Li Lu (Trades, Portfolio) is a legendary value investor who runs Himalaya Capital Management. He is highly regarded by Warren Buffett (Trades, Portfolio)’s right hand man Charlie Munger (Trades, Portfolio), who has called Li a genius and even trusts him with part of his investments.
Li is even credited for giving Munger and Buffett the idea to invest into Chinese EV maker BYD Co (SZSE:002594, Financial). Berkshire Hathaway reportedly purchased $232 million worth of BYD shares for a 10% stake back in 2008. We don't know any concrete details on this stake because it's not a U.S. holding and is thus not required to be reported to the Securities and Exchanges Commission, but if the holding has remained the same since then, it would now be worth approximately $5.6 billion.
It's clear that Li knows a lot about stock picking. Thus, in anticipation of the second-quarter 13F filings, which should start hitting the news soon, let's take a look at the top three holdings in Li's 13F portfolio as of the first quarter.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
1. Micron
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 cell phones. The holding takes up 37% of Li's U.S. equity portfolio.
The rise of 5G mobile devices is a strong secular tailwind behind the company, as 5G devices have 50% higher DRAM and double the NAND versus 4G phones. Micron makes ~71% of its revenue from DRAM and 26% from NAND, which is used in solid state hard drives (SSDs).
Micron's stock nosedived from the highs of $94 per share in January 2022 to lows of $51 per share recently, which is perhaps one of the reasons why investors such as Mohnish Pabrai (Trades, Portfolio) were buying shares lately. Li last added to this position in the third quarter of 2020 at an average price of $48 per share, which is ~22% lower than where the stock currently trades at the time of writing.
Micron generated good earnings results for the quarter ending June 2022. It generated revenue of $8.64 billion, up 16% from the $7.42 billion achieved in the quarter ending June 2021. Operating income came in at $3 billion, up a rapid 36% from $2.3 billion generated in the same period last year.
The bad news is that management stated poor guidance for the full fiscal year, and according to the CEO, “industry demand has weakened." The semiconductor industry is notoriously cyclical and all areas of the market tend to move from supply shortage (which we saw in 2020) to supply overflow or weak demand which we are seeing now. But if we zoom out, in the long term the trend towards an increasing number of electronic devices and 5G penetration is still a strong secular tailwind.
Micron’s management forecast earnings per share on a non-GAAP basis to be in the range of $1.43 and $1.83 per share, which is lower than conesus estimates of $2.62 per share.
According to the GF Value line, Micron has a fair value of $83 per share and is thus modestly undervalued at the time of writing.
2. Bank of America
Bank of America (BAC, Financial) is the second largest bank in the U.S. and eighth largest bank in the world. The bank has one of the largest brick and mortar branch networks in the U.S. and has become a “one stop shop” for consumer banking. It has a 25% weight in Li's U.S. equity portfolio.
It is also one of Warren Buffett (Trades, Portfolio)’s top stocks and makes up 11% Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) $363 billion portfolio.
Li Lu (Trades, Portfolio) was most recently adding to his Bank of America position in the fourth quarter of 2021 at an average price of $45 per share, which is 30% higher than where the stock is trading at currently.
Bank of America divides its business into four main segments;
- Consumer Banking (36% of revenue)
- Global Wealth Management (22% of revenue)
- Global Banking (22% of revenue)
- Global Markets (20% of revenue)
Bank of America reported stable earnings for the first quarter of 2022. It generated revenue of $23.2 billion, which was up 2% year-over-year, and net interest income (NII) of $11.6 billion, up 13% year-over-year on the back of strong deposit growth and investment of excess liquidity.
Bank of America could act as an “inflation hedge” as it has a large variable loan portfolio. Thus, as interest rates increase, Bank of America generates more profit. According to management, for every 100 basis points rise 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 thus is modestly undervalued at the time of writing.
3. Berkshire Hathaway
Warren Buffett (Trades, Portfolio)’s investing conglomerate, Berkshire Hathaway, is the third-largest holding of Li's U.S. portfolio, taking up 13% of the portfolio space. Li owns 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 world's largest investing conglomerates. It has over 360,000 employees but only 25 work at the headquarters. This unique decentralized setup is only made possible because of Buffett's unique management style.
Berkshire's Investment strategy has been outlined many times by many different people, so going too in-depth here would be like beating a dead horse. Buffett summarized his strategy well in Berkshire's annual letter for the year 2021:
“Our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO.”
Buffett also outlined the “Four Giants” of Berkshire in this letter, which include insurance, Apple (AAPL), BNSF and Berkshire Hathaway Energy.
Berkshire's insurance companies include GEICO, General Re, National Indemnity, etc. The firm owns “100% of the float” in these companies. Buffett stated in the 2021 shareholder letter;
“The product will never be obsolete, and sales volume will generally increase along with both economic growth and inflation.”
Apple is one of Berkshire's most successful investments and makes up ~42% of the U.S. equity portfolio by market value. Apple paid Berkshire “$785 million” in dividends in 2021. Yet their “share” of Apple’s earnings amounted to an astonishing $5.6 billion!
BNSF (Burlington Northern Santa Fe) operates the largest railroad network in the U.S. with 32,500 miles of track. The railroad hit a record $6 billion in earnings in 2021.
Berkshire Hathaway Energy, or BHE, earned a record $4 billion in 2021, which was a 30-fold increase from the $122 million earned in 2000, when Berkshire first bought shares. Berkshire now owns a 91.1% stake in the company.
Warren Buffett (Trades, Portfolio) has also been recently loading up on shares of Occidental Petroleum (OXY, Financial), and there is even some speculation that he might be planning to acquire the company outright. You can read more about this subject here.
Final thoughts
Li Lu (Trades, Portfolio) is an incredible value investor a genius that stands with the likes of Charlie Munger (Trades, Portfolio) and Warren Buffett (Trades, Portfolio). Unfortunately, we have little insight on his non-U.S. holdings, but we can see some of his positions thanks to the 13F reports. Even this limited information can be valuable for investors to analyze.
