The Vilas Fund recently published its Q1 2019 Investor Letter (download here), in which it shares its quarterly performance, reporting 34.3% gain in the period. The fund also posted short comments on several holdings, among which were CVS Health Corporation (NYSE:CVS) and Walgreens Boots Alliance, Inc. (NASDAQ:WBA). For these two companies, The Vilas Fund said the following:
“CVS and Walgreens (CVS and WBA)
CVS and Walgreens have had a tough year. The industry has experienced slowing branded drug price inflation, lower generic inflation, and lower reimbursements than expected. We believe all these pressures are temporary. However, it is clear that Amazon has set its sights on the industry, which has dramatically depressed the multiples CVS and Walgreens are trading at. Roughly speaking, both are trading at 8.5-9 times current year earnings estimates, compared to 16-18 times, on average, in the past. Their dividend yields are 3.7% for CVS and 3.2% for Walgreens, both significantly higher than the 2.9% yield on the 30-year US Treasury. Walgreen’s has raised its dividend 45 years in a row, and we expect this trend to continue. When the temporary headwinds subside and partially reverse, we expect the earnings of both to return to the high single digit earnings per share growth range. Additionally, we don’t expect Amazon to be very successful with its strategy given the fact that most people need immediate access to medicine, the incumbents will mail your prescription for free already, and that copays are fixed regardless of where your prescription is filled. Having the option of quickly driving to grab your prescription at roughly 10,000 locations each, often open 24/7, is a valuable service and network effect that we don’t believe will go away. These shares should produce an 18% return without multiple expansion, driven by dividends, retained earnings to be used for expansion, debt repayment or share repurchases, and profit growth from rising prescription volumes. Adding in a 50-70% valuation expansion, and future returns should rise to the mid-20% range over the next 5 years.”
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CVS Health Corporation is a Woonsocket-based Pharmacy Benefit Manager, and Walgreens Boots Alliance, Inc. is a Deerfield -based holding company, which owns and runs Walgreens, Boots, and other pharmaceutical manufacturers and pharmacy-related businesses. Year-to-date, CVS’ stock lost 15.88% closing on May 10th at $55.16, while WBA’s stock lost 21.49%, and had a closing price on May 10th of $53.42.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
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