13F filing by Berkshire Hathaway for Q3/2024
From the recent Q3/2024 13F filing, Berkshire has increased its shares in Heico Corp and made NEW purchases in Domino’s Pizza Inc and Pool Corp.
This news has left many in the market intrigued. What did Buffett see in the business and how we can take advantage of such news?
However, it is important to note that “cloning the trades” of other investors is difficult as we do not know their research, time horizon, risk-reward ratio and investing strategy. More importantly, 13F are dated reports and we do not know the actual date and price of these purchases. Thus, we may not be able to enter and exit like the investors. This is where we need to do our own research so that these can be a good fit for our portfolio.
However, I would like to approach the 13F updates with 2 observations:
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Berkshire would have done “research” on the business - to qualify it before they would initiate a purchase. The business should have some competitive advantages (moat).
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Berkshire would not buy a stock without a good discount (see margin of safety in the next section).
This is a news extract from a Yahoo Finance article dated 12 Aug 2024:
Importantly, Buffett notes buybacks make sense only when a stock trades below its value. "All stock repurchases should be price-dependent," he wrote in his 2023 letter to shareholders. "What is sensible at a discount to business-value becomes stupid if done at a premium."
Checking Fundamentals of Business
In a glance, I look into the growth in revenue, net profit, assets, liabilities, retained earnings and free cash flow over 5 to (preferably) 10 years.
Observations (between 2014 and 2024)
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Revenue grew 124.62%
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Operating Profit grew 137.68%
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Earnings per Share (EPS) grew 412.59%
From the last earnings,
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Net debt is $4.7B (meaning it has much more liabilities than assets)
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Retained earnings are -$3.97B (accumulated losses since the beginning)
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The latest FCF is $498M
I have concerns about the company’s retained earnings and liabilities. At this juncture, I am not confident to invest as I lack knowledge about its moat.
Checking the value of P/E and EPS (against the competition)
The TTM P/E Ratio and EPS seem “reasonable” at 27.85 and 16.26 respectively.
The above shows the list of companies in the consumer cyclical - restaurant segment.
The TTM P/E ratio and EPS of McDonalds are 25.51 and 11.38.
The TTM P/E ratio and EPS of Chipotle are 57.42 and 1.08.
The TTM P/E ratio and EPS of Starbucks are 30.97 and 3.31.
What is a Margin of Safety (MOS)?
The following extract is taken from Investopedia’s website:
Margin of Safety: Examples, Meaning, and FAQ
The margin of safety is a principle of investing in which an investor only purchases securities when their market price is significantly below their intrinsic value. In other words, when the market price of a security is significantly below your estimation of its intrinsic value, the difference is the margin of safety.
This margin of safety (MOS) differs with the individual. Some apply 30%, some 50% and above.
If a company is fairly valued (intrinsic value) at $100 per share, some investors may buy the stock when it hits a price of $70 per share (with a 30% MOS). Others may wait for the price to hit $50 per share (with a 50% MOS) before triggering a purchase.
Getting a MOS estimate
With the news, I started to do my research on Domino’s MOS for Q3/2024.
From the 3 months (July to Sep 2024), the price fluctuated between $396.06 and $516.37. While Berkshire can buy the stock at the “lowest” price during Q3, likely they did not. What they are after is a good MOS.
Applying a 30% MOS to the Q3/2024 price range, the business's fair value is between $565.80 and $737.67. The average between these two is $651.73. Applying a 50% MOS to the Q3/2024 price range, the business's fair value is between $792.12 and $1,032.74 for Q3/2024.
Being conservative, I will look at the 30% MOS to establish a narrow fair value range.
My muse
This is just a brief research into the business. Much more due diligence needs to be done. There are other qualitative and quantitative aspects that need to be looked into. As I lack experience in this industry, I am unable to lend better insights. There is a consideration about “circle of competency”.
This is a way of me demonstrating how I pivot 13F reports as an initial stock filter. I require more due diligence in financial performance and business competitive advantages. I still need to work out my MOS though there is some reference as per above.
Here is wishing all success.
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