DaVita: Low-Beta Buffett Buy
10/25/2013 10:00 am EST
Stock split expert Neil Macneale, editor of 2-for-1, explains his stock split strategy and highlights his latest buy recommendation—a health care firm that counts Warren Buffett among its large shareholders.
Steve Halpern: We're here today with Neil Macneale, editor of 2-for-1 Stock Split Newsletter. How are you doing, Neil?
Neil Macneale: I'm just great. How are you?
Steve Halpern: Very good. For those not familiar with your newsletter, let me point out that you compile an ongoing model portfolio, in which you add one stock a month, and each stock you add is selected from among those that have announced two for one stock splits. Could you explain to listeners why you look to the stock split universe for your recommendations?
Neil Macneale: Yes, well, the biggest reason is that it narrows the field and I'm only looking at a few companies a month, which makes my job a lot easier.
But, the important point is that there was a study done some years back in the 90s that showed that the group of companies that split their stocks outperforms the market over a period of two or three years.
So, if you can concoct a portfolio that's made up entirely of companies that have, and you buy them shortly after their split announcement, and hold them for two to three years, you are basically invested in a group of companies that, by definition, or statistically, will beat the market, so that's my reasoning.
Steve Halpern: We haven't seen a lot of stock split announcements lately. Is there anything that you can read from that?
Neil Macneale: Well, historically, over the 17 years I've been doing this, it seems that every time the market gets nervous, regardless of how well individual companies are doing, the Boards of Directors tend to be a little reticent to split the stock.
The stock split is basically a signal into their thinking, in terms of what they see for the future of their business over the next couple of years, and any time there's that much worry in the market, I think that, psychologically, they're just reluctant to announce the split.
Steve Halpern: There seems to be a particularly large number of high-priced stocks that have chosen not to split. Off-hand I could think of Apple, Amazon, Priceline, Netflix, and Google, which moved up to the $1000 level.
Given your expertise in analyzing splits, I'm curious what you think about these high-priced companies and why they might be deciding not to split their shares.
Neil Macneale: It's an interesting question, and I have no hard data on that at all. I've never tried to dig into the thinking of the Boards of Directors of those companies that you mentioned.
But, of course, the granddaddy of them all is Berkshire Hathaway, and Warren Buffet, I think, just feels like splits are kind of a waste of a time. The only time he ever did it was when he had to meet the conditions of a merger with the railroad. Let's see, I can't remember the name, right off-hand.
Anyway, in the case of all those companies that you mentioned, I think it's kind of a high-tech or Silicon Valley status symbol, really, to have a high-priced stock and I think we'll look back in the future and see this as kind of a fad.
Otherwise, I just can't really explain it, because the companies out in the heartland are still announcing splits, even though it's obviously not at the rate that I'd like to see.
Steve Halpern: Well, you mentioned Buffet and, interestingly, the latest edition to your portfolio, DaVita HealthCare Partners (DVA) is a stock that is liked by Warren Buffet. He holds a long-term position in it, so you're in good company with this new holding. Could you tell us a little about the stock?
Neil Macneale: Well, DaVita HealthCare Partners is a provider of dialysis services. They have about 1,800 clinics across the country—most of the country. It's a well-run business.
The growth has been around 9% a year average for the last five years, both top and bottom line, but, in spite of that, they have a reasonable P/E ratio, 21.
I particularly like the fact that it has a beta of 0.55, which is just about half of the volatility of the market in general, so that's very appealing.
It would be nice if they paid a dividend, but you can't everything, so...I did like the company. It was our number two pick in September.
But instead of that, I chose to go to Tractor Supply (TSCO), which was a favorite of mine from the past. But DaVita is a good company. I didn't really like to pass it up in September. I was glad to have the opportunity to buy it in October.
Steve Halpern: So, in fact, you looked at DaVita from its stock split the month earlier, because there weren't any stock splits in the current month, correct?
Neil Macneale: That is correct, yes. I go back as far as six months if the list is too small and I need some more choices. I'll go back and look at the split announcements from the past, up to six months or so.
Steve Halpern: Well, we appreciate you taking the time today. Thank you for joining us.
Neil Macneale: You're quite welcome, Steve. Thank you for the opportunity.