Where Buffett sees value
--  |  06/05/2015Text size  Decrease  Increase  |  

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here with Matt Coffina--he is the editor of Morningstar StockInvestor newsletter. We're at the midway point of the Berkshire Hathaway meeting. We're going to get his take on that first half.  Matt, thanks for joining me.

Matt Coffina: Thanks for having me, Jeremy.

Glaser: So, one of the most interesting discussions that Buffett had was about stock valuation and how it relates to interest rates. He said that stocks do seem to be pretty fully valued or to have high valuations, but that that might be justified with rates. What did you think of this discussion and what do you think about stock valuations?

Coffina: So, one metric that Buffett has brought up in the past is the ratio of the total stock market value to the gross domestic product of the United States, and that's definitely at the high end of its historical range. I think if you look at a variety of other measures like Shiller P/E or the price to trailing peak operating earnings, we get a similar story; the S&P is trading at a relatively rich valuation, but Buffett really emphasized the point that it all depends on interest rates.

Interest rates remain very low by historical standards. If you are comparing the expected returns from stocks against the expected returns from other asset classes like bonds, stocks still look very attractive. And so, I think you are in a situation where if interest rates stay as low as they are, stocks could still be very cheap and there could still be additional upside. And if we go back to a normal interest-rate environment, then stocks are probably more on the expensive side. And they didn't really give a clear answer as to that. They basically said it's up to you--do you think interest rates are sustainable here or not?

And if interest rates are going higher, then in all likelihood, stocks are fully valued to overvalued. people that they don't need; they shouldn't have more workers on staff than they really need. He is willing to tolerate maybe some of that inefficiency in other Berkshire subsidiaries, because he has a very hands-off approach, but ideally he would like to see all of the subsidiaries run like 3G runs an operation.

With regard to consumer staples in particular, he definitely hinted that there is the opportunity for more deals, and I won't be surprised if we see that. I would say 3G will probably be pretty busy over the next couple of years integrating Kraft and Heinz; but over the longer run, I think there is a sense that a lot of these consumer-staples companies have great brands.

He talked a lot about how a lot of these brands are the same as they were 30, 50, or 100 years ago. They have a lot of staying power. In a lot of cases, these companies may have become complacent over long periods of time of being very successful, and there may be room for cost-cutting. So, I think you'll see more consumer-staples names, even internally, focused on cost-cutting and becoming more efficient; but then, over the longer run, I think there is room for further consolidation. And especially if there are some companies that aren't able to bring their own profit margins up to the standards of the industry, and as the competitors are improving, there will be more pressure from activist investors and others to find a new management team that is able to make those tough decisions.

Glaser: One acquisition that Berkshire did make last year was of a car-dealership chain, and they said that they don't see a lot of scale advantage to this business, yet they want to make more purchases there. Can you explain why Buffett is so interested in the business if it doesn't have that scale advantage?

Coffina: It's interesting because you would think that Berkshire would want to be adding value in some way to these businesses as they are acquiring them.

Buffett basically said they are very good businesses on their own. They are very locally oriented. Often, local regulations prevent a lot of competitors from entering the market, which can give an advantage to those companies that have these mini-geographic monopolies.

So, I think he sees it as a good standalone business. He thinks that Van Tuyl Group, which they acquired, is a very good operator, able to run these businesses efficiently. He plans to buy more of these companies; hopefully, they are already run well. And if they are not, they now have the management from Van Tuyl that can come in and hopefully improve operations and run these things as efficiently as possible.

So, basically, he just sees it as an area that's very fragmented, where there's a lot of opportunity to do additional deals over time, and that he finds relatively attractive--again, having that local-geographic-monopoly advantage.

Video Archive...

Where Buffett sees value
06/05/2015  Morningstar's Matt Coffina discusses Buffett's view of stock valuations, cost-cutting, and more while attending the recent Berkshire Hathaway annual general meeting.
Finding value in small companies
01/05/2015  Investing in the small cap-sector can be wealth-destroying. Therefore, it is important that investors make informed decisions.
Top global tech opportunities
30/04/2015  Australia's foremost global investor Kerr Neilson identifies global drivers and those undervalued companies that are positioned for strong growth.
Finding value in volatile markets
24/04/2015  With the Australian market at a six-year high, it is difficult to seek value but investors can still find quality companies at good prices, according to Morningstar’s fund manager of the year.
Europe showing signs of life
23/04/2015  As growth concerns linger in China and the U.S., central-bank policy in Europe appears to be having its desired effect, says Morningstar's Bob Johnson.
Key takeaways from the Murray inquiry, SuperStream
23/04/2015  The SMSF Association's Graeme Colley discusses important points from both the Murray inquiry and the SuperStream initiative, while also giving trustees tips on how to avoid unwanted "gardening leave".
Avoiding a falling stock market
14/04/2015  Want to maximise portfolio returns and minimise losses? Stick to a value approach and resist the urge to be backward looking when it comes to performance
Navigating your portfolio amid volatility
09/04/2015  Westpac's David Simon talks about rebalancing a portfolio as investors continue to confront a number of risks.
Identifying stocks that will beat the market
31/03/2015  Think risk assets deliver the greatest returns? A new paper dispels this myth and instead proves that the equities that deliver the greatest profit are the unpopular ones
Protect your portfolio from losses
25/03/2015  Risk is not volatility - risk is the potential an investor has for loss, says Oaktree's Howard Marks. Recognising this is the first step in protecting your portfolio from losing money.
Revisiting the sole purpose test
19/03/2015  It’s important that trustees are reminded about their obligations under the sole purpose test – a key requirement in SMSF compliance.
Macro trinity underpinning eurozone
12/03/2015  Three key forces have ensured strong growth from most European markets so far this year, explains Morningstar's Jose Garcia Zarate, but structural flaws still need to be addressed
Taxing times for trustees?
05/03/2015  The government may have moved to address the tax concessions into super but trustees face a number of potential taxing issues.
Trustees under the spotlight
--  SMSF Association’s Andrea Slattery talks about the growing professionalism of the industry and what it means for trustees.
An insight into 4 top managers
02/03/2015  Morningstar’s Tom Whitelaw outlines the qualities behind this year’s fund manager of the year awards.
1 top stock set to open doors
27/02/2015  Morningstar's Peter Warnes shares his thoughts on results from the likes of QBE, BHP, Ramsay Health Care and Woolworths as the curtains close on the half-year earnings season.
Telstra picks right man for top job
20/02/2015  Morningstar's Peter Warnes gives his take on the most recent batch of corporate earnings, while also sharing his views on the appointment to the top job at Telstra.
2 stocks in earnings sweet spot
13/02/2015  Morningstar's Peter Warnes takes a look at the latest results from two big names in healthcare, as well as earnings from CBA and Telstra.
A further rate cut?
11/02/2015  Further rate cuts are expected while the Australian dollar will remain overvalued, according to Ibbotson’s Brad Bugg.
What's in store for listed investments?
05/02/2015  While the growth in LICs is more cyclical, ETFs continue to develop from stronger structural growth.