of two consecutive years of selling more than buying in 2020 and 2021.

Among the notable companies Berkshire invested in during the second quarter were Apple Inc. (AAPL), Activision Blizzard Inc. (ATVI), Chevron Corp. (CVX), Citigroup Inc. (C), HP Inc. (HPQ), and Occidental Petroleum Corp. (OXY).

Just as interesting was Berkshire Hathaway selling the last of its Verizon Communications Inc. (VZ) shares. Buffett bought his first shares in the global telecommunications company eight years ago in 2014. The stock price itself is down about 15% since then, but adjusted for dividends, it has gained about 25%.

Verizon still pays a big dividend (current yield = 6%), but future growth expectations are low. Analysts estimate earnings will shrink nearly 4% this year and grow just 1.5% next year. Over the next five years, analysts project 3.4% annual earnings growth.

Verizon’s consumer division has struggled, and the wireless market is very competitive as other providers like AT&T Inc. (T) and T-Mobile US Inc. (TMUS) aggressively go after market share in the new world of 5G networks.

This is consistent with Eric Fry’s outlook that we have talked about before here in Smart Money. Eric believes that 5G providers like Verizon and AT&T will become well positioned for growth in the future, but that the better and more immediate opportunity is in companies building the next-generation network. He has mentioned Nokia Corp. (NOK) as an example.

Here’s a sneak peek into what he told his readers in the current issue of Fry’s Investment Report

The company reported a “surprisingly” strong second-quarter result that featured robust North American demand for 5G infrastructure and technology.

Importantly, Nokia’s two largest divisions, Mobile Networks and Network Infrastructure, produced a combined 14.5% jump in sales year over year. This outstanding performance enabled Nokia to boost its operating profit 16.5% year over year.

Within the overall 5G market, the Nokia team is especially optimistic about the growth potential of the enterprise market – i.e., private networks for businesses and government entities.

Now that a great, big 5G boom is underway, Nokia is finally starting to reap a bounty from its long-term research & development efforts.

Beyond 5G, there’s another interesting trend that Warren Buffett – and Eric Fry – agree on.

And that points to profit potential for those who join in…

When Upside Potential Outweighs Downside Risk

For the first time in July, Americans spent more time watching streaming content than cable television. According to the latest Nielsen report, U.S. viewers watched streaming services like Netflix, YouTube, and Disney Plus with 34.8% of their time, outpacing the 34.4% of time watching cable.

Perhaps that’s why Berkshire Hathaway boosted its investment in Paramount Global (PARA) to 69 million shares worth nearly $2 billion, or roughly 15% of the company.

Regular Smart Money readers may remember that Eric called out Paramount just one month ago as an undervalued stock worth watching

Paramount has had four major movie releases this year, the biggest by far being Top Gun: Maverick which, following its late-May release, crushed its budget of $170 million by grossing $1.325 billion at the box office.

But whether the rest of the movies Paramount has planned for 2023 and beyond will be just as successful is moot; I believe Paramount has become a compelling and undervalued speculation.

This famous brand is the owner of many other famous brands, like CBS, Nickelodeon, and Showtime. Collectively, these media brands create a formidable competitive moat that surrounds what is fast becoming an impressive citadel of streaming services.

Although many investors view Paramount’s streaming services, Paramount+ and Pluto TV, as also-rans, these also-rans are sprinting ahead of most of the competition.

There’s a lot to like here. And yet, on most metrics, the shares trade at a steep valuation discount to peers like Comcast Corp. (CMCSA) and The Walt Disney Co. (DIS).

Even if that growth materializes more slowly than I anticipate, the stock offers ample downside protection at its current quote.

Eric refers to this kind of setup as “asymmetrical” – meaning the upside potential exceeds the downside risk at current prices. For example, just using general numbers here, you may risk 20% downside for 50% upside, or more.

Warren Buffett doesn’t usually talk about asymmetrical investing, but given what we know about his storied history, I’m confident he would approve. Just see Rule No. 1 – and Rule No. 2.

Eric regularly makes 5G and streaming stock recommendations in Fry’s Investment Report. Get more info here.

Regards,

Dave

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On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.


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