In a recent discussion on CNBC, Ross Gerber of Gerber Kawasaki and David Nelson of Belpointe Asset Management debated the merits of Buffett’s and Druckenmiller’s points.
The issue stems from recent interviews granted by Buffett and Druckenmiller to CNBC. It doesn’t make thing any easier now that other investors like Bill Miller have spoken about the issue.
According to Buffett who leads Berkshire Hathaway, he likes how International Business Machines Corp. (NYSE:IBM) has been consistently buying back shares to decrease the number of outstanding shares the company has out in the market.
However, Druckenmiller who leads Duquesne Capital told CNBC that he thinks Buffett’s assumption is that International Business Machines Corp. (NYSE:IBM)’s problems are cyclical. He thinks the company’s problem is secular and that’s why buying back shares is not good for the company.
Miller who leads Legg Mason Capital said on Twitter that cyclical or secular does not matter, what matters is whether the stock is undervalued. He added that if the value is zero in 10 years and the market is pricing the stock to be zero in five years, buybacks are good.
According to David Nelson, Big Blue is in the midst of a secular decline. He said that regardless of whether one thinks the stock is cheap or not, it is cheap because it deserves to be cheap. Growth has slowed and the company is actually going negative this year, he said. Furthermore, he said Big Blue probably deserves a multiple of less than 10 whereas it’s now at about the 140 level.
Ross Gerber, on the other hand, said that aside from not betting against Buffett, International Business Machines Corp. (NYSE:IBM) is cheap at 10 times earnings and 19 times market and everybody hates it but it has been around “forever”. They are also investing more in growth areas like the cloud and supercomputing, he added, and he sees better global macro tailwinds coming. From a long term point of view, like five years down the line, he said the company is one of the cheapest stocks now.
Nelson countered saying that it will take more than five years for Big Blue to recover. People have heard the buzzword which is “cloud,” he said, and it is going to be the market that saves the company. However, Nelson said that even if he would be generous and give it a 15% growth rate at the current $7 billion the company gets from the industry, it’s going to take them about a quarter of a century to get to $25 billion from cloud which is what the company needs. The buybacks are a waste of money, he said, as the $13 billion the company is spending every year to buy back stock could be better utilized going to growth area investments.
Gerber said, however, that buybacks may not be a great use of capital for International Business Machines Corp. (NYSE:IBM) but the company, going forward, is going to wind down buybacks and spend more on research and development and making new products and improving their existing ones.
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