Day: September 23, 2024

For the better part of two years, the bulls have been firmly in control on Wall Street. A resilient U.S. economy, coupled with excitement surrounding the rise of artificial intelligence (AI), have helped lift the ageless Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth-focused Nasdaq Composite (NASDAQINDEX: ^IXIC) to multiple record-closing highs in 2024.

However, optimism isn’t universal when it comes to investing. Some of the most prominent and widely followed billionaire money managers, including Berkshire Hathaway‘s (NYSE: BRK.A)(NYSE: BRK.B) Warren Buffett, Appaloosa’s David Tepper, and Fundsmith’s Terry Smith, have been sending an ominous warning to Wall Street with their trading activity.

Some of Wall Street’s top investors are retreating to the sidelines

Although no money manager is a carbon copy of another, Buffett, Tepper, and Smith are cut from similar cloths. While they may have different areas of expertise or dabble in investment areas the other two may not — e.g., David Tepper tends to be a bit of a contrarian and isn’t afraid to invest in distressed assets, including debt — all three tend to be patient investors who focus on locating undervalued/underappreciated companies that can be held for long periods in their respective funds. It’s a really simple formula that’s worked well for all three billionaire investors.

When Form 13Fs are filed with the Securities and Exchange Commission each quarter, professional and everyday investors flock to these reports to see which stocks, industries, sectors, and trends have been piquing the interest of Wall Street’s brightest investment minds. However, the latest round of 13Fs had a surprise for investors who closely follow the trading activity of Buffett, Tepper, and Smith.

The June-ended quarter marked the seventh consecutive quarter that Warren Buffett was a net seller of stocks. Jettisoning more than 389 million shares of top holding Apple during the second quarter, and north of 500 million shares, in aggregate, since Oct. 1, 2023, has led to a cumulative $131.6 billion in net stock sales since the start of October 2022.

Despite advocating that investors not bet against America, and emphasizing the value of long-term investing, Buffett’s short-term actions haven’t lined up with his long-term ethos.

But he’s not alone.

David Tepper’s Appaloosa closed out June with a 37-security investment portfolio worth around $6.2 billion. During the second quarter, Tepper and his team added to nine of these positions and reduced or completely sold his fund’s stake in 28 others, including Amazon, Microsoft, Meta Platforms, and Nvidia. Tepper dumped 3.73 million shares of Nvidia, equating to more than 84% of Appaloosa’s prior position.

U.K. stock picker extraordinaire Terry Smith ended June with a 40-stock portfolio worth roughly $24.5 billion. He added to his stakes in just three of these 40 stocks — Fortinet, Texas Instruments, and Oddity Tech — while reducing his fund’s position in the other 37.

These patient and historically optimistic investors are sending a message that’s undeniably clear: Value is hard to come by right now on Wall Street.

Stocks are historically pricey — and that’s a problem

Although “value” is a completely subjective term, one valuation tool points to stocks being at one of their priciest levels in history, dating back to the 1870s. I’m talking about the S&P 500’s Shiller price-to-earnings (P/E) ratio, which is also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio).

Most investors are probably familiar with the traditional P/E ratio, which divides a company’s share price into its trailing-12-month earnings per share (EPS). While the P/E ratio tends to work pretty well for mature businesses, it falls short for growth stocks that reinvest a lot of their cash flow. It can also be adversely impacted by one-off events, such as the COVID-19 lockdowns.

The Shiller P/E ratio is based on average inflation-adjusted EPS over the last 10 years. Taking a decade’s worth of earnings history into account means short-term events don’t adversely affect this valuation model.

As of the closing bell on Sept. 16, the S&P 500’s Shiller P/E stood at 36.27, which is just below its 2024 high of roughly 37, and more than double the 153-year average of 17.16, when back-tested to 1871.

To be fair, the Shiller P/E has spent much of the last 30 years above its historic average due to two factors:

1. The internet democratized the access to information, which gave everyday investors more confidence to take risks.

2. Interest rates spent more than a decade at or near historic lows, which encouraged investors to pile into higher-multiple growth stocks that can benefit from low borrowing costs.

But when examined as a whole, there are only two other periods throughout history where the S&P 500’s Shiller P/E supported a higher level during a bull market. It peaked at 44.19 in December 1999, just prior to the dot-com bubble bursting, and briefly topped 40 during the first week of January 2022.

Following the dot-com bubble peak, the S&P 500 shed just shy of half of its value, while the Nasdaq Composite lost more than three-quarters before finding its footing. Meanwhile, the 2022 bear market saw the Dow Jones, S&P 500, and Nasdaq Composite all lose at least 20% of their value.

In 153 years, there have only been six occasions where the S&P 500’s Shiller P/E has surpassed 30 during a bull market, including the present. Following all five previous instances, the minimum downside in the S&P 500 has been 20%, with the Dow Jones Industrial Average losing as much as 89% during the Great Depression.

The point is that extended stock valuations can only be sustained for so long. Even though Warren Buffett would never bet against America, and Terry Smith is always on the lookout for undervalued assets, neither billionaire money manager feels compelled to put their capital to work. In fact, Berkshire Hathaway was sitting on a record $276.9 billion in cash at the end of June, and Buffett still isn’t a buyer of stocks… other than shares of his own company.

In short, some of Wall Street’s most-successful long-term, value-seeking investors want little to do with the stock market right now, and it’s a very clear warning that investors should be paying attention to.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Amazon and Meta Platforms. The Motley Fool has positions in and recommends Amazon, Apple, Berkshire Hathaway, Fortinet, Meta Platforms, Microsoft, Nvidia, and Texas Instruments. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Billionaires Warren Buffett, David Tepper, and Terry Smith Are Sending a Very Clear Warning to Wall Street — Are You Paying Attention? was originally published by The Motley Fool

The last five years were chaotic, with a global pandemic, a presidential election, inflation, swift interest rate changes, bank failures, and more. Despite this level of economic disruption, the S&P 500 is up nearly 90%. That’s a good run, all things considered.

As good as these broad market returns have been, MercadoLibre (NASDAQ: MELI) stock has left the S&P 500 completely in the dust. Shares of this Latin American business are up over 280% in the last five years.

MercadoLibre is the largest position in my personal Roth IRA, and I’ll explain why in a moment. But first, I want to provide some context to prevent potential misunderstandings.

My Roth IRA is less than five years old. I previously had a retirement account with my employer. I didn’t have control over how that account was invested. But upon changing jobs, I rolled the account over and suddenly had investable cash and decision-making ability.

I quickly diversified the account to over 20 stock positions because diversification is important — it’s a core Motley Fool investing principle. In early 2022, I purchased shares of MercadoLibre for the first time, dollar-cost averaging into my new position until it was worth about 5% of the Roth IRA’s value.

It wasn’t the largest position at the time, but MercadoLibre stock certainly holds that title now. It’s worth far more than 5% of the total portfolio value. However, there are three reasons why I’m not looking to sell any MercadoLibre shares anytime soon.

1. MercadoLibre is poised for growth

Investors can make money in low-growth industries. But it’s way easier to find winning investments by concentrating on leaders in growing markets.

In MercadoLibre’s case, its two main business segments are its e-commerce marketplace and its financial technology (fintech) services. Competition would be far more fierce in North America or Europe. But in its native Latin America, MercadoLibre enjoys a leading position thanks to its early entry into the space.

In terms of market maturity, Latin American markets for e-commerce and digital financial products are younger than those markets in North America, generally speaking. This partly explains why MercadoLibre’s growth has been stellar and why it could remain strong for the foreseeable future.

Regarding its growth rate, the chart below shows that MercadoLibre’s slowest growth rate of the last five years was 36% — most companies rarely have a single year of growth that good. And MercadoLibre has averaged top-line growth of nearly 60% across that period. At this rate, the business will quadruple in size every three years, which is just mind-blowing.

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I’m not necessarily saying that MercadoLibre will maintain this current pace. But its growth still seems to have plenty of runway, which is the top reason I’m happy that MercadoLibre stock is the largest position in my Roth IRA.

2. MercadoLibre is poised for profits

Many years ago, MercadoLibre decided to sacrifice its good profit margins to invest in shipping and logistics. In its geographies, logistics was the challenge that few companies were solving for. It wasn’t quick, cheap, or easy. But today, MercadoLibre has impressive abilities.

For perspective, over half of orders on MercadoLibre’s e-commerce platform are being delivered same day or next day, which is a rare level of service in the company’s key markets.

Its strength in logistics supports the long-term growth of MercadoLibre’s e-commerce marketplace. Not only are more third-party sellers getting on board (feeding a high-margin revenue stream), but growth of the platform also allows for growth in advertising revenue. The company had around $250 million in ad revenue in the second quarter of 2024, which was up more than 50% year over year.

Moreover, MercadoLibre’s strength in logistics gives it a competitive advantage, and companies with powerful advantages often find ways to improve their margins over time.

In recent years, MercadoLibre’s revenue growth has been outstanding. But as the chart below shows, growth for profit metrics such as operating income and free cash flow has been even better.

I would expect more gains for MercadoLibre stock if its profits continue to grow as they are now.

3. Letting winners run is a winning strategy

One principle for investing the Motley Fool way is to have a diverse portfolio. Another principle is to let a winning investment continue running, rather than selling it prematurely.

Let’s face it, a diverse portfolio is going to be filled with plenty of bad investments — mine sure is. This can drag down overall long-term returns. However, a single winning stock can do the heavy lifting. But this can only happen if it’s allowed enough time to grow.

There are legitimate reasons to sell a stock. But MercadoLibre’s business is thriving, and it appears to have a long runway. For these reasons, I’ll keep holding my top stock and allow it to lift my portfolio as a whole.

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Jon Quast has positions in MercadoLibre. The Motley Fool has positions in and recommends MercadoLibre. The Motley Fool has a disclosure policy.

This Monster Growth Stock Is Up Nearly 300% in 5 Years. Here’s Why It’s the Largest Stock Position in My Portfolio Right Now. was originally published by The Motley Fool

Warren Buffett bought only seven stocks for Berkshire Hathaway‘s portfolio in the second quarter of 2024. He seemed to be especially enthusiastic about Sirius XM Holdings (NASDAQ: SIRI), increasing Berkshire’s stake by 262%.

Rest assured that Sirius XM’s 1-for-10 reverse stock split conducted earlier this month had nothing to do with Buffett’s purchase of more shares. The legendary investor might have liked the related decision to merge Liberty Media‘s holdings in the company with Sirius XM. However, he knows that stock splits of any shape, form, or fashion change nothing about the underlying business.

So, why is Buffett buying this stock-split stock hand over fist? I think there are three main reasons.

1. He understands Sirius XM’s business

Buffett famously shuns investing in businesses that he doesn’t understand. He missed out on huge gains in several of today’s top tech stocks because their business models weren’t in his wheelhouse. However, Buffett no doubt understands Sirius XM’s business.

He’s said to be a fan of Sirius XM’s satellite radio. Reportedly, Buffett especially likes the “Siriusly Sinatra” channel that plays Frank Sinatra music along with other similar crooners, including Tony Bennett and Dean Martin.

Although Sirius XM’s business isn’t the same as a newspaper’s business, there are some distinct similarities — notably including that they both rely on subscriptions for revenue. As a former paper boy, Buffett definitely knows how subscription models work.

Buffett has also always prized companies with dominant market positions. Sirius XM has a monopoly in the satellite radio business in the U.S. and is a major player in the podcast market.

2. He views management favorably

Many know Buffett once said, “[O]ur favorite holding period is forever.” What they often leave out, though, is that he prefaces that remark by saying it applies “when we own portions of outstanding businesses with outstanding managements.” I suspect a key reason Buffett has invested so heavily in Sirius XM is that he views its management favorably.

Sirius XM CEO Jennifer Witz joined the company in 2002. She served in several financial and operating positions, including chief marketing officer from August 2017 through March 2019 and president of sales, marketing and operations from March 2019 through December 2020. Witz moved into the CEO role in January 2021. Before working at Sirius XM, she held executive positions at Viacom (now part of Paramount Global) and Metro-Goldwyn-Mayer (now owned by Amazon).

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Importantly, she has plenty of skin in the game. Witz owns nearly 12.1 million shares of Sirius XM.

3. He thinks the price is right

Buffett learned from Benjamin Graham, the “father of value investing.” He remains a value investor at heart despite straying from Graham’s philosophy somewhat over time. Buffett would never buy a stock if he didn’t think its valuation was attractive. He undoubtedly thinks the price is right with Sirius XM.

The numbers back him up. Sirius XM trades at a forward price-to-earnings ratio of 6.4, making it one of the cheapest stocks in Berkshire Hathaway’s portfolio.

In 2013, Buffett wrote to Berkshire Hathaway shareholders, saying his first step in evaluating whether to buy a stock is to “decide whether we can sensibly estimate an earnings range for five years out, or more.” If that answer is yes, he will buy the stock only if its price is attractive relative to the lower end of his estimated earnings range.

This approach shares much in common with a valuation metric popularized by Peter Lynch — the price-to-earnings-to-growth (PEG) ratio. Lynch maintained that a stock with a PEG ratio of less than 1.0 was valued attractively. Sirius XM’s PEG ratio is 0.64, according to data from LSEG.

Did Buffett look at Sirius XM’s low PEG ratio before buying the stock? Probably not. However, I suspect his analysis revealed that the company’s price is attractive with its earnings growth factored in.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Amazon and Berkshire Hathaway. The Motley Fool has positions in and recommends Amazon and Berkshire Hathaway. The Motley Fool has a disclosure policy.

Why Is Warren Buffett Buying This Stock-Split Stock Hand Over Fist? was originally published by The Motley Fool