Published Date: 2020-07-17 | Source: INCE|Community | Author: Mark Ingham
Welcome to Ingham Analytics weekly research summary, highlighting pertinent local and international financial newsflow, recent notes that we have published, and what has been among some of the most read notes in the past few weeks or months.
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In this Weekly we look at Tech, gold and Berkshire Hathaway.
Markets in the US bounded up this week on Tech mania. In fact, not just the usual American FAANG stocks but also Chinese stocks such as Alibaba, Baidu and Tencent.
Interested in buying some Amazon, Netflix or Alphabet? They are good companies, they capture our imagination and offer goods and services that people worldwide value. Their share prices are heading north.
But increasing share prices mean only one thing - price earnings ratios are inflating but not earnings.
Buying Amazon at over $3,100 today means you are paying more for the same earnings than you were in March, when the market fell sharply. Based on our adjusted earnings per share for 2020, Amazon is on a PE of 169x. If we assume a sharp improvement in earnings in 2021 the forward PE eighteen months out is a still lofty 86x. Each unit of earnings is costing 89% more than at the low point in March. On Netflix, investors today are paying 70% more than in March for the same earnings stream whilst the same number for Alphabet is 44%.
Just three stocks - Amazon, Apple and Microsoft - currently account for a quarter, $4.9bn, of the Nasdaq Composite Index market cap of around $20 trillion. The bifurcation between a handful of tech stocks and the remainder of the US market is stark. Nasdaq's advantage over the Dow Jones and S&P 500 is the biggest since 1983 whilst the gap between the S&P 500 and the Dow Jones is the widest since 2002.
The chart below tells a tale. Amazon - Yellow, Nasdaq 100 - Red, DJIA - Green and S&P 500 - Blue
Over in Hong Kong, at the Thursday close Tencent was up 50% year-to-date at HK$563 - it eased on Friday to HK$546 but is still close to all-time highs.
Prosus, at €87 on the Amsterdam Euronext or R1,668 on the JSE, is at a 24% discount to the see-though value of the 31% shareholding in Tencent given prevailing exchange rates and share prices, the highest gap this year. That translates to a negative variance of €45bn (R860bn) between the market capitalization of Prosus and the value of the share in Tencent. To contextualise that, the Big Four banks FirstRand, Standard, ABSA and Nedbank have a combined market value of R540bn as of Friday - even if you add in Capitec and Investec you only get to R670bn.
The Prosus/Tencent gap deviated further following release of the annual results last week. Excluding the outsized impact of Tencent, net cash used in operating activities was $591m - up 21% - and the net headline loss was $440m - up 88%.
The graph below shows the deviation year-to-date between the share price of Tencent and the share price of Prosus in euro. Other than for a few days in May Tencent has consistently outperformed Prosus.
At Ingham Analytics we have no expectation that the Prosus discount will evaporate in the short term and we continue to caution that there is a risk it may increase if Prosus assets remain loss making and cash absorbing, as they have been for several years.
For those that are gold bulls you have not been disappointed. Gold is traditionally seen as a haven and typically moves in the opposite direction to equities. Not now. At $1,814/oz gold is at a nine-year high, and within striking distance of its record, even though equities remain buoyant after the rebound. Answer? The opportunity cost of holding gold is zero or less due to central bank's pushing down interest rates.
Gold miners are having a bonanza - a weak rand and higher gold price. Key to gold miners is the rand price of gold per kilogramme. On Friday, gold was fetching just under R1 million per kg, that is around 50% higher than is required to breakeven. The share price of AngloGold Ashanti has doubled since late February and Harmony is 80% higher.
But we caution that this is about as good as it gets. Miners are very sensitive to movements in variables beyond their control and there is no certainty that the rand will remain weaker for a prolonged period or that gold will keep at these level - meantime this is a welcome reprieve.
For fans of Warren Buffett, this week there was news that Berkshire Hathaway was writing a big cheque. The company is buying Dominion Energy's natural gas storage and transmission assets in a deal worth a total of $9.7bn. Berkshire Hathaway's energy subsidiary will gain ownership of 7,700 miles of natural gas pipelines, with approximately 20.8bn cubic feet per day of transportation capacity and 900bn cubic feet of operated natural gas storage with 364bn cubic feet of company-owned working storage capacity, and 25% ownership of a liquefied natural gas export, import and storage facility in Maryland.
This adds to a Berkshire Hathaway Energy portfolio that currently exceeds $100bn, delivering to 12m electric and natural gas customers and end-users around the world.
Buffet has been criticised for not buying things during the COVID-19 downturn, but this shows that Berkshire Hathaway hasn't lost its touch, doing homework and then pouncing on currently underappreciated assets.
Gas transmission and storage is on long-term take-or-pay contracts largely independent of utilization. The assets Berkshire Hathaway is buying have several years of remaining contract life on gas pipelines & storage and longer on export. Most of the revenue is from demand-driven counterparties such as utilities. Dominion has high debt $40bn and needs to realise cash - which Berkshire Hathaway has plenty of. It is boring assets such as this that keeps the cash flowing.
Berkshire Hathaway has been a good share to own over time and when this Tech bonanza comes back down to earth it will again show its merits.
We think Mr Buffet made a smart move in cutting his losses in airlines - the aviation world turned on its head in March. If circumstances change in life you change your mind, which Mr Buffet is known for. The bulking up in the midstream energy assets of Dominion is an old out of favour area he knows well. There are environmental and regulatory barriers to new pipeline builds in North America which could mean better value for existing ones. The pace of pipeline builds has long lagged the production of oil and gas; even with reduced production recently, pipelines will likely have plenty of business going forward. The Berkshire acquisition also includes a 25% stake in the only operating liquefied-natural-gas export terminal on the East Coast.
This week we issued "Fighting inflation" and "Rating retreat", the first examining the Satrix ILBI ETF and the second analysing Capitec.
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