A look at Li Lu’s American Top 3
Li Lu (Trades, Portfolio) is a legendary value investor who runs Himalaya Capital Management. He is much appreciated by
warren buffet Right arm of (Professions, Portfolio)
Charlie Munger (Trades, Portfolio), who called Li a genius and even gave him some of his investments.
Li is even credited with giving Munger and Buffett the idea to invest in Chinese electric vehicle maker BYD Co (SZSE: 002594, Financial). Berkshire Hathaway reportedly purchased $232 million worth of BYD stock for a 10% stake in 2008. We don’t know any concrete details about this stake, as it is not a US stake and therefore should not be reported to the Securities and Exchanges Commission. , but if the holding has stayed the same since then, it would now be worth around $5.6 billion.
Clearly Li knows a lot about stock picking. So, in anticipation of Q2’s 13F filings, which are likely to hit the headlines soon, let’s take a look at the top three holdings in Li’s Q1 13F portfolio.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They only include an overview of long positions in US-listed stocks and US certificates of deposit at the end of the quarter. They do not include short positions, international non-ADR holdings or other types of securities. However, even this limited repository can provide valuable information.
micron (MU, Financial) is the fourth largest semiconductor company in the world and one of the “Big 3” providers of DRAM technology. RAM (Random Access Memory) is an essential component of all computers and mobile phones. The stake represents 37% of Li’s U.S. equity portfolio.
The rise of 5G mobile devices is a powerful secular tailwind behind the company, as 5G devices have 50% more DRAM and double the NAND compared to 4G phones. Micron derives about 71% of its revenue from DRAM and 26% from NAND, which is used in solid-state hard drives (SSDs).
Micron shares have plunged from highs of $94 per share in January 2022 to lows of $51 per share recently, which may be one of the reasons why investors such as
Mohnish Pabrai (Trades, Portfolio) were buying stocks lately. Li last added to this position in the third quarter of 2020 at an average price of $48 per share, around 22% below where the stock is currently trading at the time of writing.
Micron generated strong results for the quarter ending June 2022. It generated revenue of $8.64 billion, up 16% from $7.42 billion in the quarter ending in June 2021. Operating profit was $3 billion, up a rapid 36% from $2.3 billion. generated during the same period last year.
The bad news is that management announced poor guidance for the full year and, according to the CEO, “industry demand has weakened.” The semiconductor industry is notoriously cyclical and all market sectors tend to go from the supply shortage in 2020) to the supply overflow or weak demand we are seeing right now. But if we zoom out, in the long term, the trend of more electronic devices and 5G penetration remains a strong secular tailwind.
Micron management expects earnings per share on a non-GAAP basis to be between $1.43 and $1.83 per share, which is below consensus estimates of $2.62 per share.
According to the GF Value line, Micron has a fair value of $83 per share and is therefore slightly undervalued at the time of writing.
2. Bank of America
Bank of America (BAC, Financial) is the second largest bank in the United States and the eighth largest bank in the world. The bank has one of the largest physical branch networks in the United States and has become a “one-stop-shop” for retail banking. He has a 25% weighting in Li’s US equity portfolio.
It is also one of
warren buffet (Trades, Portfolio)’s top stocks and represents 11% Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, financial) $363 billion portfolio.
Li Lu (Trades, Portfolio) recently added to its position in Bank of America in the fourth quarter of 2021 at an average price of $45 per share, or 30% above the current share price.
Bank of America divides its business into four main segments;
- Consumer banking (36% of turnover)
- Global Wealth Management (22% of revenue)
- Wholesale Banking (22% of turnover)
- Global markets (20% of sales)
Bank of America reported flat earnings for the first quarter of 2022. It generated revenue of $23.2 billion, up 2% year-on-year, and net interest income (NII) of 11. $6 billion, up 13% year-on-year. thanks to strong growth in deposits and the investment of excess liquidity.
Bank of America could act as an “inflation hedge” as it has a large portfolio of variable loans. So, as interest rates rise, Bank of America generates more profit. According to management, for every 100 basis point increase in interest rates, net interest income is expected to increase by $6.5 billion.
According to the GF Value line, Bank of America has a fair value of $37 per share and is therefore slightly undervalued at the time of writing.
2. Berkshire Hathaway
warren buffet (Trades, Portfolio) investment conglomerate Berkshire Hathaway is the third largest portfolio in Li’s US portfolio, taking up 13% of portfolio space. Li holds the Class B shares (BRK.B, Financial) and was buying more in the third quarter of 2021 at an average price of $280 per share, which is close to where the stock trades today.
Berkshire Hathaway is one of the largest investment conglomerates in the world. It has over 360,000 employees but only 25 work at headquarters. This unique decentralized setup is only made possible by Buffett’s unique management style.
Berkshire’s investment strategy has been described many times by many different people, so going too deep here would be like beating a dead horse. Buffett summarized his strategy well in Berkshire’s 2021 annual letter:
“Our goal is to have significant investments in companies with both lasting economic benefits and a top notch CEO.
Buffett also described Berkshire’s “giant four” in the letter, which include insurance, Apple (AAPL), BNSF and Berkshire Hathaway Energy.
Berkshire insurance companies include GEICO, General Re, National Indemnity, etc. The company holds “100% of the free float” in these companies. Buffett said in the 2021 shareholder letter;
“The product will never be obsolete, and the sales volume will generally increase with economic growth and inflation.”
Apple is one of Berkshire’s most successful investments and makes up around 42% of the US equity portfolio by market value. Apple paid Berkshire “$785 million” in dividends in 2021. Yet their “share” of Apple’s earnings was $5.6 billion!
BNSF (Burlington Northern Santa Fe) operates the largest rail network in the United States with 32,500 miles of track. The railroad hit a record $6 billion in revenue in 2021.
Berkshire Hathaway Energy, or BHE, earned a record $4 billion in 2021, a 30-fold increase from $122 million earned in 2000, when Berkshire first bought shares. Berkshire now owns a 91.1% stake in the company.
warren buffet (Trades, Portfolio) also recently stocked up on shares of Occidental Petroleum (OXY, Financial), and there is even speculation that he may be considering acquiring the company outright. You can read more about this topic here.
Li Lu (Trades, Portfolio) is an incredible value investor, a genius who stands alongside
Charlie Munger (Businesses, Portfolio) and
warren buffet (Jobs, Portfolio). Unfortunately, we have little information on his non-US holdings, but we can see some of his positions through 13F reports. Even this limited information can be valuable for investors to analyze.