Author: The INO.com Team

5 Stocks Warren Buffett Is Buying – Should You?

Posted on by The INO.com Team

Legendary investor Warren Buffett likes being in Omaha. The quiet, folksy surroundings of his hometown enable him to develop billion-dollar perspectives hidden, in plain sight, from the hyperactive money managers in busy fund houses in bustling financial hubs. However, occasionally when the Oracle travels out of Omaha for work, he means business.

Warren Buffett was in Tokyo for the first time in twelve years in April. He, along with his heir apparent and Vice Chairman Greg Abel, was in the Japanese capital to visit the heads of five trading houses in which his conglomerate Berkshire Hathaway (BRK.B) had acquired 5% stakes in August 2020 through its wholly owned subsidiary, National Indemnity Company.

During his visit, he upped stakes in all of those companies to 7.4%. However, according to the latest disclosure this month, BRK owns an average of more than 8.5% of each of the five companies. This has made its Japanese investments the largest outside the United States.

Moreover, in its June 19 press release, the conglomerate announced that its “intention continues to be to hold its Japanese investments for the long term.” While BRK may increase its holdings up to a maximum of 9.9% in any of the five investments, depending on the price, Buffett has pledged that the company will make no purchases beyond that point unless given specific approval by the investees’ board of directors.

In this context, let’s take a closer look at the investments in which Buffett and Berkshire are deploying a significant chunk of their mountain of cash.
Firstly, the five biggest trading houses based in Japan: Mitsubishi Corporation (MSBHF), ITOCHU Corporation (ITOCY), Mitsui & Co., Ltd. (MITSY),Marubeni Corporation (MARUY), and Sumitomo Corporation (SSUMY), are what the Japanese call "sogo shosha."

These are trading companies that deal in a wide range of products. They are involved in multiple businesses, such as imports, energy, minerals, materials, chemicals, textiles, and much more.

Mitsubishi is involved in multiple businesses, including automotive products, chemicals, energy, food, and mineral resources. Mitsui and Itochu aren't too far behind Mitsubishi in size, while Marubeni and Sumitomo are considerably smaller. However, together they are adequately geographically diversified to play an instrumental role in the functioning of the Japanese economy and the global economy.

Secondly, in addition to the large size of the investees that have put them on the radar of BRK in its perpetual search for “elephant-sized” acquisitions, the Japanese companies are in businesses within Buffet’s circle of competence.

Moreover, the attractively-valued businesses capable of generating strong cash flows were available for what Buffett has described as “ridiculous prices compared to the prevailing interest rates.” He added that he was “confounded by the fact that we could buy in these companies."

With the benefit of hindsight, these investments appear no-brainers because even after significant price appreciation in each of these stocks after disclosure of BRK’s expanded position, their dividend yields range from 2.54% at the very least to as high as 3.88%, with a CAGR as high as 5.3% over a horizon of 5-years.

In view of the above, as American investor Chamath Palihapitiya pointed out in his shout-out to one of the Greatest Of All Time (G.O.A.T), it’s hardly surprising that Buffett issued significant yen-denominated debt at dirt-cheap rates, used the proceeds to acquire stakes in the Japanese businesses.
Buffett is now using “the dividends he then gets from owning these stocks (which are greater than the interest rates he’s paying to borrow in the first place) to pay the coupon!” This translates to a “near-risk less bet” by borrowing trillions of Japanese Yen for free and using the proceeds to buy stakes in companies that are “growing earnings in the mid-teens.”

Moreover, an improbable but possible downside of the Japanese economy completely blowing up is covered by the global exposure of all of the trading houses.

Fit for A Retail Investor?

Without mincing words, Yes!

However, given the fact that all the stocks spit back capital in the form of dividends, if reinvestment of those funds is a headache investors would like to spare themselves from, it could be wise to take Mohnish Pabrai’s maxim of being a shameless cloner one step further and acquire a stake in the BRK, a capital allocation and compounding machine in and of itself.

Apple Inc. (AAPL) Unbeatable Buy for 2024, Set to Skyrocket 37%?

Posted on by The INO.com Team

According to a recent note from Fairlead Strategies, technology and consumer electronics giant Apple Inc. (AAPL) could witness a major upside in its stock. According to the agency, the stock has confirmed its breakout above the record high of $183. Consequently, its shares could jump to $254 by the end of 2024.

Given that this is one of those relatively-rare occasions in the world of investment research in which a forecast has been accompanied by a time horizon, in this piece, we evaluate the likelihood of this upside which could elevate iPhone maker’s market capitalization from its current levels of $2.96 trillion to $4 trillion.

AAPL has a lot going for it at this point in time. Its fiscal second-quarter earnings exceeded Street expectations, driven by stronger-than-expected iPhone sales.

The company, which has a history of revolutionizing products like the personal computer, smartphone, and tablet, has begun scripting the next key chapter in its success story with the announcement of its first product in the AR/VR market, the Apple Vision headset, which will sell for $3,499 when it is released early next year.

In addition, AAPL also announced its partnership with the game-development software maker Unity and unveiled a slew of other new products. Its year-ahead product roadmap includes the new Apple Watch Ultra along with the traditional fall launch lined up for the iPhone 15.
The company is also reportedly beginning work on two new and bifurcated product lines, one second-generation high-end model that will be the continuation of the original Vision Pro and the other a lower-end version. It is also expected to ship new M3-powered laptops, and new OLED-screen iPads will ship by next year.

The Catch

With a strong product portfolio and a healthy pipeline, there seems to be little, if any, that can hinder AAPL’s progress from strength to strength. However, the company isn’t immune to macroeconomic headwinds.

AAPL reported $24.16 billion in net income during the quarter compared to $25.01 billion in the previous-year period. Moreover, sales have declined for two straight quarters, with total revenue down 3% from $97.28 billion in the prior quarter.

With macroeconomic challenges in digital advertising and mobile gaming, part of AAPL’s services business, finance chief Luca Maestri said the company expects overall revenue in the current quarter to decline about 3%.

Hence, brand equity apart, AAPL is quite an expensive stock to own based on fundamental financial performance.
Pros Outweigh Cons

Regardless of the near-term and temporary softness and slowdown, traditional valuation metrics seem inadequate to gauge the quality of a compounding machine such as AAPL, which boasts a sticky user base with a retention rate of over 90% that assures the company adequate cash flow through repeat purchases and upgrades.

Moreover, AAPL’s board authorized $90 billion in share repurchases and dividends. It spent $23 billion in buybacks and dividends in the March quarter and raised its dividend by 4% to 24 cents per share.

Through relentless share repurchases, the company increased the existing shareholders' stake by decreasing its float.

By decreasing the number of outstanding shares, AAPL has been increasing the remaining shares' intrinsic value (and consequently the price) without a proportional rise in market capitalization. AAPL’s current market cap is $2.96 trillion, with 15.79 billion shares outstanding, compared to a market cap of $2.97 trillion, with 16.33 billion shares outstanding as of January 3, 2022.

Bottomline

Given the above, if the Federal Reserve and other major central banks manage to engineer the much coveted ‘soft landing’ and all else remains (at least) equal, there is a significant likelihood that AAPL can achieve a record share price by the end of 2024.

4 Assets to Hide While Investors Combat the Chances of a Recession

Posted on by The INO.com Team

With the resolution of the debt-ceiling crisis and an appreciable moderation of inflation from its decades-high levels around this time last year, an exuberant market was optimistic about a much-coveted “soft-landing” and seemed to have priced in a pause in interest rate hikes by the Federal Reserve.

Moreover, with Artificial Intelligence emerging as the next big thing, the optimistic outlook for semiconductor and technology stocks kept sentiments buoyant on Wall Street.

After ten interest-rate hikes in about a year to take the Fed funds rate to a target range of 5% to 5.25%, Jerome Powell and the FOMC announced a much-awaited pause. However, this came with a projection (and caveat) of two additional quarter-percentage point hikes before the end of the year as the Central Bank remains determined to bring inflation down to its target of 2%.

While the labor market has remained persistently tight amid an economic resilience that has largely exceeded expectations, signs of softness have begun to emerge as increased borrowing costs have kept the demand in check and hurt supplies by making growth more expensive to finance.
Secondly, rising interest rates have made servicing debt expensive not just for individuals and businesses but for sovereign nations as well. Back-to-back global crises have aggravated public debt burdens accrued by developing nations in recent years and have triggered Ghana, Chad, Ethiopia, and Zambia to seek debt treatment under the Common Framework.

With the Bank of England outpacing its peers with half percentage point interest-rate hike and Turkish Central Bank also getting in on the act in a departure from its earlier policy, the ‘hawkish pause’ by the Federal Reserve has increased misgivings that the central banks might overcook it with rate hikes.

Such fears had already materialized earlier this year with the recent bank failures on both sides of the Atlantic when banks across the board suffered steep markdowns of their long-dated bonds and loans while holding on to deposits became more expensive.
Treasury Secretary Janet Yellen also echoed these concerns on the sidelines of a conference in Paris, “I’m not going to say it’s not a risk, because the Fed is tightening policy.”

With the latest data also suggesting that central-bank rate hikes are causing a global economic cooldown, investors are understandably spooked and seeking safety in fixed-income instruments and precious metals.

With the 10-Year Treasury note yield hovering around 3.5% after recently topping 4% for the first time since 2008, it’s not difficult to understand investors’ rekindled love for bonds.

Also, gold has emerged stronger than ever as the safe-haven asset to make wealth resistant to corrosion from black swans and fat tails arising from climate change, the unrestricted rise of Artificial Intelligence, and the proliferation of weapons of mass destruction.
In the above context, these four ETFs could gain from market instability and rising rates.

VanEck Vectors Gold Miners ETF (GDX)

GDX is managed by Van Eck Associates Corporation. It offers exposure to some of the largest gold mining companies in the world. Since their stocks have a strong correlation to prevailing gold prices, the ETF provides indirect exposure to gold prices.
Although aggressive interest-rate hikes by the Federal Reserve have increased the strength of the U.S. dollar, that has not been able to diminish the luster of gold.

Although the yellow metal has unusually been negatively correlated to the global reserve currency, the demand for gold from central banks worldwide totaled 1,136 tonnes in 2022.

GDX has an expense ratio of 0.51%. It pays $0.48 annually as dividends, and its payouts have grown at a 22% CAGR over the past five years. It saw a net inflow of $42.96 million over the past year.

GDX has about $11.98 billion in assets under management (AUM). The ETF’s top holding is Newmont Corporation (NEM) which has a 10.27% weighting in the fund. It is followed by Barrick Gold Corporation (GOLD) at 8.84% and Franco-Nevada Corporation (FNV) at 8.15%. The fund has 52 holdings, with 64.44% of its assets concentrated in the top 10 holdings.

iShares TIPS Bond ETF (TIP)

TIP is managed by BlackRock Fund Advisors. The ETF invests in dollar-denominated fixed-income instruments issued by the U.S. government. The fund seeks to protect asset values against an uptick in inflation by adjusting the principal accordingly.
By providing unmatched liquidity, TIP appeals as a tactical play when concerns about inflationary pressures intensify or may be used as a core holding in a long-term buy-and-hold portfolio.

TIP has an expense ratio of 0.19%, compared to the category average of 0.23%. The fund pays $4.65 annually as dividends, and dividend payouts have grown at a 10.5% CAGR over the past five years. It has seen a net inflow of $5.7 billion over the past three years.
TIP has about $21.58 billion in AUM. The ETF’s 51 holdings are U.S. government securities of varying maturities, with 36.9% of its assets concentrated in the top 10 holdings.

Vanguard Total International Bond ETF (BNDX)

BNDX has been launched and is managed by The Vanguard Group, Inc. The ETF offers broad market-like exposure to investment-grade bonds denominated in foreign currencies.

In addition to the benefits of geographical diversification, the fund is hedged to limit the impact of non-U.S. currency fluctuations on performance through the use of non-deliverable forward contracts.

BNDX has an expense ratio of 0.07%, compared to the category average of 0.42%. The fund pays $0.85 annually as dividends. It has seen net inflows of $464.59 million and $1.67 billion over the past month and three months, respectively.

BNDX has about $49.83 billion in AUM. Most of the ETF’s 6966 diverse holdings are in sovereign bonds with an AA rating or better. With just 3.77% of its assets concentrated in the top 10 holdings, concentration risks have also been largely mitigated.

iShares Core U.S. Aggregate Bond ETF (AGG)

AGG is managed by BlackRock Fund Advisors. It offers broad exposure to investment grade and dollar-denominated U.S. treasury, government-related and corporate bonds, and other fixed-income instruments with at least one-year maturities.

With such a low-risk profile, AGG has strategic utility for investors seeking to construct a balanced, long-term portfolio and tactical utility as a potentially attractive safe haven for those wishing to pull money out of equity markets temporarily.

AGG has an expense ratio of 0.03%, compared to the category average of 0.42%. The fund pays $2.71 annually as dividends. It has seen net inflows of $1.74 billion and $4.44 billion over the past month and three months, respectively.

AGG has about $91.62 billion in AUM. The fund is sufficiently diversified with 11,027 holdings, with 8.12% of its assets in the top 10 holdings.

Is Singapore Airlines (SINGY) an Attractive Buy Despite Denying Air India Stake Increase?

Posted on by The INO.com Team

On June 15, news broke that Singapore Airlines Limited (SINGY) had expressed interest in increasing its 25.1% stake in the Tata Group-operated Air India, secured as part of its merger with Vistara that was announced in November 2022 and due to be completed by March 2024. The report claimed that SINGY could gradually increase its stake to 40% to have more skin in the game.

However, the report was soon followed by a denial by SINGY, with its spokesperson confirming that there is no change in SIA’s position from the November 2022 announcement.

However, Goh Choon Phong, the CEO of SINGY, reaffirmed his support by stating, “With this merger, we have an opportunity to deepen our relationship with Tata and participate directly in an exciting new growth phase in India’s aviation market.”

The salt-to-steel conglomerate Tata Group operates three airlines in India: Air India (with Air India Express as its low-cost subsidiary), Air Asia India, and Vistara (a 51:49 joint venture between Tata Sons and SINGY).

The merger of Vistara and Air India into a single entity (Air India), with SIA investing INR 20.59 billion, is under review by the Competition Commission of India (CCI).

With SIA’s expertise in operating a successful airline, particularly when dealing with powerful players such as IndiGo as well as international competition like Emirates and Qatar Airways, it is understandable why Air India might have reportedly been keen on a potential stake increase.
Pinch of Salt

“If something cannot go on forever, it will stop.” The obviousness of this observation made by Herb Stein was what made it famous.
In our June 13 article, we discussed how, despite air carriers turning to bigger airplanes, even on shorter routes and jumbo-jets, such as the Boeing 747 and the Airbus A380, being brought back to help ease airport congestion and work around pilot shortages, Delta Air Lines, Inc. (DAL) wishful extrapolation of the narrative of “revenge travel” could rapidly unravel.

While there remain valid reasons to doubt whether business travel is ever going back to normal and that the pent-up demand might not be enough to sustain the momentum, the battle for Indian skies comes with its own set of challenges.

When the facts, such as 90% of wage earners in India earn INR 25000 or below, the seemingly unending exodus of millionaires from India, and Indigo ordered 500 Airbus aircraft soon after Air India’s combined order of 470 aircraft from both Boeing and Airbus, are taken into consideration, it only takes willful suspension of disbelief to equate low penetration with growth potential.

Hence the possibility that civil aviation in India could be a bubble waiting to burst or at least a profitability sink for air carriers can only be ignored by investors, including SINGY, at their own peril.

Safer Alternative

With The Boeing Company (BA)still on the back foot and playing catch up to its European rival, Airbus SE (EADSY), the latter, with ROCE and ROTC better than the industry average, could be a common denominator that could give investors (relatively) safe exposure to the heated battle for a greater share of the pie of the Indian sky.

Analyzing Walmart Inc.'s (WMT) Progress in a Post-Pandemic Era and Amid Shifting Economic Dynamics

Posted on by The INO.com Team

In our posts on May 25 and June 14, when we discussed how inflationary pressures and online retail is altering brick-and-mortar stores in today’s economy and resulting in widespread store closures, we found budget retailers, such as Walmart Inc. (WMT)to be relatively immune to the seismic shifts in the consumption ecosystem.

However, on May 18, it was disclosed that the big box retailer would be closing 21 stores in 12 states and DC this year , with four stores in Chicago being the latest to join the list owing to poor financial performance being cited by the company.

These closures would extend the trend of WMT closing a handful of stores across various states each year, with the company saying that the stores are "underperforming" without specifics.

Such developments could understandably dampen investor sentiments and confidence and even trigger panic regarding the retailer's financial health. However, counterintuitively, in its earnings release for the first quarter of the fiscal year 2024, the big-box retailer surpassed expectations for both earnings and revenue, with sales rising by nearly 8%.

Encouraged by the strong performance, WMT also raised its full-year guidance. It anticipates consolidated net sales to rise about 3.5% in the fiscal year. It expects adjusted earnings per share for the full year will be between $6.10 and $6.20.
However, it does not mean that the retailing giant has been completely immune to the bite of inflation. In fact, like a double-edged sword, it has cut both ways.

As we have discussed in a previous article, on the one hand, WMT has attracted new and more frequent shoppers, including younger and wealthier customers, who are turning to Walmart for both convenience and value.

However, on the other hand, as inflation factors into Americans’ spending decisions, the shift back to services is taking a bite out of sales of goods, particularly after a pandemic-fueled spending boom.

Moreover, spending trends weakened as the quarter continued, with the sharpest drop after February. Chief Financial Officer John David Rainey attributed that, in part, to the end of pandemic-related emergency funding from the Supplemental Nutrition Assistance Program and a decline in tax refund amounts.

Consequently, consumers have been buying fewer discretionary items, such as electronics and home appliances, and trading for lower-priced items. WMT’s sales have also reflected the shift toward groceries and essentials, with the former accounting for nearly 60% of the annual U.S. sales for the nation’s largest grocer.

In fact, WMT’s grocery business helped to offset weaker sales of clothing and electronics, as sales of general merchandise in the U.S. declined mid-single-digits, while sales of food and consumables increased low double-digits.

Another bright spot for the retail giant has been growth in online sales, which jumped 27% and 19% year-over-year for Walmart U.S. and Sam’s Club, respectively. According to Rainey, curbside pickup and home delivery of online purchases fueled the growth.
However, the increase in volumes online and overall came at the cost of a year-over-year decline in the company’s first-quarter gross margin rate since food has slimmer margins than other merchandise.

In order to protect and preferably increase its margins, WMT has been doubling down on initiatives to increase the efficiency of its operations.
As digital transactions now constitute about 13% and growing of its total annual sales in the U.S., WMT is cutting costs by reducing packaging.
On June 1, in its push for greater sustainability and lesser waste generation, the company introduced new packaging by using paper mailers and technology that makes custom-fit cardboard boxes.

WMT will add made-to-fit technology in about half of its fulfillment centers and for customers at all of its stores by the end of the year. Moreover, the nation’s largest retailer will also allow customers to skip plastic bags when retrieving curbside pickup orders.

While, at scale, the company’s switch to paper mailers is expected to eliminate more than 2,000 tons of plastic from circulation in the U.S. by the end of January, the sustainability push can come with cost benefits.

For example, with made-to-fit packaging, each box requires less material and plastic air pillows that cushion an item— making truckloads more efficient. The box changes also reduce labor for workers who previously made and taped the containers by hand. As a result, the company can realize significant savings in energy and workforce costs.

In its push for greater efficiency, WMT has also been leveraging Artificial Intelligence (AI) and Machine Learning (ML) by deploying them to improve both the customer and employee experience by figuring out what the customer wants and how best to get it.

For instance, one autonomous floor scrubber travels around in each store, keeping floors clean and free of debris while capturing, in real-time, images of more than 20 million photos of everything on the shelves daily with inventory intelligence towers.

WMT has trained its algorithms to discern the different brands and their inventory positions, taking into account how much light there is or how deep the shelf is, with more than 95% accuracy. Therefore, when a product gets to a pre-determined level, the stock room is automatically alerted so that the item is always available.

According to Anshu Bhardwaj, senior vice president of tech strategy and commercialization at WMT, employee productivity has increased by 15% since deploying this AI last year.

Moreover, for years, WMT has also been leveraging the vast amount of data generated by its ever-increasing online traffic to optimize its shopping app with the help of AI.

Given the optimization levels the retail giant is achieving in its internal processes through the proactive deployment of technology, it’s unsurprising that it is laying off hundreds of employees at e-commerce facilities nationwide.

WMT has confirmed eliminating hundreds of jobs at five fulfillment centers in Pedricktown, New Jersey; Fort Worth, Texas; Chino, California; Davenport, Florida; and Bethlehem, Pennsylvania.

Bottomline

In order to immunize itself from the risk of getting disrupted, the country’s largest retailer has embraced what Joseph Schumpeter has aptly described as creative destruction.

While it could mean continual realignment for its workforce, WMT shows promise as an investable and future-ready business.