Buffett Bought WHAT?!?
Every three months, institutional investors have to open up the vaults and show anyone who's interested what they're invested in, when the total investment is over $100 million.
It may sound like an intrusion. And it might even be a disadvantage. I mean, if you run a hedge fund, why do you have to tell anyone what stocks you own?
Of course, nobody's ever worried that this disclosure helps the fund out. Even though I think this is what happens more often. Because every time the due date for 13F forms comes around, you get a bunch of articles like this one...
What are the favorite stocks of hedge funds? What are the top fund managers buying? And of course: What is Buffett buying?
For an individual investor, these 13F disclosures seem like a nice shortcut for research. You know, if Buffett is buying it, it's gotta be pretty decent, right?
I actually have no problem with this. We all know Buffett is a conservative long-term investor. When he buys a stock, he assumes he's gonna own it forever. The problem with all this is timing...
Buffett says he wants to own a great company at a good price. But by the time that 13F form comes out, that "good price" might be long gone. Because 13Fs are due 45 days after a quarter ends. So the most recent round of disclosures that just came out could be telling you about purchases made in January. That's almost five months ago!
Buffett Bought WHAT?!?
So when the latest round of 13F disclosures came out, a lot people were very surprised to see that Buffett's Berkshire Hathaway now owns nearly $1 billion worth of Amazon (NASDAQ: AMZN) stock.
Sure, Buffett was buying in January, when the market was still recovering from that nasty correction at the end of last year. But that's not why people were so surprised. It's because Amazon doesn't seem like a Warren Buffett-type stock.
Amazon doesn't pay a dividend. It trades at a very high price-to-earnings ratio: 77. And the price-to-book is also very high, nearly 19.
But here's the thing: Amazon is one of the most misunderstood companies there's ever been.
I figured this out in 2017, when the stock was about $900. An analyst had downgraded Amazon. He said the company needed "to show greater operating [profit margin] leverage for shares to move meaningfully higher."
I responded that Amazon could double its profits at the drop of a hat.
And that's exactly what happened over the next year. In the first three quarters of 2018, Amazon put up profit growth of 144%, 120%, and 1,117%!!
I'll even tell you how I knew this would happen. I dug into the numbers and found a few juicy tidbits. Like, did you know that in 2018, Amazon's R&D budget was double that of Apple's? Yeah, Amazon spent $28 billion on R&D last year. That means anytime it wants, it can assume an R&D budget of exactly what Apple spends and drop $14 billion to its bottom line... and immediately double its profits!
Are you starting to see what Buffett sees in this company? Amazon is a cash machine! And I haven't even gotten to the best part...
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Amazon Has Partnered with Every Business in the World
For the longest time, most people thought Amazon Web Services (AWS) was basically one big data center. It would host your website and get you connected to the internet.
But you'd still have to do all the dirty work: get your payment processing software... get your customer service team... get your fulfillment software, accounting software, etc., etc.
But the fact is, Amazon provides all of that. As I wrote here earlier this month:
So, Amazon. Yeah, you can open your own store there, sell what you want, have customer service tools (which is critical; somebody waits five seconds for help and they are pissed), and it's all automated. But these are basically storefronts. It's the small pond.
Amazon Web Services is the big pond, where the big fish are. Sure, you can just host a website at AWS. Or you can implement every tool that's available and build the entire backend of your business. You wanna know who's there?
Disney. Netflix. Slack. Spotify. Pfizer. Samsung. Comcast. NASA. Johnson & Johnson. BMW. Adobe. Airbnb. Expedia. Zillow. The list goes on and on.
Quite literally, Amazon has created the backend platform for any company in the world. Doesn't matter how big — Amazon can apparently handle it. This really isn't just Amazon selling something. Amazon is a true partner to the world's businesses.
Now, I wanna share another juicy tidbit. No, it's not that e-commerce — where Amazon dominates — is still just 10% of total retail. Though admittedly that's a good one, because it clearly shows how much growth Amazon (and its investors) can still enjoy.
No, this tidbit has to do with the fact that even though Amazon gets all the glory, it did not accomplish all this on its own. It has a small dynamic team of companies whose primary job is to help Amazon win. These companies are like those birds that ride around on the backs of crocodiles. You may not know what they're called, but you know they've got it made.
These companies are cheap, they have years of growth ahead of them, and they pay dividends. And I'd like to tell you more about them right here.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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