Will Whitney Tilson's Kids Go To College?
- We admire accomplished value investor Whitney Tilson and his success in the investment business.
- The Harvard MBA recently recommended never shorting stock and disclosed he owns Berkshire Hathaway, Amazon, Alphabet and Facebook.
- The holdings are for his kid's college savings portfolios.
Value investor and finance whiz Whitney Tilson came out swinging March 1st, declaring that short selling is too difficult and dangerous and that he has learned his bearish lessons. He also announced he had recently purchased a perma-bull stake in Berkshire Hathaway (BRK.A) (BRK.B), Howard Hughes (HHC), Facebook (FB), Amazon (AMZN) and Google (GOOG) (GOOGL) for his kids' college savings plan... Aka: the whole 529 ranch recently bought "BHHHFAG."
We admire Tilson's guts investing in this concentrated portfolio which is 2/3 of FAANG plus a whopping helping of Berkshire Hathaway (50% of the portfolio) and a hefty side of Howard Hughes (25% of the college savings fund). We do think the acronym of the portfolio could cause some tense moments for his family office in the near term.
The final 25% will be invested in Facebook, Alphabet, and Amazon. At today's prices, one has to wonder whether Tilson secretly harbors some angst towards his offspring - in this essay we conclude that his love is strong but his timing could always be off.
Valuewalk.com did a good job of explaining the following table - peaks and troughs in the overall market can greatly affect the swings in a concentrated portfolio. When stocks fall, correlations head towards one.
Maybe the investments in these names at a CAPE of 32 for the overall market points to some love lost, potentially, at the venerable Tilson family head office. Or, Tilson has finally moved to a growth at reasonable prices model, which after all has worked well for all of the stocks in the 529 portfolio over time.
After evaluating his portfolio below, you will agree that Tilson's love for his children is strong, though maybe his investments on their behalf are riskier than they seem given how far we are into the current business cycle. We wouldn't take the other side of his trades, but Berkshire and Howard Hughes are much more in line with a value investing approach.
The tail wind for this portfolio is quite strong, however, on a valuation and quality basis - Berkshire Hathaway is outperforming expectations this year thanks in part to a tax savings windfall. A portfolio with a large concentration is a vote of confidence in Berkshire in general but also a vote of confidence in the succession plan and deep bench that supports Chairman Buffett. So, for now at least, we would certainly not mind being one of Tilson's children, at least as far as asset allocation is concerned.
Berkshire is trading for 21X forward earnings and 26X trailing earnings. The company scooped up around $45 Billion in owner earnings last year. With a 14.5% return on equity and a price to book under 2X, Berkshire seems to be a long term hold at these levels. If revenues can grow 4-5% per year over the longer term, Berkshire may hit a million per share over the next decade. Tilson is wise to invest in these shares for his kids, expect them to go Ivy.
Howard Hughes Corp. trades for 19X forward earnings estimates and 1.76X book value. The 15% net margin looks healthy here, as does the 6.6% quarterly revenue growth but the company suffers from a low 5.6% return on equity and an even drearier 1.7% return on assets. HHC is a Dallas based company, which provides tax benefits and litigation is challenging in Texas.
The balance sheet seems conservatively managed here, with a low debt to equity level, and lots of cash on hand to redeploy if the market goes down.
Howard Hughes Corporation owns, manages, and develops commercial, residential, and mixed-use real estate properties in the United States. It operates in three segments: Master Planned Communities, Operating Assets, and Strategic Developments.
The Master Planned Communities segment develops and sells residential and commercial land. This segment sells residential land designated for detached and attached single family homes ranging from entry-level to luxury homes to home builders; and commercial land parcels designated for retail, office, hospitality, and high density residential projects, as well as services and other for-profit activities, and parcels designated for use by government, schools, and other not-for-profit entities.
As of December 31, 2017, this segment had 11,031 remaining saleable acres of land. The Operating Assets segment owns 13 retail, 25 office, 6 multi-family, and 3 hospitality properties, as well as 10 other operating assets and investments primarily located in and around Columbia, Maryland; Honolulu, Hawaii; Las Vegas, Nevada; New York, New York; and The Woodlands, Texas
The assets are likely undervalued on the books thanks to book value accounting which shows the assets as the price paid for them back when real estate was much less valuable. Tilson might be helping his kids here by buying a dollar for 75 cents.
Now we get to the 25% that's, well, not exactly abusive to future generations of Tilsons but clearly a high beta diversifier that could help the portfolio track the benchmark more closely or could be an investment in a crowded trade. Still, one wonders how a former high PE short seller suddenly turns long FAANG for his kids accounts. Maybe he is right, but we likely want to clear the double top before signing the lease on the apartment across from campus just yet.
The main risk in these Internet names is their quasi monopoly status and the backlash from becoming more politically active - antitrust scrutiny is an issue. Also, central bank tightening is a risk for most equities, but high PE growth names in particular. Tariffs and trade wars would certainly not benefit Amazon, for example.
Buffett did say that a big regret was not buying Amazon. If Tilson's cost basis is under $500 or so, we can't find fault with the position. If the name was bought over $1000 we think Tilson may be suffering from style drift as a value manager.
Amazon - The company trades for an astounding 294X trailing earnings, and the chart has gone parabolic. The fear of missing out is real, however, and the stock might continue to rip some faces off in the near term so long as the Nasdaq 100 (QQQ) is not making an overall double top here:
We like the business Amazon is in and we feel it is the best run company in the world. We also feel the stock is massively overpriced and due for a correction. With only a 5-7% allocation to the stock, Tilson's kids shouldn't worry too much, though a little extra homework wouldn't hurt if we head into a bear market. If the Nasdaq rolls over, a part time job could make up for any losses in the position.
Alphabet - Another smaller 7% position for Tilson's kid's college dreams is the company formally known as Google. My family office is currently long the stock at a fairly low cost basis. I would sell it if it weren't for the taxes, but I do think the business is solid long term. The valuation is more reasonable than Amazon's at 22X forward earnings and 59 times trailing earnings. At 18X EV/EBITDA the cash flow covers some margin of safety compared to most tech stocks, but if the bear market is starting in earnest this year (and we think it is) then owning Google will be a turbulent proposition until the next inevitable round of global QE begins. With an outstanding 11.4% Net Margin and a healthy 10% return on assets, Google appears to be ready for the transition to IOT, cloud, and big data. Revenue growth of 24% is higher than the forward PE which means that GARP (growth at reasonable price) investors will be looking to buy the dips in the name. We like the stock, but would like it a lot more at a 30% cheaper price - not expensive enough to sell it, but too dear for a new purchase given the overall direction of equity markets and the current valuation. However, by the time college rolls around for the kids, we think Google will pay off or at least break even. Smile kids!
Facebook - This company is probably not going away like Myspace anytime soon. Facebook is the real deal, but the company recently announced that visitors are spending less time on the platform than they did in the past. We don't particularly like the stock here, and wouldn't put money to work in this chart:
From a TA perspective, Facebook needs to hold the 200 day moving average at $170.75 or many trend followers will sell. The 50 day has served as support and resistance for many years here, and is not violated. If anything, Facebook stock looks like a short. The company will be around in five years, however, so a small tracking position seems like a gamble, but at least it is a well calculated one. At 32X trailing earnings, and 20X forward earnings Facebook is a cheap stock given the company grew top line revenues at a 47% clip last quarter. Facebook stock looks weak shorter term, but if the company can execute this may be a name with room to run long term. All in all, Facebook passes the smell test but we wouldn't buy any until the technical damage on the chart is repaired. Tilson was a concentrated value manager who laments selling stocks short during the deadly era of QE and overnight futures volatility.
We are agnostic about many stocks at today's valuations, and we also think the generation of money managers and new to the game investors need to see a bear market first hand at some point. We've all taken our lumps in the 2000-2008 periods, so many experienced traders are similarly skeptical.
Normally, central bankers have had the backs of those willing to take leveraged risks. With exit plans being drawn up by Japan and Europe, and with our Federal Reserve bank tightening and selling bonds; we feel it is better to hold some cash like Warren Buffett, who has 118 billion in cash and short term bills and 120 billion invested in stocks.
All in all, we think Tilson's kids will go to college at the institution of their choice; but it might take a little longer for the accounts to make money:
- Rodney Dangerfield, in Back to School
This article was written by
Analyst’s Disclosure: I am/we are long GOOG, BRK.B, BRK.A. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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