New Stock Investments

I added to some existing positions (like Google and Celgene) during the selloff following the Brexit vote but also made some new purchases over the past few weeks that I’ve been meaning to detail.

New Positions

1. Red Hat Software (RHT)

Red Hat is a distributor of open-source Linux operating systems.  Open-source means that the code is public and available for anyone to download and tinker with to make improvements.  Red Hat makes its money by offering subscriptions to platforms they develop, acting as the lead in making improvements and upgrades.  Linux has always been popular given that it’s a free system, and Red Hat is now proving to be a fast growing force as they capitalize on the wide user base by expanding their services and applications to get companies to upgrade to their paid services.  The stock looks more expensive than it actually is because of the way they book revenues and profits.  Cash flow is a much better metric to measure it by, and the stock trades at a market multiple on Free Cash Flow despite much stronger growth.

2. Franklin Resources (BEN)

Franklin Resources is an investment management company that manages mutual funds and accounts under the Franklin and Templeton names.  Over half of their funds are international with a strong focus on Emerging Markets.  Because of this, the stock is highly correlated with the Emerging Markets stock index (changes in EM performance lead to inflows/outflows of assets into and out of the funds, which leads to increases or decreases in revenue for BEN).  I still think the Emerging Markets have a few more years of trouble ahead but the stock is now trading at basically its lowest valuation ever, likely reflecting the issues.  Plus, the company has $9.4 billion of net cash on the balance sheet which it has been using to buy back stock and often pays one time special dividends.  I view the stock as a high beta way to have portfolio exposure to the Emerging Markets but in an extremely safe manner with a focus on returning tons of cash to shareholders.

Here are two charts to illustrate.  The first shows BEN vs EEM on separate scales to illustrate how closely their movements track, and the second shows them on the same scale to illustrate how BEN’s price changes tend to be more dramatic (higher beta) than EEM.

BEN (black) vs EEM (blue) – separate scales

BEN (black) vs EEM (blue) – same scale

3. Berkshire Hathaway (BRK.B)

Berkshire Hathaway is the holding company run by Warren Buffett and Charlie Munger.  It owns both private and public companies across numerous industries including insurance, rail and transport, manufacturing, utilities and energy.  It’s essentially a leveraged play on the US economy as Buffett is able to utilize and invest the float from the insurance assets until needed.  The value in Berkshire Hathaway, other than being run by some of the greatest investors of all time, is the business model.  All income from the various business units comes in and management (Buffett) decides where to allocate it after looking across all industries.  If one industry is slow, he’ll take the profits and shift them over to invest in another area that’s doing well.  This central point of allocation makes the company extremely efficient at allocating and compounding the growth of capital over time. 

I’m starting small with these positions and will likely use any weakness to double-down on them.

Thanks for following!

-Nick