The letter from Berkshire Hathaway chairman Warren Buffett was released on Saturday and “preaches timeless lessons”, Credit Suisse Australian equity strategist Hasan Tevfik said on Monday.
He pointed out four key takeaways from the 17-page letter:
1. ‘Bonds can be risky’
Mr Tevfik said, “The bond market has been accommodative for leveraged Aussie companies. Now the bond market is clearly riskier. We expect more capital raisings by leveraged entities.”
2. ‘Betting on people v betting on assets’
According to the equities strategist, some of Australia’s best CEOs have delivered some of the “best reports so far” in this reporting season. He pointed to Qantas’ Alan Joyce, CSL’s Paul Perreault and Nine Entertainment’s Hugh Marks.
Credit Suisse noted that Mr Buffett concedes that he does not fully understand the manufacturing operations for some of his companies.
“Fortunately, he doesn’t need to as Berkshire has an extraordinary manufacturing executive and any business in his domain is slated to do well,” Mr Tevfik said.
“Sometimes ‘betting on people can be more certain than betting on physical assets’. We agree, investing in some of Australia’s world-class business leaders can be a more prudent way of positioning a portfolio than thinking too much about the underlying assets.”
3. ‘Look for a sensible purchase price’
He said stock performance over the reporting season has been “clearly skewed” towards those with lower price-earnings ratios.
“We continue to tilt our portfolio to cheap companies as they are likely to gain most as the earnings expansion continues,” Mr Tevfik said.
He noted that companies in the most expensive quintile delivered the worst returns, exluding the results for A2 Milk and Altium stocks.
4. ‘Be willing to look foolish’
Referencing Mr Buffett’s quoting of Rudyard Kipling’s poem If, Mr Tevfik said, “We thought the key line here was ‘If you can wait and not be tired by waiting…’
“We know many Aussie investors have been underweight the expensive bond-sensitives for some time. Some of these companies trade on exorbitant multiples, rely on accommodative debt markets to sustain their strong returns and had an aura of invincibility about them.”
He said the reporting season has been “dismal” for the stocks of Credit Suisse’s “Bondcano”.
“Being underweight these expensive bond sensitives seemed foolish through parts of 2017 … but not during the current reporting period,” Mr Tevfik said.
“The reporting season has been a dismal one for the stocks at the top of our Bondcano. Remember these have high P/Es, high payout ratios and highly leveraged balance sheet leverage.
“The infrastructure stocks are all there and it is telling that these companies struggled during the reporting period,” he concluded, telling investors that Credit Suisse remains short the stocks at the top of the Bondcano.