Polen Capital discussed Oracle Corporation (NYSE: ORCL) and other companies in its Q2 investor letter – you can download a copy here. The investment management firm believes that the “cloud is more incremental” to Oracle’s business “than threatening.” Let’s take a look at Polen Capital’s comments about Oracle.
Oracle’s weakness in the quarter likely has more to do with its new earnings disclosures or lack thereof. The business is growing as we would expect with Oracle navigating a complicated transition to the cloud that is not very easy to track as outsiders. We have been very patient shareholders for 13 years as we know how difficult it is to replace Oracle’s databases once they are operating inside a customer’s business.
It is not the fastest growing business, but it does have a lot of stability and satisfactory growth potential as cloud is more incremental to their business than threatening. Going forward, Oracle is merging its on-premise and cloud disclosures, making it even more difficult to track the progress here over time. We, likely along with many other shareholders, will be communicating our dissatisfaction with their disclosure policies and hope management reconsiders. The stability of the underlying business makes this more of a nuisance issue for us, but we certainly believe more disclosure is better than less, especially during business model transition periods like they are going through today.
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For the first quarter of fiscal 2019, Oracle Corporation (NYSE: ORCL) reported total revenues of $9.2 billion, up 1% in U.S. dollars and up 2% in constant currency, compared to the same quarter last year. Total cloud services and license support plus cloud license and on-premise license revenues were up 2% to $7.5 billion. Cloud services and license support revenues were $6.6 billion, while cloud license and on-premise license revenues were $867 million.
Oracle shares are up 8.22% since the beginning of this year. The company’s share price has increased 17.77% over the past three months and 7.38% over the past 12 months. ORCL has a consensus average target price of $53.14 and a consensus average recommendation of ‘OVERWEIGHT’, according to analysts polled by FactSet. The stock was closed at $51.63 on Wednesday.
Further, Oracle Corporation (NYSE: ORCL) is a popular stock among many hedge funds tracked by Insider Monkey. As of the end of the second quarter of 2018, there were 50 funds in our database with position in the company, including Yacktman Asset Management, International Value Advisers, and BloombergSen.
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.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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