Kellogg’s ad spending fell 33% from 2010 to 2018.) Neither stock looks expensive at around 14-15 times earnings today, but if Stahl is right and growth fails to materialize as expected, they could actually be overvalued at these levels. And Stahl isn’t the only one questioning the sustainability of some big-name brands today... In 2013, investing legend Warren Buffett worked with Brazilian investment firm 3G Capital to buy ketchup maker H.J. Heinz and form packaged-foods company Kraft Heinz. But in a recent Financial Times interview, Buffett did not disagree that 3G Capital likely Even owning the best sacrificed the long-term health of the business for short-term profits by adding leverage and cutting costs sharply. He denied the problem was underinvestment in the brand, but admitted with potentially worse consequences over the long term: “overestimating the strength of the Kraft Heinz brands and their power with retailers.” And 3G Capital’s leader, Jorge Lemann, publicly admitted that sentiment last year. As he explained to the crowd during the 2018 Milken Institute Global Conference in April 2018... I’ve been living in this cozy world of old brands and big volumes. We bought brands that we thought could last forever. businesses won’t save you during the next financial disaster.
and Amazon achieves all of this margin expansion and all this profit growth, the return to shareholders would be 5.23% per [year]. Again, this makes the unlikely assumption that the company issues no more shares. It does seem like a great deal of risk for a rather unexciting rate of return. Stahl went through a similar exercise for Netflix... It resulted in a similar conclusion. Starting in late 2017, I sounded similar alarms about Facebook... and the stock lost 19% of its value in a single day last July. These are all great businesses, but here’s the thing... Even owning the best businesses won’t save you during the next financial disaster . In early 2000, most investors viewed tech giant Cisco as the “no brainer”... But then the dot-com bubble burst, and the stock plummeted nearly 90% in the ensuing bear market. Almost two decades later, Cisco still hasn’t recovered to its dot-com high. And it isn’t just the big, favored tech companies... Investors also love to scoop up shares of so-called “wide moat” brand-name companies, planning to hold them for the long term. Stahl reviewed consumer-goods giants Kellogg and PepsiCo in his letter... He wondered how they’ll maintain their moats as advertising spending and other investment metrics decline. (For example,
68
May 2019
Made with FlippingBook Learn more on our blog