Practical analysis for investment professionals
07 March 2016

The C-Suite Speaks: Warren’s Wisdom

The C-Suite Speaks: Warren's Wisdom

Each week our team at Avondale Asset Management reads dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts as well as other forums.

Last week was a slow one for earnings calls, but Warren Buffett did do an interview with CNBC that featured classic Buffett wisdom. This week we also included excerpts from Dan Loeb’s Third Point Reinsurance conference call. Loeb was relatively positive on the economy, but not very excited about opportunities for activist investing.

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The Macro Outlook

Warren Buffett said despite the occasional soft spot, the economy has continued to improve.

“Business, I would say, is a little softer in many places, than people . . . than I anticipated say four or five months ago . . . But, you know . . . overall the economy’s just kept moving up around 2%.” — Berkshire Hathaway (BRK) chairman and CEO Warren Buffett (Conglomerate)

Dan Loeb sees a lot of people on alert, but not recession.

“So as to your question about recession, look, along with the other things like China oil prices, Fed policy, etc., I mean, that’s on the top of people’s list as far as concerns go. We are looking at economic data. . . . What we do see is weakness in companies with cyclical exposure. . . . But as far as industrial companies, consumer companies, certainly health care companies, we are not seeing any sign of a recession. We see a lot of people that are on alert, but there haven’t really been any signs of recession from either the economic data, the surveys, or individual conversations with companies.” — Third Point Reinsurance (TPRE) chief executive Dan Loeb (Reinsurance)

Companies generally had positive things to say about the economy. Dollar Tree is positive with how its current quarter is trending.

“As far as current trends . . . I’m pleased with where we are. . . . My expectation is that . . . we’re on track for a good first quarter.” — Dollar Tree (DLTR) CEO Bob Sasser (Discount Stores)

Construction is as robust as its ever been in New York, Florida, and California.

“Building markets are stronger than ever in California, New York and Florida.” — Tutor Perini (TPC) chairman and CEO Ronald Tutor (Engineering and Construction)

Medtronic didn’t see the broader economic situation impacting its performance.

“Anniversarying of the Affordable Care Act and that probably had a little bit of an impact. The overall procedure volumes based on the economy, I think, were more or less steady. . . . There were no economy-related issues.” — Medtronic (MDT) chairman and CEO Omar Ishrak (Medical Device)

Del Frisco’s restaurants said that its high-end patrons are not tightening their belts.

“Contrary to popular belief, the upscale guest is spending more money. We see that at the Del Frisco’s brand. We see [that] at the Sullivan’s brand.” — Del Frisco (DFRG) CEO Mark Mednansky (Restaurants)

Sun Hydraulics said that its distributors have reduced inventories as much as possible.

“We also follow our distributor inventory, and we saw that inventory started going south in late ’14, continuing into ’15. And it appears that that distributor inventory, they’ve taken it down to as far as they can take it down. So when they get an order from a customer, they now have to place orders on us.” — Sun Hydraulics (SNHY) president and CEO Allen Carlson (Industrial Components)

At some point, you would expect to see companies spend more on expansion.

“I think another thing that’s going to happen, I can’t predict when, and that is consumer spending will eventually turn into capital spending in projects. That hasn’t happen yet, but I think the way out of this slowdown — I won’t call it a recession, but the slowdown — will be based upon consumer spending driving things into the capital markets.” — Sun Hydraulics (SNHY) president and CEO Allen Carlson (Industrial Components)

But then again, if Donald Trump gets elected . . .

“If Donald Trump’s plans were ever implemented, the country would sink into a prolonged recession. . . . His proposed 35% tariff-like penalties would instigate a trade war that would raise prices for consumers, kill export jobs, and lead entrepreneurs and businesses of all stripes to flee America. His tax plan, in combination with his refusal to reform entitlements and to honestly address spending would balloon the deficit and the national debt. So even as Donald Trump has offered very few specific economic plans, what little he has said is enough to know that he would be very bad for American workers and for American families.” — Mitt Romney (Son of former American Motors President, George Romney)


Government policies are already leading to super-charged real estate markets in China.

“Favorable government policies in China’s real estate sector, including easy monetary policies, relaxed home purchase and lower down-payments, have supported the markets we serve. . . . The China real estate market, it’s actually getting better. It’s getting actually crazy in recent weeks. . . . The real estate market in Shanghai is getting overheated.” — Xinyuan Real Estate (XIN) CFO George Liu (Chinese Real Estate Developer)

Baidu is a carbon copy of Google, including the moon shot projects.

“We see a very bright future for autonomous driving, especially here in China where we face severe pollution, frequent traffic jams, and high mortality rates from traffic accidents. . . . These days, the search algorithm itself is pretty much machine learning.” — Baidu (BIDU) co-founder, chairman, and CEO Robin Li (Search Engine)

Baidu is the type of company that benefits as the Chinese government promotes a “service based economy.”

“Even as China’s overall growth slows, service and domestic consumption are growing faster. . . . Baidu largely services these growing sectors, with our top revenue verticals by broad classification including retail e-commerce, local services, health care, financial services, and education. We are confident in our outlook for Baidu and China’s growing sectors. Baidu plays a vital role as the platform to connect users and merchants in these verticals.” — Baidu (BIDU) co-founder, chairman, and CEO Robin Li (Search Engine)


Volatility in public credit markets usually precedes defaults in private credit markets.

“The fourth quarter was marked by escalating volatility in the public credit markets, a scene that continued into early 2016. As has been observed many times in the past, private credit markets tend to lag public credit markets. We expect that this time it is no different.” — Goldman Sachs BDC (GSBD) COO Jonathan Yoder (BDC)

We’re in an interest rate environment that the world has never seen.

“What’s happened with interest rates is really extraordinary. I mean, you can go back and read everything Keynes wrote and everything Adam Smith wrote or Ricardo wrote . . . or you name it, and Paul Samuelson . . . you won’t see a word . . . about sustained negative interest rates. I mean, [it’s] really something the world hasn’t seen.” — Berkshire Hathaway (BRK) chairman and CEO Warren Buffett (Conglomerate)

Interest rates have a huge gravitational pull on valuations.

“It does have the effect of making all assets more valuable. I mean, interest rates are like gravity in valuations. I mean, if interest rates are nothing, you know, values can be almost infinite.” — Berkshire Hathaway (BRK) chairman and CEO Warren Buffett (Conglomerate)

Negative rates absolutely impact people’s behavior.

“Negative rates affect everybody’s behavior. I mean, hell, I know that I paid more for precision cast parts because interest rates are so low than I would’ve paid if interest rates were 6% or 8%. I mean . . . it absolutely has an effect on my behavior. . . . I mean, it is a huge stimulus.” — Berkshire Hathaway (BRK) chairman and CEO Warren Buffett (Conglomerate)

No one can predict the future.

“In economics the most important thing to remember . . . after anything that happens, if somebody tells you, ‘This is going to happen,’ you have to say, ‘And then what?’ . . . It’s like in physics or anything else. There’s always an ‘And then what?’ So the question I always ask myself, ‘And then what?’ And in terms of the, say, no interest rates, when I say “And then what?” I don’t know the answer. . . . Nobody’s seen this movie before. And you can go back and read all the great economists and nobody’s written about a long period of negative interest rates.” — Berkshire Hathaway (BRK) chairman and CEO Warren Buffett (Conglomerate)

Dan Loeb doesn’t see as many activist opportunities because companies have focused on rationalizing their capital structure.

“I think what’s happening actually is a lot of companies have undertaken the sorts of operational improvements and more rational capital structure moves, that is making it . . . more difficult for activists, because you don’t have as many blatantly underperforming companies, because boards are holding the management teams more accountable.” — Third Point Reinsurance (TPRE) chief executive Dan Loeb (Reinsurance)

He’s more focused on under-valued opportunities.

“So we’re not seeing — that that’s not really what we’re focusing on. We’re really focusing on securities that are under-valued where we can make investments in the constructive and not have to take any kind of confrontational role with management teams.” — Third Point Reinsurance (TPRE) chief executive Dan Loeb (Reinsurance)

There are 29 million small businesses in the United States and one million use QuickBooks Online.

“In terms of opportunity ahead in total addressable market, there’s about 29 million small businesses in the United States . . . and we currently have one million that are using QuickBooks Online.” — Intuit (INTU) chairman and CEO Brad Smith (Accounting Software)


Poor results from traditional retailers continue to create openings for off-price retailers.

“As long as traditional retailers continue to perform the way they are performing, you would think that there would be more opportunities there.” — Ross Stores (ROST) CEO Barbara Rentler (Off-Price Retail)

The natural foods channel has fallen into a bit of a lull.

“We’re at a little bit of a lull, as you know, within our natural channel. But I feel fairly optimistic that we will also come out of that. It may take a couple years, but we will come out of that, too.” — United Natural Foods (UNFI) president and CEO Steven Spinner (Foods Distributor)

Television now only reaches 85% of US adults.

“According to Nielsen’s Q3 comparable metrics report, TVs weekly reach continues to decline, now reaching only 85% of US adults 18-plus, and it’s particularly losing ground with the key millennial audience. By contrast, radio continues to reach 93% of all US adults 18-plus.” — Clear Channel (CCO) president, COO, and CFO Richard Bressler (Radio and Billboards)

The price environment for online retailers is extremely competitive.

“I think you are very well aware that the most aggressive pricing environment in retail exists online, because of all the dynamic price scraping that exists and the numerous times specifically pure-play e-commerce sites can change prices throughout the day.” — JC Penney (JCP) president and CEO Marvin Ellison (Retail)


Workday says that legacy incumbents are suffering for not fully adopting the cloud.

“I think when both companies, when SAP and Oracle moved in to the cloud, they were given a bit of a hall pass. They marketed the right terms, they used the same buzzword. But at the end of the day, we all get measured about getting customers successful and in production and they failed. They have some proof points here and there, but in the large part, neither really embraced a true cloud model and I think they are paying the price for that.” — Workday (WDAY) co-founder and CEO Aneel Bhusri (SaaS)


The dry bulk shipping industry is facing perhaps its most difficult year ever.

“We expect 2016 to be one of the most challenging years in dry bulk history.” — Star Bulk Carriers (SBLK) director and CEO Petros Pappas (Dry Bulk Shipping)

Hopefully earnings are as low as they can go, but we’re not near the end of the dry bulk recession yet.

“We can’t go much further down on the earnings. . . . But we’re not near yet at the end of recession.” — Diana Shipping (DSX) director, chairman, and CEO Simeon Palios (Dry Bulk)

Materials, Energy

Warren Buffett explained why lower oil prices have not immediately boosted the economy.

“There’s no question that it is good for the country . . . lower oil prices. But what happens is that the benefit to the consumer, it feeds in. Next time you go . . . to the filling station, the gas station, you know, you save 15 or 20 bucks. It feeds in very slowly. But the capital values disappear immediately. So if you’re sitting with an oil industry in this country that’s producing 10 million barrels a day or something of the sort . . . at $100 — 10 million barrels a day is a billion dollars of revenue. $365 billion a year. Capital values may be $2 trillion based on that. Now, all of a sudden, you take it down to where you’re not making any money, and the $2 trillion of capital values disappears very quickly. The bank loans against it get sour very quickly. They quit buying from the service companies very quickly. So the negative effects to this huge capital value happen very quickly, whereas it’s easing to the consumer very slowly. So even though it’s good for the country net, when you’re an importing economy, it can be very bad in the immediate effects it has.” — Berkshire Hathaway (BRK) chairman and CEO Warren Buffett (Conglomerate)

Lower gas prices are definitely good for auto parts retailers though.

“Clearly the economic cycle that we’re [in], with lower gas prices which are leading to really, really high miles driven, is very favorable for us.” — Autozone (AZO) chairman, president and CEO Bill Rhodes, III (Auto Parts Retail)

EOG says that it still has opportunities to improve productivity that could drive returns back to triple digits, though this is probably not a positive data point for oil prices.

“It’s important to realize that this is much more than a small incremental shift in our drilling program. It’s a major step change in terms of per-well productivity. For the average 2016 well, we estimate a 50% increase in the first 120 days of production per foot of treated lateral versus wells we completed in 2015. Our shift to premium drilling allows EOG to quickly return to triple-digit, and I’ll say this again, to quickly return to triple-digit capital rates of return as oil prices improve to modest levels.” — EOG Resources (EOG) chairman and CEO William Thomas (Oil Exploration and Production)

No one wants to be fooled by a false bottom again like last year.

“When the oil prices begin to recover, we’re going to be disciplined going forward. We . . . obviously don’t want to be fooled again, like the industry was fooled last year by a little bit of an uptick in oil price and it is not sustainable. So, we’re going to be disciplined and cautious going forward on ramping up capital until we’re very much convinced that this is not a short-term uptick in the price, and that the market is more in balance, and that the price is more sustainable.” — EOG Resources (EOG) chairman and CEO William Thomas (Oil Exploration and Production)

Dan Loeb sees more opportunities in debt than equity in energy markets.

“We’re watching the energy markets very, very closely. We think that the better opportunities are on the credit side than on equities. As far as discounting, potential bad news ahead, we think the equities reflect more optimism about the price.” — Third Point Reinsurance (TPRE) chief executive Dan Loeb (Reinsurance)

Miscellaneous Nuggets of Wisdom

Incentivize employees to think like owners.

“Our vision, values, and process are building the culture of ownership and empowerment necessary for the long-term achievements of our company.” — Kraft Heinz (KHC) CEO Bernardo Hees (Packaged Food)

There are no hyper-rich economists.

“I don’t pay any attention to what economists say, frankly. . . . I mean, all these economists with 160 IQs and spending their life studying it. And can you name me one super wealthy economist who’s ever earned money out of securities? No. I mean, just go down the list now.” — Berkshire Hathaway (BRK) chairman and CEO Warren Buffett (Conglomerate)

You’d be better off in stocks if you didn’t get a quote on them.

“I mean if I owned a McDonald’s stand here in Omaha, I would not get a quote on it every day. . . . What I would think about is, ‘How’s this going to work over five years or 10 years?’ I mean, people [are] going to keep eating hamburgers, they’re going to like ours, and all of that sort of thing. And you’d be better off in stocks if you did not get a quote on them.” — Berkshire Hathaway (BRK) chairman and CEO Warren Buffett (Conglomerate)

It’s a good thing when robots displace people’s jobs.

“Wouldn’t it be wonderful if someday we got to the point where there were robots everyplace? They were running farms, they were running Apple, they were running Berkshire Hathaway. And all you had to do was one person could punch a button at the start of every morning and all the goods and services that we’re getting now would be turned out by robots or whatever? And we’d have the goods. We’d have 18 million cars a year. You’d have a million more housing starts. We’d have all the iPads being sold. And if all of that came to one person pushing a button, would that be a tragedy? I mean, just think how how well we’d live. Now we’d have, instead of having to work 35 hours a week, we might work an hour a week or something of the sort. So, I mean, basically, the more output you can get from people, . . . it frees them up to do other things. And one of the things it frees them up to do is work less.” — Berkshire Hathaway (BRK) chairman and CEO Warren Buffett (Conglomerate)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©AP Photo/Nati Harnik

About the Author(s)
Scott Krisiloff, CFA

Scott Krisiloff, CFA, is the CEO of Avondale Asset Management, an independent investment advisory firm located in Los Angeles. Krisiloff is the author of the firm's blog, Company Notes.

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