Chris Bloomstran of Semper Augustus Investments Group joined John Mihaljevic at Intelligent Investing in Crisis Mode 2020 to discuss the COVID-19 crash, Berkshire Hathaway, Disney, Dollar General, Cummins and government intervention.
Summary:
Chris argued on March 26, 2020, that the COVID-19 shutdown had no historical parallel. Depression-era nominal GDP fell from $103 billion in 1929 to about $55 billion, but over three or four years. The US entered this crisis with debt at 350% of GDP, versus about 100% before the Depression. With the Fed’s balance sheet at $4.7 trillion and unlimited QE announced, he saw the deficit swelling from $1 trillion to perhaps $4 trillion and federal debt reaching 130% of GDP.
His February 14 letter, Money for Nothing, argued that stocks were expensive and credit excessive. Chris saw margins peaking above 12% in the third quarter of 2018 and assumed $140 of S&P 500 operating earnings at 15x, an optimistic fair value of 2,100 versus roughly 2,600. Rebuilding S&P 500 cash flows to the 1980s, his team found buybacks of about 3% of market value a year cut share counts only 1%, implying 2% annual dilution, largely from restricted stock.
Semper Augustus held about 30 stocks, its top 10 near 75% of capital, earning 13% on equity; more than half had net cash. Chris sold half of a 4% Dollar General (US: DG) position, bought near $60 and recently above $160, to buy more Disney (US: DIS), which he had held at only 1% since buying at $99. Closed parks and cruises, a third of operating income, would push 2020 below his $7.50 estimate, but he valued 2021 and 2022 earning power.
Cummins (US: CMI), already in a downturn, held $1.5 billion of cash and almost $3 billion of revolver capacity as truck makers shut plants, while its service network kept trucks running. Earnings of about $12 could fall to $7 or $8, but Chris expected no bailout. At Berkshire Hathaway (US: BRK), business interruption cover generally required property damage, GEICO would gain as driving stopped, and the railroad and utilities, about 25% of profit, were largely protected. MSR profit of $10 billion could halve.
Chris put Berkshire’s normalized economic earnings at about $40 billion, so a market cap below $400 billion meant about 10x, a once-in-a-lifetime chance to back the truck up. Beyond the crisis, he warned that debt monetization had opened Pandora’s box. Bayer shareholders salvaged value through German hyperinflation, war and Allied control, convincing him that businesses selling necessities store value.
Disclaimer
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