I've noticed three common themes with Buffett's recent investments in energy and Japan: low valuations, improving capital allocation, and rising ROIC's.
John - thought this article was so interesting, particularly the reference to Marathon Asset and idea that stocks with low asset growth tend to be the best performing. I went back and looked at OXY and CVX’s total assets and numbers are flat/declining over past several years. Very helpful in understanding what may be driving Buffett’s view of these companies -- he also obviously likes aggressive buybacks by both companies.
Also went and looked at BRK’s total assets -- growing steadily while share count goes down due to buybacks. BRK’s equity still growing despite buybacks. Love BRK’s trends: EPS going up due to buybacks and FCF growth; assets and equity up due to reinvestment (despite buybacks); and FCF steadily going up on a growing asset base. Maybe returns on incremental invested equity aren’t optimal (although equity returns look good after backing out excess cash and unrealized gains on BRK’s public equity investments and adding look through earnings to BRK’s returns), but the reinvestment runway looks decades long with lots of internal compounding in the future.
Aug 22, 2023·edited Aug 22, 2023Liked by John Huber
Great article as always, John. Loved the thoughtful and thorough coverage of all the value levers, not just growth. As I was reading, I found this section somewhat confusing, maybe there is a typo here:
Under "3 Types of Rising ROIC's," you said, "1 — increasing the denominator (reinvesting all capital into the business at high rates of return)."
I am guessing you meant "increasing the numerator for a unit of additional capital deployed" because the sentence seems to indicate ROIC would go up with a higher denominator which is clearly not the case.
Hi John, I hope you're doing well. Massive fan of your Substack/Twitter.
I am a founder of Zeed (https://zeed.ai/). We're helping creators transform their written content (like this Substack) into dynamic video pieces using AI to capture new audiences.
Would love to show you an example and jump on a call if you're interested in hearing more! Best, Rohan.
Very insightful post. Thanks for fleshing these ideas out fully. While it may be known that buybacks can propel gains, this laid it out very clearly and logically.
John - thought this article was so interesting, particularly the reference to Marathon Asset and idea that stocks with low asset growth tend to be the best performing. I went back and looked at OXY and CVX’s total assets and numbers are flat/declining over past several years. Very helpful in understanding what may be driving Buffett’s view of these companies -- he also obviously likes aggressive buybacks by both companies.
Also went and looked at BRK’s total assets -- growing steadily while share count goes down due to buybacks. BRK’s equity still growing despite buybacks. Love BRK’s trends: EPS going up due to buybacks and FCF growth; assets and equity up due to reinvestment (despite buybacks); and FCF steadily going up on a growing asset base. Maybe returns on incremental invested equity aren’t optimal (although equity returns look good after backing out excess cash and unrealized gains on BRK’s public equity investments and adding look through earnings to BRK’s returns), but the reinvestment runway looks decades long with lots of internal compounding in the future.
Thanks again for your efforts!
Great article as always, John. Loved the thoughtful and thorough coverage of all the value levers, not just growth. As I was reading, I found this section somewhat confusing, maybe there is a typo here:
Under "3 Types of Rising ROIC's," you said, "1 — increasing the denominator (reinvesting all capital into the business at high rates of return)."
I am guessing you meant "increasing the numerator for a unit of additional capital deployed" because the sentence seems to indicate ROIC would go up with a higher denominator which is clearly not the case.
Thanks again for a writing a wonderful article.
I wish i came across these in 2016
Many make a case for NVR bc it doesn’t own land compared to other home builders. Is land ownership by PHM a detriment?
Great post! I really enjoy your opinion on buybacks and how you've explained them to the reader.
Way to go📈
Hi John, I hope you're doing well. Massive fan of your Substack/Twitter.
I am a founder of Zeed (https://zeed.ai/). We're helping creators transform their written content (like this Substack) into dynamic video pieces using AI to capture new audiences.
Would love to show you an example and jump on a call if you're interested in hearing more! Best, Rohan.
Very insightful post. Thanks for fleshing these ideas out fully. While it may be known that buybacks can propel gains, this laid it out very clearly and logically.