Author's Note: I am quoted in this article which appeared in Smith Brain Trust (Robert H. Smith School of Business, University of Maryland) on December 13th as "16 Stocks to Watch in 2021."
Robert H. Smith School of Business Brain Trust – Maryland Smith’s David Kass (university bio) has made his list and checked it twice. And he’s adding a few new stocks to his expanded semi-annual “nice” list of 16 stocks to watch.
Once again, his midyear picks did very well, returning +30% (before dividends) over the latter six months of 2020, compared to the Dow Jones Industrial Average’s approximate return of +16% and S&P 500’s +18%. The best performers in Kass’s portfolio were upscale furniture seller RH (RH) +82% and Micron Technologies (MU) +38%.
Kass, clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business, says he’s holding onto some longtime favorites (Berkshire Hathaway (BRK.A) (BRK.B), Apple (AAPL), Microsoft (MSFT)), returning an older pick (Bank of America (BAC)) back into the lineup, and adding seven new equities into the mix.
He’s keeping nine of the 10 stocks he recommended just six months ago, and dropping one – farewell, Costco (COST) (up 27% since June 30). For 2021, Kass is keeping these nine on his nice list:
Berkshire Hathaway (BRK.A) +27% since midyear: The conglomerate helmed by CEO Warren Buffett has consistently been ranked among Kass’s picks. “It’s always been a strong performer,” says Kass, who has studied Buffett’s investments and philosophy for more than 35 years. He sees more strength ahead.
Apple (AAPL) +36%: Cupertino-based Apple continues to innovate, Kass says, and is Berkshire Hathaway’s top holding. As of Sept. 30, Kass notes, Apple represented 48% of Berkshire’s portfolio.
Microsoft (MSFT) +4%: Microsoft has underperformed the S&P 500 since June 30, but Kass is undeterred. He sees the company thriving amid continued work-from-home and school-from-home demand, helped by the strength of its cloud computing business. Also, he notes, while Facebook (FB) and Google (GOOGL) (GOOG) are being accused of antitrust-related improprieties, Microsoft has already weathered those storms (some 10 years ago) and survived them.
Amazon.com (AMZN) +12%: The e-commerce behemoth, recommended in June 2019, then dropped for 2020, returned to Kass’ lineup midyear, amid COVID-19’s spike in home-delivery and cloud-computing demand. “I can’t live without Amazon,” Kass says.
Facebook (FB) +22%: The social giant generates a lot of cash flow and requires little capital to run. “Taking a little bit of a risk here, but for the moment, I want to stick with Facebook,” Kass says. “I personally don’t agree with the antitrust argument being made against them.”
Charter Communications (CHTR) +29%: The cable and broadband company saw a boom in business amid lockdown orders, as at-home customers dramatically increased their TV viewing, streaming and computing. It hired thousands of additional billing and sales agents, using virtual job interviews to get the job done. It showed good management, Kass says, and it’s been paying off. Berkshire and investor John Malone, whose investments Kass also monitors, own stakes.
Micron Technology (MU) +38%: The Idaho-based memory chip maker saw demand for its wares surge, with a swell of stay-at-home workers and students. “Several of the investors I follow – and I only follow a few – like Micron Technology,” Kass says. It is the No. 4 investment in David Tepper’s portfolio at Appaloosa Management. And perhaps most notably, Micron is the No. 1 investment of Li Lu, founder and chairman of Himalaya Capital, representing 41% of his U.S. portfolio. Lu is the only investment manager that Berkshire’s Charlie Munger trusts to invest his money.
RH (RH) +82%: When Berkshire added upscale home furnishings retailer Restoration Hardware to its holdings about a year ago, Bloomberg reached out to Kass to explain why. “I said, ‘Berkshire Hathaway is an expert in furniture; they own Nebraska Furniture Mart. This is within its circle of competence, so they may see growth opportunities” Kass looked deeper into RH and saw it expanding internationally and doing well, as people stuck at home look to upgrade their surroundings. Berkshire owns 9% of the brand.
Cable One (CABO) +20%: Like Charter Communications, Cable One has seen a surge in broadband business because of the pandemic’s work-at-home mandates. The company, a 2015 spinoff of Graham Holdings, has a high rate of free cash flow, high return on equity and high operating margins. Since the spinoff, shares in CABO have quintupled in value, and Kass sees it continuing to do well, though it’s not a significant holding of any of the investors he follows.
And that’s nine. The other seven equities, one making a return and six making a debut are:
Bank of America (BAC): “It’s the only bank on my list,” Kass says. Run by CEO Brian Moynihan, Bank of America appeared on Kass’s watch list a year ago, but he dropped it midyear. It has since climbed 20%. The bank is Berkshire’s second-largest holding, at 11% of its portfolio.
Pacific Gas & Electric (PCG): The utility, which recently emerged from bankruptcy has undergone a reorganization, and has become a sort of darling of an elite group of superinvestors. “If I had to name the top 10 portfolio managers in the country, certainly Warren Buffett would be on that list, and so would David Tepper and Seth Klarman, CEO of Baupost Group. Both Tepper and Klarman have taken initial positions in PG&E in the most recent quarter, with Tepper making it his No. 1 holding, at 13% of his portfolio. “That caught my attention,” Kass says.
Pershing Square Tontine Holdings (PSTH): The special purpose acquisition company (SPAC), created by Pershing Square founder and CEO Bill Ackman is “a little more speculative. It could do very well, but it might not,” says Kass. Ackman is an “all or nothing” investor, scoring a home run on investments or striking out completely. But his investments at the beginning of the coronavirus crisis proved prescient, Kass notes, and his SPAC, or “blank check” company as they’re sometimes known, is likely to invest in winning companies. Also catching Kass’s attention: Klarman has recently added a stake, making it his No. 6 holding.
Google (GOOG): “I may be sticking my neck out there in light of the antitrust accusations, by keeping Facebook and by adding Google. But I think they’re fairly valued,” says Kass. But there is risk, he admits, of legal action being taken against Google in the United States and in Europe. Kass formerly worked as an antitrust economist with the Federal Trade Commission. “These issues won’t be settled overnight. Over the next three years or so, these companies will be growing, but they will be hamstrung a little bit and reluctant to make new acquisitions.”
Liberty Sirius XM (LSXMK): The asset is Liberty Media’s holding of Sirius XM. Berkshire has years-long investment in the stock, and Baupost’s Klarman has recently added to its stake. “Seth Klarman may not be that well known outside the investment community, but he is highly regarded within,” says Kass. “There are a handful of geniuses and he is one of them.”
AbbVie (ABBV): In the third quarter, Berkshire invested in several pharmaceutical stocks, including AbbVie, Bristol-Myers (BMY), Pfizer (PFE) and Merck (MRK). “I thought AbbVie is very interesting,” Kass says. AbbVie is not involved in the global COVID-19 vaccine rollouts, but it does pay a 5% dividend, is a conservative stock and is reasonably valued relative to the market, says Kass, and has a good growth profile.
RedBall Acquisition (RBAC): This special purpose acquisition company (SPAC) has Oakland Athletics baseball executive Billy Beane of Moneyball fame and Nobel Prize-winning economist Richard Thaler as directors. This SPAC was reported this fall to be in talks to merge with Fenway Sports Group, which owns the Boston Red Sox and the reigning English soccer champions, Liverpool F.C. “An eventual merger could end up being a home run” according to Barron’s. Baupost’s Klarman has a stake in this somewhat speculative SPAC.
This article was written by
Disclosure: I am/we are long BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.