Editors of some top-performing stock-market newsletters are convinced that Warren Buffett is wrong to have sold IBM shares.
I’m referring, of course, to the latest regulatory filing of Buffett’s company, Berkshire Hathaway BRK.A, +0.46% , BRK.B, +0.94% which reported that it had sold almost all of its IBM stake. This follows another sale of a big block of IBM IBM, +1.59% stock last year.
These top-performing newsletters responded to Buffett’s no-confidence vote by continuing to heavily recommend IBM. Betting that Buffett made a mistake is risky, of course. But given the market-beating track records of the several newsletters continuing to recommend IBM, this may well be a case in which Buffett will eventually regret his decision.
Kelley Wright, editor of the Investment Quality Trends newsletter, boldly told me that, while he intends “no disrespect” for the so-called Oracle of Omaha, “I don’t pay any attention to what he does.” Wright’s newsletter is in first place for risk-adjusted performance over the last 30 years according to my newsletter tracking service.
That’s because Wright’s approach focuses on a company’s relative dividend yield. If the current yield is close to the high-end of the historical range of that company’s yield, then Wright concludes that the stock is undervalued — provided that the company’s financials are strong enough to continue paying its dividend.
Take IBM, which is one of the stocks Wright recommends. Its stock currently sports a dividend yield of 3.8%, which is close to the high-end of its historical range of 1.3% to 4.0%. Furthermore, it’s in strong enough financial shape to make a dividend cut unlikely: Its S&P quality ranking is A-, for example, and its dividend payout ratio is a modest 52%, according to Wright’s calculations. That ratio compares to an average of 51% among the 200+ blue chip stocks he analyzes on a regular basis.
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John Buckingham, editor of the The Prudent Speculator newsletter, also takes issue with Buffett’s verdict on IBM. His newsletter is in first place for non-risk-adjusted performance over the last 30 years among the newsletters I monitor.
“Certainly, we are always disappointed when the Oracle of Omaha exits a position in which we are invested,” Buckingham said in an email. “But we think Mr. Buffett should have been more patient as the 3.8% dividend yield on IBM is nicely higher than the ‘coupons’ he talks about on his Treasury holdings. Further, we think that a P/E ratio of 11 is inexpensive.”
To be sure, Buckingham conceded, “it is hard to get excited about [IBM’s] lackluster overall top- and bottom-line growth,… …even as we believe that the terrific growth and prospects going forward for the Strategic Imperatives segment, which had revenue of $37 billion (46% of the firmwide total) in 2017 and saw growth of 14% in the latest quarter, can be a catalyst toward a more reasonable valuation for the stock.”
Gray Cardiff, editor of the Sound Advice newsletter, emphasizes that IBM’s healthy dividend makes it relatively painless to wait for this growth to materialize — even if it takes longer than impatient investors would like. Cardiff’s newsletter has beaten the dividend-adjusted S&P 500 SPX, +1.10% over the last 20 years by 1.1 percentage points annualized, according to my performance monitoring service. Not only is IBM’s yield well-above that of Treasurys, the company is likely to increase its dividend even more in coming years. “IBM has increased its dividend each year for the past 22 years,” Cardiff pointed out in an email.
In fact, given IBM’s attractive prospects and healthy dividend yield, and Buffett’s famous focus on the long term, more than one of the top performing newsletter editors wonder if Buffett’s decision was motivated by extraneous factors such as harvesting tax losses.
Regardless, not one of the top performing newsletters I monitor has downgraded IBM, and it remains tied for being the most recommended among these top-performing newsletters. So you are in good company if you decide not to follow Buffett’s lead.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com .