Markets Show Some Cracks Even as Munger’s Top Stock Soars

U.S. markets had a mixed week, even as both the S&P 500 and Dow averages hit record highs.

The S&P 500 closed the week 0.12% higher, while the Dow Jones soared 1.54%. Reflecting a sharp sell-off in tech stocks, the Nasdaq fell 2.41%, while the MSCI Emerging Markets Index tumbled by 3.08%.

This week, it was your most conservative bets that shined. Charlie Munger’s Costco Wholesale Corporation (COST) soared 8.16% as it reported strong November sales into the holiday season. Warren Buffett’s Berkshire Hathaway (BRK-B) gained another 4.55%, continuing a robust recovery. Buffett’s most prominent single bet, Kraft Heinz (KHC), rose 2.01%. “Baby Buffett” Markel Corp. (MKL), managed by Tom Gaynor, rose 1.88%.

You were stopped out of Carl Icahn’s PayPal Holdings (PYPL) for a 70% gain.

Most of your positions slipped below their 50-day moving averages this past week and are currently HOLDs.

After this week’s trading, only Costco (COST), Berkshire Hathaway (BRK-B), Markel Corp. (MKL), Kraft Heinz (KHC) and Baxter International (BAX) remain BUYs.

Note that most of these recommendations are very conservative, Warren Buffett and Charlie Munger-style bets.

Portfolio Update

Even as consumer confidence stands near record highs, the broader market exhibited some cracks this past week. You can see this in the number of stocks in your Smart Money Masters portfolio dropping below their 50-day moving averages this week. Tech stocks suffered the most as investors shifted money into more stable stocks. Such behavior is highly unusual for this time of the year. Time will tell whether it the start of a longer trend.

A big beneficiary of this shift out of tech stocks was Costco Wholesale Corporation (COST). 

Shares of Costco soared over 8% last week as the retailer reported upbeat November sales figures.

Raymond James called Costco’s recent sales “nothing short of impressive” as it put a target price of $202 on the stock. That’s 7.5% upside compared to yesterday’s closing price. Raymond James also expects Costco to continue to gain market share by opening new stores both in the United States and abroad.

Here’s what’s even more interesting: these estimates exclude the impact of potential tax reforms.

Given Costco’s significant U.S. exposure, the company’s earnings will benefit tremendously if U.S. tax reforms passed. Raymond James estimates that every 1% reduction the in the tax rate equates to a 10-cent increase in earnings.

Costco’s current tax rate stands at about 33.5%. My back of the envelope calculation suggests that if corporate tax rates fall to 20%, Costco’s 2018 earnings per share (EPS) estimate will rise by $1.35 per share from $6.49 to $7.84.

That would put Costco shares at a forward price/earnings (P/E) ratio of 24, down from the current 31.

Sincerely,

Nicholas A. Vardy