Wyatt Research Week in Review: Aug. 9-15

Warren Buffett went big this week. Very big.
Buffett’s Berkshire Hathaway (NYSE: BRK-B) announced Monday that it agreed to purchase Portland, Ore.-based aerospace supplier Precision Castparts (NYSE: PCP) for $37.2 billion, including debt. It’s Berkshire’s biggest deal ever, easily surpassing its $26.3 billion acquisition of Burlington Northern Santa Fe Railway in 2009.
The deal was announced just days after Berkshire reported lackluster second-quarter earnings that saw net income fall to $4.01 billion, compared to $6.4 billion in the year-ago quarter.
Precision Castparts is a classic meat-and-potatoes Buffett target: a boring company which quietly makes industrial components most people take for granted, and which will probably continue to do so for the next 100 years. And for the 84-year-old Buffett, who likely has only a few years left until retirement, the Precision deal may well remain his largest.
The Buffett name was also invoked later in the day on Monday – in a markedly different context.
Not to be outdone by the Oracle of Omaha, Google (NASDAQ: GOOGL) blindsided Wall Street by announcing that it’s reorganizing its corporate structure and has created a holding company – Alphabet Inc. – that will manage its various business segments.
Don’t worry, Google.com isn’t going anywhere, and Google will still remain a transitive verb in the English language. But under the umbrella of Alphabet, investors will now be able to see the financials of the core Google search and advertising business broken out from Alphabet’s – née Google’s – other “moonshot” projects, such as self-driving cars and rural Internet access via high-altitude balloons.
Many analysts, including Wyatt Research’s own Jay Taylor, have compared the new Alphabet corporate structure to Berkshire Hathaway, a conglomerate with diversified investments that supplement its core permanent assets.
As Jay suggested, “Though Warren Buffett would likely never want to invest in any of Google’s various innovative lines of business, he would have a hard time arguing with the way that Google uses the cash it generates to make new – and occasionally huge – investments.”
The other major news from the week was China’s move to devalue its currency, which had a ripple effect on the global economy. But I’ll save my breath on that topic and let Tyler Laundon do the talking in the first entry of my favorite Wyatt Investment Research articles of the week:
Blame China: Yuan Devaluation and the Impact on US Stocks – The Dow fell 212 points on Tuesday following news that China moved to devalue the yuan by 1.9%. According to Credit Suisse (NYSE: CS), as of Tuesday afternoon the forward market was factoring in another 3% decline in the yuan over the next 12 months. Given that many leading growth stocks – especially technology stocks – have significant exposure to Asia, what does China’s policy decision mean for U.S. growth-stock investors?
The Real Lesson From Shell’s Arctic Drilling Gamble – In July, Royal Dutch Shell (NYSE: RDS-A) began an Arctic drilling project in the Chukchi Sea off the coast of Alaska. Investors are holding their breath. The reserves in the Arctic may be the last source of truly untapped oil left in the world. But there’s a reason it hasn’t been tapped yet.
One of the Greatest Dividend Growth Stocks Is a Buy – Permanency is tough to come by. Most everything is fleeting. Of the 30 Dow stocks in 1985, only 11 remain today. Go back to 1960, only six remain. One of those six stocks – a Dow component since 1932 – has increased its dividend for 59 consecutive years and is currently yielding 3.5%.
Media Dividends Are Suddenly on Sale – All things media took a real beating last week. Nearly all the major media companies tumbled 10% or more in just a few days. Granted, some stocks deserved a nice haircut, but some of the selling may have been overdone. Panics and overreactions are great buying opportunities for the right stocks, and it’s a big bonus when dividend yields are near all-time highs.
Coal Stocks: Separating the Winners and Losers – In the United States, the coal industry is under siege from a variety of pressures, including heightened public and regulatory scrutiny, as well as the rising adoption of alternative energy sources like natural gas. In August, Alpha Natural Resources (NYSE: ANR) declared Chapter 11 bankruptcy, joining fellow coal miners Walter Energy and Patriot Coal, which already filed for bankruptcy protection earlier this year. But not all coal companies are failing. And one in particular saw sales volumes hit a record last quarter.
What Is Ackman Up to With Mondelez? – Activist investor Bill Ackman recently disclosed that he’s taken a 7.5% stake in Mondelez International (NASDAQ: MDLZ). Yet Mondelez’s second-quarter profit was down an abysmal 35% year-over-year. So why is Ackman here? With food companies, it usually means one or both of the following: enhancing performance by cost cuts and more efficient operations, or prepping the company to be acquired. Could a reunion with Kraft Heinz (NASDAQ: KHC) be in the works?
Ferrari IPO Revs Up Change for Chrysler – Though a spinoff of Fiat Chrysler Automobiles’ (NYSE: FCAU) Ferrari brand has long been rumored, it wasn’t until the recent S-1 filing that the Ferrari IPO was confirmed. Considering the high-flying nature of recent initial public offerings, as well as the allure of anything named Ferrari, the IPO is likely to draw considerable attention. But there are a couple of structural issues with the Ferrari IPO that investors should be aware of.
Alibaba Stock Hits Record Low Since IPO – Alibaba Group (NYSE: BABA) hit a record low closing price of $73.38 on Wednesday following a disappointing earnings report. The company faces a triple threat: the devaluation of the yuan, the slowing Chinese economy and stronger competition. Will the stock fall below its IPO price of $68?
With Chinese Air Travel Soaring, Delta Wants In – In late July, Delta Air Lines (NYSE: DAL) invested $450 million for a 3.55% stake in China Eastern Airlines (NYSE: CEA). Despite recent turmoil in the Chinese stock market, Chinese air travel and China’s tourism industry are still growing rapidly. But are the U.S.-based airlines at risk from Chinese airlines? Will China’s air carriers become the leaders in international air travel?
Have a great weekend!