Buffett And The Missing Link In Value Investing
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Earlier this month news broke that Berkshire Hathaway had acquired a position in beaten-down retailer Ulta Beauty (ULTA). The stock soared the next day in reaction but it’s coming back to earth this morning after a weak earnings report Thursday afternoon. While we don’t know whether it was Buffett himself or one of his lieutenants – Ted Weschler and Todd Combs – who bought ULTA the timing appears to have been a bit off – and this points to the missing link in value investing.
I understand why Berkshire bought ULTA. One, it’s a high quality company – the leader in the beauty category. Two, after being beaten down the stock is cheap. But the timing was bad as ULTA’s quarter was weak and they made big downard revisions to their full year guidance. For example, full year comps are now expected to come in at -2% to 0% versus 2% to 3% previously and EPS to be $22.60-$23.50 versus $25.20-$26.00 previously. As a result, ULTA’s shares are down 6% at the open – well below the price Berkshire was acquiring them in the second quarter.
ULTA is still a high-quality company and it’s cheap – though not as cheap after the downard revision in guidance. But what value investing fails to take into account is the business cycle. The economy appears to be rolling over and ULTA’s business is being affected. Value investors exclusively focus on individual businesses and pay no attention to the macro economy – and as a result Berkshire’s ULTA timing was off.
A complete approach to investing which takes into account all of the factors impacting a stock’s performance would have to include macro – and other investing approaches as well (see “The Stock Game: Value, Macro, Momentum And Technical Approaches”, Top Gun Financial, August 30, 2023). While Buffett is and forever will be the GOAT – and I wish him a happy 94th birthday – those who aspire to push the investment game forward will have to transcend him in the same way that he transcended his mentor Ben Graham (on Buffett’s evolution as an investor also see “Munger: The Man Behind Warren Buffett’s Rise To Greatness”, Top Gun Financial, November 29, 2023).
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