In a recently published Horizon Kinetics’ Q1 2019 Market Commentary, the fund shared detailed comments on several stocks in its portfolio. Among them was PepsiCo, Inc. (NASDAQ:PEP) for which it said the following:
PepsiCo Inc., with a $169.5 billion market capitalization, is a global wide moat company that deals in soft drinks and snacks. It is, of course, true, as for Coca-Cola, that the displacement of such an enterprise by a new competitor would be extraordinarily difficult. However, the company can’t be protected from the tastes and desires of customers. The consumption desire or capacity of the people of this planet for soft drinks and snacks is not infinite. Moreover, the ability of the company to extract operating profit from this base of sales also has its limits. This is easily visualized in the accompanying table, which provides essentially the same multi-year revenue and profit progression as Kellogg — none.
The investment analyst community does not accept that the recent past is prologue. The consensus earnings forecast is that the company can grow profit on an annual basis by about 8% to 9%. No degree of empirical evidence seems able to contradict this view. As a consequence, the shares trade at about 22x estimated 2019 profits.
If one accepts the premise that the profits might at least remain at this level, one could perhaps justify the current valuation in terms of the extremely low level of interest rates. Yet, even if the analysts are correct in their forecast, the situation is still not as stable as the estimates might suggest.
PepsiCo earned $7.45 billion this year, excluding tax income for non-repeatable reasons. From this sum, the company intends to pay about $5 billion in dividends and to purchase about $2 billion of stock. This leaves about $450 million of residual income. From this sum, capital expenditures should be about $3.3 billion, though partially offset by non-cash depreciation expense of $2.4 billion. This leaves, overall, about a $450 million deficiency. The deficiency can be addressed by reducing capital spending. Or, the company could borrow it, as the funding shortfall is fairly minor in the context of the PepsiCo balance sheet.
Whichever decision PepsiCo makes, though, it is self-evident from a capital allocation standpoint that the business is planned to be in stasis: there are no plans, in the capital expending sense, to expand the business. These, then, are the possibilities:
a.everything remains in stasis;
b.the margins decline, because sooner or later the workforce will require more compensation than in the past—just because of inflationary pressures, if nothing else;
c.the valuation multiple placed on the shares declines; and
d.maybe be the most likely, margins decline and the valuation multiple contracts simultaneously.
PepsiCo is simply another example of an assumption of risk with little realistic possibility of long-term reward. It is a one-way stock that happens to pay a modest dividend.”
MAHATHIR MOHD YASIN / Shutterstock.com
PepsiCo is a Harrison, New York-based food, snack, and everage corporation, widely known for its flagship product – Pepsi, a non-alcoholic beverage. Year-to-date, its stock gained 15.35%, and on May 9th it had a closing price of $126.05. The company has a market cap of $176.7 billion, and it is trading at a price-to-earnings ratio of 14.23.
At Q4’s end, a total of 53 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 10% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards PEP over the last 14 quarters. With hedgies’ sentiment swirling, there exists a few notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).
Among these funds, Yacktman Asset Management held the most valuable stake in PepsiCo, Inc. (NYSE:PEP), which was worth $849.7 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $804.3 million worth of shares. Moreover, Fisher Asset Management, Two Sigma Advisors, and AQR Capital Management were also bullish on PepsiCo, Inc. (NYSE:PEP), allocating a large percentage of their portfolios to this stock.
In this piece, we will take a look at ten recent IPOs in micro cap stocks.
There are a variety of benefits and drawbacks to listing a firm’s equity for trading on the stock market. The single biggest benefit of the process called an IPO, is that it allows management to raise large amounts of funds and investors to potentially profit by seeing their existing stakes multiply in value. At the same time, the IPO process also brings in a variety of constraints. Publicly listed companies are subject to corporate financial reporting requirements of the jurisdictions in which their shares trade. At the same time, share prices can be a volatile affair, and while investors stand to gain significantly if their companies are well received by the market, they also risk equally massive losses should the opposite occur.
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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