Dear Investors,
The stock and bond markets rallied in November after hearing comments from Federal Reserve Chairman Powell which suggesting interest rate increases may be smaller and come at a slower pace.
There is not a lot of news economically. After nine months, the conflict in Europe between Russia and Ukraine continues. Inflation is high yet seems to be on the way downward and the economy is strong yet many fear a recession next year.
This year differs from most in the past century in that both stocks and bonds are down. Many suggest a portfolio of 60% stocks and 40% bonds, building a diverse portfolio of assets which are not correlated to one another to decrease volatility. Not this year. I recently reviewed a portfolio comprised of a similar mix. It was -18% year-to-date. I am pleased to report our Opportunity Strategy, an all-stock portfolio containing less than 30 companies, is -3.14%, after fees, through November 30th. Clients with an average to above average risk tolerance are invested in a similar portfolio.
We continue to like companies which make things people need vs. want. Over 16% is represented by stocks in the energy sector. We do not believe fossil fuels will go away anytime soon. A barrel of oil provides more than gasoline for your automobile. Petroleum based products are used to produce plastics, items such as a toothbrush, the bag your potato chips are in, the cell phone you use, etc.
Another product, liquified natural gas (LNG), is a clean source of power and a commodity we have a surplus of in the United States. Natural gas is compressed 600 to 1 to create liquified natural gas (LNG). U.S. exporters of LNG have long-term contracts with countries in Europe and Asia. The long-term demand for LNG is greater than the supply and the economics of the business make it an attractive investment.
Auto part retailers are responsible for about 10% of the strategy. The average age of an automobile in the U.S. is the oldest on record. Those automobiles need new brakes, axels, windshield wipers, etc. and most do not put those purchases off for a very long.
Dollar General is a favorite of ours and one which should do well in any type of economy. We visited a Dollar General Market recently and were overly impressed with the variety of fresh meat, produce, and mix of other consumables. They have a remarkable growth opportunity and can earn high returns on each additional store.
Berkshire Hathaway, the conglomerate controlled by famous investor Warren Buffett, makes up about 10% of the strategy. Many associate the name with the real estate brokerage. It represents a small fraction of their total business. Originally a textile mill, Warren diversified into insurance in the early days. Today, Berkshire owns Government Employers Insurance Company (GEICO), Gen Re, and Allegany. They also own the Burlington Northern Santa Fe (BNSF) railroad. In retail, they own the Nebraska Furniture Mart, Justin Boots and Brooks athletics. Other companies widely recognized include Dairy Queen, See’s Candy, Fruit of the Loom, and others. In total, there are 63 subsidiary companies owned by Berkshire. Given the diversity of businesses, Berkshire has a wide reach through the economy.
In addition, Berkshire owns about $300 billion in the stocks of other companies, the largest being Apple. The position is currently $123 billion and represents a 5% ownership in the company. Other stocks include: Chevron, Bank of America, American Express, Occidental Petroleum, Moody’s, Kraft Heinz, and Taiwan Semiconductor.
Many of the companies losing significant value this year were trading at high multiples of their earnings or had no earnings at all. Exercise equipment maker Peloton, a darling of the pandemic era, has -63% of its value year-to-date.
Carvana, a company selling used cars online featuring car vending machines began the year valued at $15.5 billion. As I write this, the company is valued at just $680 million, a decline of 95%!
Perhaps you have been to an auction, an estate sale, or thrift shop and bought something that needed a little fixing. Despite your best efforts, it just did not work out. This happens with investing as well. It is called a ‘value trap.’ We have been there. Investing is simple but not easy. We may buy cheap and never realize gains, but we try and avoid high-fliers, which may only end up falling back to earth.
I hope this provides some insightful information to our readers with respect to our investment philosophy as well as some of the companies we like and why.
Thanks for reading and please contact us with any questions or comments.
Sincerely,
Brady Ritchey Chief Investment Officer