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Mr. Market's Masquerade Party

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MR. MARKET’S MASQUERADE PARTY After stock markets plummeted in the first quar- an apple pie into four big slices to commemo- ter due to the global COVID-19 pandemic, U.S. rate the occasion and celebrate Apple’s four for equity markets staged a remarkable rebound one stock split. Someone should ask Siri if four with the S&P 500 and NASDAQ reaching recent slices of pie are really worth more than the record levels. This marks the quickest recovery whole pie. A giddy Mr. Market thinks so. from a bear market in history amid a continuing healthcare crisis and double-digit unemploy- Patriotic music played when Uncle Sam arrived This issue: ment. The sharp stock market rally from the with deflated dollar bills drooping from the brim March 23rd lows was due to massive monetary of his hat. By contrast, a gold rush led many Stock Performance and fiscal stimulus, better than expected second guests to join the party in glittering gold masks. Pages 2-3 quarter financial results as the economy re- Even Warren Buffett appeared sporting a bright opened and optimism on COVID - 19 treatments gold tooth, although everyone whispered that it Portfolio Review and potential vaccines. really was not Buffett behind that mask. Buffett Pages 4-5 has long disparaged gold as an investment even To celebrate record stock market highs, Mr. though Berkshire Hathaway recently acquired Market is using his fiscal stimulus check to throw a stake in American Barrick, a gold miner. This Fundamentals a masquerade party with everyone required to was likely a purchase made by one of the other Pages 6-7 wear masks. Federal Reserve Chairman, Je- Berkshire investment managers. rome Powell, agreed to preside over the punch Portfolio HI-Lites bowl. With Powell saying the Fed is “not even Riding to the party in a convoy of tractors, many Pages 8-9 thinking about thinking about raising rates,” the folks arrived at the party wearing bandanas for party is expected to continue until the economy masks. As people move from crowded cities to Under the Spotlight gets back on its feet to dance again. green acres in the country to garden and raise Intel chickens, Tractor Supply has seen its stock Page 10 Given that this is an election year, Mr. Market plow up a nearly 60% gain this year and now set up the head table for guests wearing Donald appears fully valued. A UPS driver showed up to Trump and Joe Biden masks. Goodie bags in- the party in his unmistakable brown uniform. Walgreens clude bottles of Pepto Bismol to deal with plenty During the past three months, UPS has been Page 11 of political rhetoric from both sides of the table. one of the strongest stock market performers No matter who wins the election, the first priority with the stock up 64% and also appearing fully Bank of Hawaii will be addressing an economy still reeling from valued. Page 12 high unemployment and a boatload of bankrupt- cies due to the pandemic. Raising taxes and The UPS driver quickly delivered bubble party imposing new regulations will not be an immedi- favors to all the guests running around in Robin- ate political prescription to restoring economic hood masks. If Mr. Market peeked behind the health. Robinhood masks, he would find signs of ex- treme speculation that have emerged with pen- The most raucous table at the party hosts tech- ny stocks and even the stocks of bankrupt com- nology company leaders from Apple, Face- panies rising exponentially on huge trading vol- book, Microsoft, Alphabet and Amazon toast- ume. This often is a sign that the party music ing their dominance of the stock market. All may soon stop or at least pause until Dr. Fauci these stocks appear fully valued. In fact, these arrives with a coronavirus vaccine or Mr. Market five companies are valued more than the next passes out from too much punch. With few bar- 50 largest companies in the S&P 500 combined. gains to be found in the stock or bond market Big tech gains mask weakness in many other and valuations stretched even on HI-quality sectors of the market. Envious cheers could be companies, we have become party poopers and heard when Apple was the first U.S. company net sellers of stocks. We don’t mind patiently ever to surpass the $2 trillion market capitaliza- fanning ourselves in the corner with cash until tion milestone. A fellow in a Tim Cook mask cut Mr. Market sobers up. Editor: Ingrid R. Hendershot, CFA September 2020 Volume 27 Issue 3 Page 2 Hendershot Investments, Sept. 2020 STOCK PERFORMANCE Purchase Price Total (c) Stock-Symbol Business Date(a) Price(b) 8-28-20 Return Advice* Comment Accenture-ACN Consulting 03-06-12 59.95 242.99 338% HOLD Raised free cash flow outlook for 2020 to $5.8 billion to $6.3 billion Alphabet, Cl A-GOOGL 06-10-11 256.38 New $28 billion share buyback program; Alphabet, Cl A-GOOGL Technology 06-08-15 546.47 1,639.43 265% HOLD ended the quarter with $138 billion in Alphabet, Cl C-GOOG 06-10-11 254.89 1,644.41 545% cash and minimal long-term debt Apple-AAPL iPhones, computers, 09-07-10 36.97 499.23 1,302% HOLD New $6 billion accelerated share services repurchase program; 4 for 1 stock split Automatic Data Human capital mgmt. 03-09-16 85.62 141.34 26% BUY Free cash flow up 13% in 2020 to $2.9 Processing-ADP 03-11-20 148.95 billion; generated 43% ROE Bank of Hawaii-BOH Financial services 12-3-18 79.30 56.29 -24% BUY Adding to position (see p. 12) Berkshire Hathaway- Insurance/diversified 12-28-94! 21.56 218.55 720% BUY Repurchased record $6.7 billion of BRKB 03-10-00 27.45 common stock in first half; ended 2Q 03-17-00 34.13 with more than $142 billion in cash Biogen-BIIB Biotechnology 09-09-15 286.19 281.46 -2% HOLD Alzheimer’s drug application in FDA review; $2.8 billion buyback in 2Q Brown-Forman-BFB Liquor 03-10-00 4.25 73.60 1,882% HOLD Generated 42% ROE in 2020 Canadian National Railroad 06-28-15 58.05 106.34 53% HOLD Trimming position (see p. 4) Railway-CNI 12-03-19 88.61 Cisco Systems-CSCO Internetworking 03-12-97 5.78 42.20 774% HOLD Generated 30% ROE in 2020; ended quarter with $29 billion in cash Cognizant Tech.-CTSH IT consulting 09-07-12 33.43 67.69 110% HOLD Free cash flow increased significantly in 2Q to $886 million F5 Networks-FFIV Network technology 09-09-15 121.84 130.27 7% HOLD Ended 3Q with strong balance sheet with $1 billion in cash Facebook-FB Social media 06-04-18 193.35 293.66 52% HOLD Trimming position (see p. 4) FactSet Research-FDS Financial information 03-14-14 104.42 352.92 251% HOLD Expanded share buyback program by $220 million Fastenal-FAST Industrial supplies 03-10-00 2.44 48.84 209% HOLD Free cash flow +91% to $402 million in 09-07-17 20.85 first half of 2020 General Dynamics-GD Aerospace and defense 12-03-19 176.29 152.27 -12% BUY Backlog up 22% to $82.7 billion as of end of second quarter Gentex-GNTX Auto mirrors 12-08-15 16.29 27.28 79% HOLD Strong balance sheet with $585 million in cash and no long-term debt as of 6-30-20 Genuine Parts-GPC Diversified distributor 03-10-00 20.81 94.88 43% BUY Cash flow jumped significantly to $921 09-09-15 84.09 million during the first half; dividend 03-13-20 84.69 yields 3.4% Hormel Foods-HRL Food 06-14-01 6.01 50.62 874% HOLD Free cash flow +56% YTD to $419 million Johnson & Johnson-JNJ Healthcare products 03-10-00 35.48 153.64 68% BUY Acquiring Momenta Pharmaceuticals for 09-10-18 137.52 $6.5 billion in cash *All recommendations made in this newsletter may not be suitable for every account, depending on an individual’s investment objective, risk-tolerance and financial situation. It should not be assumed that recommendations will be profitable or will equal the performance of securities listed here or recommended in the past. Clients should contact Hendershot Investments, Inc. if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. (a) Date purchased for Hendershot IRA. See personal trading restrictions footnote on page 3. ! Received BRKB shares following acquisition of FlightSafety Int’l in Dec ‘96 and Int’l Dairy Queen in Jan ‘98 ( b) Price includes commissions paid. (c) Total return includes dividends. NI-Net Income, Q-quarter, H-half, YTD-year-to-date, ROE-return on equity www.hendershotinvestments.com Page 3 (continued) Purchase Price Total (c) Stock-Symbol Business Date(a) Price(b) 8-28-20 Return Advice* Comment 3M-MMM Diversified 03-07-07 73.70 165.66 8% BUY Free cash flow +18% in 2Q to $1.5 billion 09-10-18 213.64 Mastercard-MA Global payments 09-05-14 76.45 366.12 387% HOLD Resumed $1 billion share buyback in 2Q; buying Finicity for $825 million Maximus-MMS Business services 06-02-16 57.54 78.21 18% HOLD Raised fiscal 2020 sales and EPS outlook, 12-03-19 73.70 with EPS expected in range of $3.20-$3.30 Microsoft-MSFT Software 06-07-07 30.16 228.91 767% HOLD Free cash flow +18% to $45 billion in 2020; 12-03-10 26.94 ended fiscal year with $137 billion in cash Nike-NKE Shoes and apparel 03-07-17 56.55 112.29 104% HOLD Generated 32% ROE in 2020 Oracle-ORCL Software 09-05-13 32.31 57.88 94% HOLD In 2020 paid $3 billion in dividends and repurchased $19 billion of shares Paychex-PAYX Payroll processing 12-03-10 29.49 77.31 235% HOLD Generated 40% ROE in 2020; free cash 08-31-11 27.28 flow +14% to $1.3 billion PepsiCo-PEP Food and beverages 03-14-14 81.89 139.94 96% HOLD Dividend increased 7%, marking 48th 03-07-18 109.42 consecutive year of dividend increases Raytheon Technologies-RTX Aerospace/Defense 09-10-01 18.45 62.24 -14% BUY Record $159 billion backlog as of end of 03-06-19 78.40 second quarter Ross Stores-ROST Off-price retailer 06-08-17 61.70 93.83 56% BUY Held $4.3 billion in liquidity at end of 2Q SEI Investments-SEIC Investment mgmt.
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