Stocks Register 9 Straight Weeks of Gains As Kraft Gets Pummeled While Warren Disses Gold and Adds Financials-

There is a close analogy between organic chemistry in its relation to biochemistry and pure mathematics in its relation to physics. Robert Robinson

In today’s modern world, millenials are blamed for wanting genuine experiences. Part of that mentality is to supposedly prefer natural foods, you know, the stuff without chemicals and preservatives, coming straight from the ground or the animal (assuming the animal hasn’t been fed with chemicals either, right?). We can see the shift in public opinion towards going, ‘Oh natural’ in the kinds of foods people gravitate towards. If we look at what many still love to eat, fast food, the largest hawkers of hamburgers and other assorted fares have moved to advertising their natural products. In the chicken space, pity the chain that doesn’t use cage free eggs. The emphasis on sticking to pure ingredients can also be applied to our always pertinent friend, the study and practice of investing, especially in the stock market.

Investing in equities is the analysis and purchase of a small piece of a business with the idea to profit from income and capital appreciation of the asset (the stock). Why invest in a stock if the asset doesn’t appreciate or provide income? Given the fact that the majority of stock purchases are now driven by institutions, much in the form of algorithmic trading, quarterly results are given a great deal of scrutiny, as are the long term strategies companies use as a basis for growing their business. As part of this idea, not all growth is viewed as the same. On the top of the list is organic growth, ah yes, there it is, our friend organic. If one looks at enterprises which have been highly rewarded in the stock market, much of it is based on the idea that the Amazon’s, Google’s, Netflix’es, Apple’s, and Facebook’s of the world have primary businesses which they can reinvest in and grow at very fast rates. The faster the rate of growth, the higher the multiple the company is awarded. The primary business often has very low penetration rates in large markets, giving investors the belief that high rates of growth can continue for a long period of time. If you look at the example of Amazon entering large markets like retail clothing and advertising, along with it’s powerful web services business, or Netflix with very low penetration rates in Western Europe, India, and China, those give you an indication of an ideal situation from an organic growth perspective. Google, with its investment in automated driving vehicles and other moonshot investments, also might qualify there. Coming in behind organic growth from a strategy perspective would be acquisitions. Ideally, organic growth is supplemented with a very good purchase of a related business that can be combined in a parent, think something like Facebook buying Instagram, or Google buying Youtube. There are also many companies that use acquisitions as their primary strategy to grow their business. In many cases, it involves acquiring multiple smaller companies in the same industry, which is called a roll up. The path of companies trying to grow by acquisition is often more difficult because of the challenges in integrating new companies into an existing entity. As investors, you see the consequences of the kinds of strategies company pursue when results get digested by the investment community. With that, let’s take a look at what took place in the market because it gives a good example of organic versus acquisition and how they are perceived by investors.

The most foremost example to discuss would be Warren Buffet’s Berkshire Hathaway. Buffet has built his behemoth with both strategies, but much of the incredible results from Berkshire have been from owning businesses that can reinvest their profits into their own entity. In addition, Buffet buys companies that have plenty of room do do the same thing, so once they join the fold, the quest for the natural expansion of the enterprise repeats. On the opposite end of the spectrum would be a company like Kraft, which announced earnings this week and an SEC investigation into accounting issues. Kraft was owned by Philip Morris, the cigarette company, and then spun off into a separate company. It wrote off the value of a few of its brands in it’s earnings announcement. Buffet owns over 25% of the company and his position took a 4 billion dollar hit on the poor stock performance yesterday. Kraft was a big acquirer of food brands and tried to buy Unilever a few years ago. It appears that right now, with the move towards organic type foods, heavily laden preservative type offerings, those which Kraft specializes in, are being shunned by the consuming public. Don’t fret for Warren, he will be fine.

Along those lines, in his annual letter to shareholders today, the great one mentioned the performance of businesses versus owning gold, and the difference in returns over a long period of time is staggering. Much of it is related to the ability of a business to reinvest its profits into growing the business. The more successfully leaders are able to do that, the higher the returns for their owners, the shareholders. Clearly, Mr. Buffet is the best who ever lived as his doubling the S&P 500 return for 50 years is unprecedented. What was also interesting is that Mr. Buffet took advantage of the winter selloff to add to his positions in financial entities. Anyway, it will be interesting to see if the continued emphasis on organic advantages is what the public desires, both in food and investments.

Thank you for reading the blog this week, and if you have any questions about investing, please email me at [email protected].
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation.  The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.