November 24, 2014 - Investing Like Warren Buffett
Warren Buffett has become a legend for his value investing strategy, buying stock in proven performers and then holding these stocks for the long term. Few would expect the Oracle of Omaha to be swayed by short-term gains generated by mergers and acquisitions. For this reason, some observers are scratching their heads over his recent interest in Charter Communications.
To gain some understanding of Buffett's motives, it may be necessary to explore the long and somewhat convoluted cable industry merger saga currently swirling around Charter Communications.
In 2013, Charter began pursuit of a merger with Time Warner Cable. At the time, Charter saw an opportunity to become the number two cable supplier in the country. This plan was quickly thwarted when Comcast moved in with its own offer of $45 billion for Time Warner.
At that point, it seemed that Charter would be left with nothing, but the cable company appears to have renewed reason for optimism. Charter may be in line to add millions of subscribers as Comcast will be forced to divest itself of customers in some areas of the country in order to satisfy the Federal Communications Commission and the Justice Department. After all is said and done, Charter could wind up where it set out to be? the second largest cable operator in the country.
Such an outcome for Charter would make Buffett's investment look less like a short term play based on merger activity and more like a long term investment in a company poised for future growth.
In any case, the investment in Charter fits with Buffett's ongoing strategy of media industry investment. Though the size of the Charter acquisition means that Buffet must have signed off on it, Berkshire's stock pickers, Todd Combs and Ted Wechsler's fingerprints appear to be on the buy. The two have presided over recent purchases of DirecTV and Verizon.
The DirecTV purchases have been particularly interesting. Berkshire originally purchased a $200 million position in the company in 2011. When it bought into Charter, Berkshire sold off 30% of its DirecTV holdings. Recently, the DirecTV position has been increased to nearly the original level. With DirecTV involved in negotiations with AT&T, Berkshire's recent purchase may appear as another attempt to take advantage of merger activity. When viewed as part of a larger series of moves, it can be interpreted as a longer term value investment.
Chart courtesy of stockcharts.com
Charter Communications would appear to be a part of Berkshire's ongoing effort to expand their holdings in the media industry. Given Buffet's well established track record for picking solid performers, we will pursue a covered call strategy to take advantage of the company's strengths. Look at the December 160 covered call for net debit of about $156 per share. You will need to use limit orders to place this trade. This trade has a target return of 2.6% over 30 days, which is an annualized return of 31.63%, (for comparison purposes only).
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