Now Is A Time To Buy Stocks

Now Is A Time To Buy Stocks where there is fear and uncertainty in the market. This opportunity where valuations are down across the board including high growth stocks and value stocks has valuations for S&P at 14 times forward earnings. It is quite possible that valuations can get further attractive over the next while into 1Q2019. However timing the bottom is a fools errand and dollar cost averaging down over the next few months is a reasonable approach. The previous such market dislocations including Jan 2016 (Commodity Cycle Bottom), Jul 2015 (Chinese Market Crash), Jun 2012 (Euro Crisis), Sep 2013 (Emerging Market Bond Crisis due to Perceived Fed Rate Increases) Aug-Oct 2011 (US Govt Shutdown etc.) have all been good opportunities looking back.

Below are some of the geo-political and macro economic factors at play in the market over the next few months. It is good to remember that the works is uncertain all the time and investors focus on it at some times while they ignore it most other times.

Market Outlook For Next 6 Months

I believe a confluence of political and macro economic issues will weigh on the stock market over the next few months. These will be compounded by swings in investor psychology which can lead to sharp sell offs due to herd like mentality. 

1. China US Economic Warfare 

China and US are engaged in an economic and geopolitical warfare that will last a long time and is inevitable. There may be a truce but this is a 20 year battle. China has got economically strong and will overtake US economy in next 10+ years due to their faster growth rate and higher population which is moving from semi skilled to highly skilled economy focused on services and higher end manufacturing. This economic might will be translated into military spending and enable it to challenge US as the #1 superpower. China has also been running a smart operation to steal US and Global Intellectual Property. US wants to remain #1 so they will challenge and try to prevent rise of China any further. US and China will target each other’s economy and companies and this will create winners and losers in industries and specific companies. Some US manufacturing and service and tech companies will benefit while other agriculture companies and some companies exposed to Chinese customers will be negatively impacted. 

Companies may reduce new investments and consumer sentiment and investor sentiment may be affected. Strong employment in US and rising wages may counter this effect. 

Brexit Mess and Anti Immigrant Right Wing Movement in Europe

UK is mired in a mess with Brexit with a lose lose options all around and a deeply divided country. EU countries need to cut down immigration or else there will be a huge backlash as in US from the voters. The uncertainty and trade friction caused by Brexit will reduce consumer sentiment and business investment in the next 2 years and can effect the economy. With lower sentiment house prices and demand for luxury goods and big ticket items like cars may go own in near term. 

US Political IssuesI believe Trump administration may run into issues with legal matters if they conspired with Russia to tilt the 2016 US presidential election. I think this will be ongoing and may or may of resolve before 2020 elections. Regardless of outcome I don’t think this will impact the US economy in the long term as the lower taxes and reduced regulation and capitalist system will favor investors and company profits.

Trend Against Large Cap Tech Monopolies Sentiment has turned negative against large cap tech monopolies like AMZN, GOOGL, FB etc in US and Europe and globally. Europe will likely increase regulation and also enforce minimum taxes on revenue. However the monopoly and market position of tech giants is so strong that their business juggernaut will continue to move forward. Growth rates of earnings may slow and hence the P/E multiples may continue to contract. 
 

Interest Rates & Monetary Policy

Possibility of accelerated interest rate increases in US were a risk. However the intervention of Trump and other factors now seem to imply the US Fed won’t raise rates much from this point.

This could be a positive for emerging market economies like Brazil and India. Brazil has elected a new pro market leader after 15 years so investment sentiment and returns are expected to be good and BRL weakening over last few years has made the agriculture and other industries very competitive globally. In India outcome of April 2019 elections may have a major impact on international investor sentiment.

Facebook (FB) at $130 Trading at 17 Times Forward Earnings.

Facebook (FB) at $130 is trading  at a very attractive entry point at 17 Times Forward Earnings.
FB is valued at ~$360B excluding excess cash which is a very attractive price for a dominant company in its industry of Social Networking and Advertising. FB has strong products including FaceBook, Instagram, Whatsapp, Messenger. Instagram and Whatsapp will  be monetized over the coming years. FB also has 19% market share in the fast growing online advertising space with GOOGL having 37% share and AMZN catching up with 5% market share.

Even assuming reduced margins going forward for FB due to increased spending for security and impact of regulations for a company that can grow revenue and earnings 20%+ for next 5+ years $130 and $360B excluding cash is an attractive price. Any additional innovation by FB can add additional upside. Projected FB target price 3 to 5 years out from Oct 2018 is $250 to $350.

BAM to Take Advantage of Dip in BPY To Increase Ownership

Shares of Brookfield Property Partners LP (BPY) have been weak to concerns about a soft 3Q2018 and investors shying away due to concerns about the high leverage, extermal management, rising interest rates and pessimism about propects for the Retail (GGP) portion of the business.

Brookfield Asset Management (BAM) is likely to take advantage of this dip in BPY and could increase its ownership stake in BPY from 53% to 60% or more over the course of next few months.

It is yet to be seen if BAM 's plan for re positioning  and redevelopment of GGP assets will be successful or not. There is also some risk in terms of whether BAM and BPY can sell select GGP assets at good valuation over next 12 to 24 months to deleverage the balance sheet as planned.

BAM will need to execute flawlessly over next year to strengthen BPY balance sheet. Brexit related pessimism (BPY has significant UK assets including 50% ownership in Canary Wharf and assets in Central London) and fear of rising interest rates and BPY having 37% of debt exposed to variable rate mortgages are a factor to consider.

Time will tell but odds are in favor of BAM succeeding in its plans for BPY and realizing unit price of $30 over next 3 years.

FB at $150 - An Attractive Entry at 20 Times Forward Earnings

Facebook (FB) at $150 is trading  at a very attractive entry point at 20 Times Forward Earnings.
FB is valued at ~$400B excluding excess cash which is a very attractive price for a dominant company in its industry of Social Networking and Advertising. FB has strong products including FaceBook, Instagram, Whatsapp, Messenger. Instagram and Whatsapp will  be monetized over the coming years. FB also has 19% market share in the fast growing online advertising space with GOOGL having 37% share and AMZN catching up with 5% market share.

Even assuming reduced margins going forward for FB due to increased spending for security and impact of regulations for a company that can grow revenue and earnings 20%+ for next 5+ years $150 and $400B excluding cash is an attractive price. Any additional innovation by FB can add additional upside. Projected FB target price 3 to 5 years out from Oct 2018 is $250 to $350.

Amazon Continues to Innovate with Alexa and Echo Product Updates

Amazon (AMZN) continues to Innovate with Alexa and Echo Product Updates.
Products and Updates released include:

1. Echo Dot
2. Echo Plus
3. Echo Show
4. Microwave Echo/Alexa Enabled
5. Echo Auto
6. Smart Plug Echo/Alexa Enabled
7. Wall Clock Echo/Alexa Enabled
8. Alexa Guard 
9. Ring Security Cameras 
10. Fire TV Recast 
11. New Alexa capabilities - Hunches 
12. Echo Link Amp and Echo Link Audio Equipment

With a growing moat and expanding customer engagement with Amazon Prime, Video, Advertising, AWS & Cloud Services, Alexa, Whole Foods etc. an expanded addressable market of $10+ Trillion makes a path of eventual AMZN Equity valuation of $2T eventually feasible. AMZN current trades at $1950 per share with a market cap of ~$950B.

AMZN also could be looking to open 3000 stores in US over next 5 years with its revolutionary store concept and this could help with better engagement with users and expansion into additional end markets including Medical, Food Services, Travel etc.

Brookfield Asset Management Primed for Growth

Brookfield Asset Management (BAM) had its Annual Investor Day Presentation presentation on 26th September 2018. Aseets Under Management (AUM) reached $300+B for the first time in its history with Fee Paying Assets Under Manement (FP AUM) trending to ~$130B.


With operations in 30+ countries and a growing investment footprint across Real Estate, Infrastructure and Private Equity the company is at the cusp of explosive growth over the next 5 years. BAM raised $20B in the last 12 months and invested a staggering $33B in the last 12 months. The quality of  assets purchased mostly in US, Canada, Brazil, Germany, India demonstrate that value investing is possible even when the Equity and Debt Capital Markets are at a peak. The distinguishing size of BAM and its large scale capital, operating expertise and the ability to make synergistic acquisitions and management with ownership mentality and long term focus are key  competitive advantages that make this possible.

Some of the high quality investments of BAM over the last 12-24 months are as below:

1. GGP Inc. ($15B Equity)
2. Westinhouse Electric ($1B Equity, $4B Enterprise Value)
3. Forest City Realty ($6.5B Equity, $11B Enterprise Value)
4. Enbridge Natural Gas Gathering Pipelines ($3.3B Equity)
5. Enercare ($3.3B Equity)
6. Asciano Ports and Logistics ($3.4B Equity, 50% ownership and select assets 100%)
7. NTS Brazil Natural Gas Pipeline ($5.2B Equity overall, 90% ownership)
8. BRK Ambiental Brazil Water Services Utility ($0.9B Equity for 70% ownership).
9. Potsdamer Platz in Berlin (Price Not Disclosed)
10. Powai Mumbai India Office Park ($1B Equity)
11. TerraForm Power and TerraForm Global ($1.5B Equity)
12. Isagen Colombia Hydro Assets ($2.2B Equity), Gas Natural Columbia Transmission Assets ($1.2B Equity) 

BAM is Primed for Growth over the next 5 years and price could reach from $42 recent price to a target price of 80 to $100 per ($80B to $100B Market Capital) if estimated growth in AUM, Fees and Growth in Invested Capital pans out.

Facebook Slowing Growth Could Lead to Better Investing Entry Point

Facebook (FB) Slowing Growth Could Lead to Better Investing Entry Point in 2019.
FB revenue growth might slow from 40% to the 20-30% growth as the company matures, user growth stalls (in US & Europe) and expenses ramp up due to increased spending on Investment in Security and Regulations.

A price per share of $150 when forward EPS is projected to be $9 offers an appealing risk reward in our opinion. FB 2018 EPS projected is $7+ and currently shares trade between $165 to $185.

Brookfield Business Partners Update - Westinhouse Purchase & Graftech Monetization

Brookfield Business Partners (BBU) Closes Westinhouse Purchase which Equity Investment of $420M. This investment over the next 3-5 years has the potential to be a 5 to 10 bagger if Brookfield can expand the service offering and add enhance customer service  and broaden the portfolio with synergistic acquisitions.

BBU has started monetizing the Graftech investment which has been a 10 bagger so far worth a total of $2.7B so far. Prospects are good to monetize the North American Palladium investment as well over the next 1-3 years.

Company continues to progress the business plan at BRK Ambiental, Greenergy, Canadian Gaming and Gas Station Assets, Teekay Offshore etc. The Construction Services business Multiplex has been disappointing and will likely take 1-2 years more to turnaround and get to stage of providing dividends to BBU.

Target price for BBU is $50 by 2019 end and the growth prospects are very strong over next 5 years.

Brookfield Asset Management 2Q2018 Update

Brookfield Asset Management (BAM) 2Q2018 results were on trend as expected.
Total AUM was $287B, Fee Bearing Capital increased 12% to $129B, Fee Related Earnings increased 34% to $1.1B and Annual run rate of Fees plus Target Carry increased 23% to $2.6B.

In the last few months BAM have advanced or completed a number of large transactions – including the acquisition of the balance of GGP for $15 billion, a large mid-stream natural gas gathering system in western Canada for $3.3 billion, the closing of the acquisition of Westinghouse Electric Company for a total purchase price of $4 billion, the commitment to acquire Forest City Realty Trust and Enercare for $6.8 billion and $2.5 billion, respectively, and the acquisition of a number of solar and wind facilities in Spain for $1.2 billion.

Brookfield is in the market to raise the next Real Estate Fund and Private Equity Fund and plans to start raising the next Infrastructure Fund from 4Q2018.

We believe BAM shares are worth $50 today with $22 attributed to Asset Management Franchise and $28 attributed to Balance Sheet Assets. It is likely that growth over next 4-5 years will lead to $80+ with Asset Management Franchise worth $40 and Balance Sheet Assets worth $40.

Brookfield 2Q2018 Results

BRK Changes BuyBack Policy to Remove 1.2 Times Book Value Restriction

Since 2012, Berkshire (BRK.A) has restricted buybacks to prices below 120 percent of the stock's book value, which is an estimate of the company's value after liabilities are subtracted from assets.
Given the company's massive cash pile of $120B+ , the rule change Remove 1.2 Times Book Value Restriction for share buybacks. It will not do so if it reduces its cash below $20 billion.

BRK has not done a good job deploying capital over last 3 years. A share buyback at $125 to $145 range over last 2-3 years would have been a good use of excess capital in the absence of any meaningful acquisitions.

GOOGL 2Q2018 Results Analysis - Revenue UP 26% Year Over Year

GOOGL Revenues up 26% Year Over Year to $26B (32.5B revenue - TAC 6.5B) and excluding currency gains organic growth in revenue was 23%. GOOGL expected revenue for 2018 will be > 100B. The current valuation is in range of $850B. So it is trading at 8 times revenue. 

Profit will depend on operating margin which has been shrinking steadily over the years. GOOGL also has excess net cash balance of $120B+ which is $150+/share. 

Excluding the fines EPS for the quarter would be $11.75. So on an annualized basis GOOGL is currently earning $50 EPS. So excluding cash ($150 per share) GOOGL can be considered as trading at 22 times Forward earnings [($1200-$150)/50]. 

If GOOGL can continue to grow top line at 24% per year over next 4 years to 2022 then revue will double and earnings will double if margins remain comparable. So an investor today at $1200 needs to hope for this to happen to start making 10% business  return per year 4-5 years from today and hope the business is sustainable in the long run. 

The economics on the shares purchase a year ago at $950 per share are 6.25% earnings yield currently if we exclude the $150/share cash and divide EPS $50 by share price $800. 

https://abc.xyz/investor/pdf/2018Q2_alphabet_earnings_release.pdf

Brookfield Renewable now owns 30% of TERP

Brookfield Renewable (BEP) increased its total commitment to $420 million and now its interest in TerraForm Power (TERP) is 30%.


With change to tax subsidy rules in US there are fewer players in Solar and Wind Energy development. This will allow TERP to emerge as a major player in US in this attractive market and allow the company to deleverage with cost reductions, organic growth and synergies when merged with Saeta Yield.

GOOGL and FB are Best Large Cap Tech Growth Stocks at Reasonable Value

GOOGL and FB are Best Large Cap Tech Growth Stocks at Reasonable Value as of 1Q2018 end. Excluding Cash both GOOGL at $1050 and FB at $160 trade at 20 times Forward Earnings assuming GOOGL earnings growth of 20%+ and FB earnings growth of 25%+.

Both Alphabet (GOOGL) and Facebook (FB) continue to invest in future growth drivers including Artificial Intelligence, Cloud Services etc.

Brookfield Continues to Execute on 2022 Plan

Brookfield (BAM) Continues to Execute on 2022 Plan as evidenced by 1Q2018 results.

As of 1Q2018 Fee Paying AUM increased to $127B, ENI for LTM increased to $2.1B, Annualized Fee Base and Target Carry increased to $2.5B and Cash Flow for LTM increased to $2.5B with $1B of Fee Related Earnings and $1.5B of Investment Income (from BPY/BIP/BEP/BBU and other Listed and Un-Listed Investments).

Mritik Capital expects Fee Related Earnings to grow 15% to 20% per year through 2022 and Investment Income to 10% per year through 2022 (aided by organic growth and new investments). This would imply Fee Related Earnings close to $2B and Investment Income of $2.5B which would imply $4.5 Cash EPS by 2022 end. We project BAM fair value to increase to $75+ by 2022 end.

Key value drivers over next few years would be GGP deal closing for BPY, Organic Growth and TerraFirm related growth for BEP, Organic Growth, NTS recapitalization and Major New Acquisitions for BIP, GrafTech and North American Palladiun Exits and Westinghouse turnaround for BBU and continuing strength in the Brookfield Homes business.

Berkshire Hathaway 1Q2018 Results Analysis

Berkshire Hathaway (BRK.B) 1Q2018 Results Analysis indicate that the company is moving along slow and steady with existing operating companies continuing to generate cash. With the exception of Insurance Businesses all other operations are doing well and generating earnings growth.

Not withstanding the $12B invested in APPL in the latest quarter BRK.B inability to invest the $112B cash has been a major disappointment and a drag on the growth of the book value and earnings power. Warren Buffets performance as the Chief Capital Allocator over the last 24 months has been a huge disappointment.

Mritik Capital rates BRK.B a HOLD with a price target of $250 for 2018 year end.

Lack of Energy Logistics Costs Canada Billions in Lost Revenue

Lack of Energy Logistics Costs Canada Billions in Lost Revenue 

Canada has lost $117B due to pipeline woes, says McKenna

With a Canadian Government that can ensure Energy Logistics and International Market Access for Resources and one that can help diversify Canadian Exports to Asia (India and China) the Canadian Economy and Canadian Dollar would greatly benefit.

Market Focus to Shift to 1Q2018 Business Results from Geo Politics

Market Focus will Shift to 1Q2018 Business Results from Geo Politics as companies start the reporting season for the latest quarter. The earnings growth is expected to be significant due to the reduced US Corporation Tax Rate and continued revenue growth in the Technology Sector.

As earnings increase in 2018 the market multiple which has seemed elevated over last 12 months would likely trend to a more reasonable range.

Netflix Is Now Worth Almost As Much As Disney

Netflix Is Now Worth Almost As Much As Disney.

After reporting impressive first-quarter subscriber growth that drove its stock higher more than 9% on Tuesday, Netflix Inc. (NFLX) is now worth nearly as much as the much older and larger Walt Disney Company (DIS) .

Netflix, which went public in May 2002, ended the day valued at just under $146 billion, compared to Disney's market cap of $153.6 billion. Disney's revenues dwarf those of Netflix's, having made $55.7 billion in the last 12 months compared to just $11.7 billion for Netflix. But Netflix has been growing significantly faster and is consequently valued much more highly by investors. Netflix's forward price-to-earnings ratio is 78, according to Thomson Reuters, versus just 14 times future earnings for Disney. 

Netflix shares have soared 75% this year alone, compared to Disney's 5% decline, and as Netflix nears Disney's market cap, it is gearing up for a head-to-head streaming battle with the Mouse House.

Brookfield GGP Bid Financing - Brookfield Gets Calpers, TIAA Financing for GGP Deal

Brookfield Property Partners LP has lined up a slate of heavyweight backers to help finance its planned takeover of GGP Inc. The California Public Employees’ Retirement System, a CBRE Group Inc. unit, Future Fund and TIAA affiliate TH Real Estate have agreed to invest in select GGP malls, according to people with knowledge of the matter. The properties weren’t identified.

Expect BPY to close GGP deal by Sep 2018 and if things go well it may be feasible by Jun 2018.

Berkshire Hathaway Book Value and Intrinsic Value Update

Berkshire Hathaway Book Value and Intrinsic Value continue to grow slowly and steadily. At 4Q2017 Book Value per BRK.B share is $141 and Intrinsic Value projected stands at $200 per BRK.B share thanks to the reduced corporation tax rate in US.

Berkshire Hathaway value can be derived as a sum of parts based on Equity Investments per share + Cash and Fixed Income securities per share + Subsidiary company value per share. As of 2017 year end Equity Investments (Including Kraft Heinz) total $196B which equates to close to $80 per share. The cash position and fixed income securities at year end is $116B which equates to $47 per share. Berkshire private owned investments including Insurance, BNSF Railway, BH Energy, Manufacturing and Retailing companies continue to perform well. BRK Insurance float increased to $115B which is $46 per share in float although due to major events the insurance division generated a net loss for the year. Increased market share and premiums imply likely profits in next few years assuming no major catastrophe events. We can expect BRK to generate $30B in annualized cash earnings in 2018 and beyond with possible growth as the $116B net cash is invested productively.

We expect 2018 year end BRK.B Book Value to be $155 and Fair Value to be in the range of $215 to $225. We expect 2022 year end Fair Value per share to range between $275 to $350. This is a good return for a conservatively run company with businesses with moderate exposure to technology disruption. 

Read Berkshire 2017 Annual Report for further details.

Brookfield Continues to Compund Wealth

Brookfield Asset Management (BAM) Continues to Compund Wealth at a steady pace.

Brookfield Assets per share Excluding Corporate Level Debt and Preferred Shares increased to $25. At a recent price of $39 this implies $14 value for Asset Management Franchise. This is a significant discount to the intrinsic value which has $1.5B annualized Fee Revenue and $1B aanualized Target Carried Interest and has significant growth potential.

BAM Fee Bearing AUM has increased from $77B in 2013 to $126B in 2017 which is a 13% CAGR. In the mean time Fee Related Earnings have increased from $300M in 2013 to $896M in 2017 which is a 31% CAGR. With Brookfield expected to raise flagship funds in RealEstate and PrivateEquity in 2018 and new Infrastructure Fund in 2019 it is very much feasible to grow the Fee Bearing AUM to $200B over the next 5 years. This would imply Fee Related Earnings could be in range of $1.5B to $2.0B range annualized depending on margin improvement potential. There will also be valued ascribed to Carry from 2022 onward as past funds mature.

Consistent growth in Net Invested Capital from $25 per share in 2017 to $40 per share in 2022 is feasible as BIP, BPY, BEP, BBU continue to grow the business through organic investments, new acquisitions and capital recycling.

Acquisition of GGP by BPY if closes at a reasonable valuation there is more upside potential.
See 4Q2017 BAM Results in detail.

Estimated BAM Fair Value by 2018 end is $50 per share with buy under price recommended at $39.
Estimated BAM Fair Value by 2022 end is $75+ per share.

Amazon Widening Moat With Prime, Alexa And Echo Integration

Sentiment rings true in Seeking Alpha article by Gary Bourgeault Amazon Widening Moat With Prime, Alexa And Echo Integration

Amazon (AMZN) thesis continues to be that the company is innovative and is well run and dominant in industry segments that have large market sizes including Retail (E-Commerce), IT Infrastructure and Services, Advertising, Entertainment. The company can grow in these markets with disruption and also seamlessly enter new adjacent markets over time and its innovation ability and competitive differentiation including Alexa, Prime and Logistics are key drivers.

Major threats to Amazon are Regulations and Government Interventions.

Mritik Capital Top Picks for 2018

Mritik Capital Top Picks for 2018 Include the following.

1. Brookfield Asset Management (BAM) Recommend Buy Under $42
2. Brookfield Property Partners LP (BPY) Recommend Buy Under $21.50
3. Brookfield Property Partners LP (BIP) Recommend Buy Under $42
4. Brookfield Renewable Partners LP (BEP) Recommend Buy Under $25
5. Brookfield |Business Partners LP (BBU) Recommend Buy Under $30
6. Berkshire Hatheway Inc (BRK-B) Recommend Buy Under $175]
7. Amazon Inc (AMZN) Recommend Buy Under $950]
8. Google Inc (GOOGL) Recommend Buy Under $930
9. Canadian National Railway Inc (CNI) Recommend Buy Under $72
10. Liberty Global Inc (LBTYA) Recommend Buy Under $30

To get the full list of 2018 picks and to subscribe to  subscribe by contacting Mritik Capital Equity Advisor Newsletter and Alerts

Brookfield Private Equity Business Starts 2018 with a Bang!

Brookfield Asset Management (BAM) to reach the $500B AUM target by 2022 needs to make great strides in Private Equity. Brookfield Business Partners LP (BBU) Starts 2018 with a Bang!

BBU announced two deals in first week of Jan 2018.

1. Brookfield to Buy Westinghouse Nuclear Business and Brookfield Goes Nuclear.
2. Brookfield to buy 75 pct stake in Schoeller Allibert for $310 mln

Mritik Capital Top Pick is up 100% from Jan 2016 to Jan 2018. Even at $38 per unit price BBU has potential to deliver huge upside if Graftech and North American Palladium investments can be exited at good valuation in the ongoing commodity upcycle.