The Verizon Problem

We all know that Warren Buffett is one of the most successful investors in history. His Berkshire Hathaway empire is worth $643 billion and has made him insanely wealthy. 

With a net worth of over $100 billion, it’s fine with me if you want to give Buffett the “best investor ever” crown. Any argument against it is basically nitpicking and serves no purpose. 

I’ve studied his methods in great detail. And that’s led me to recommend stocks like Chinese oil company PetroChina to my readers even before Buffett “discovered” them. I told investors to buy that stock at $20, and a few months later Buffett’s buying helped push that stock to $150.

Investors that followed my advice did very well. But that was 15 years ago. The fact is Buffett stocks are no longer the best stocks for individual investors to buy. In fact, my research has concluded that buying so-called Buffett stocks is a surefire way to make sure your portfolio underperforms the S&P 500.

I’m not telling you Buffett’s lost his touch. Really, in some ways it’s the exact opposite. He and his team have to make exceptional decisions to grow Berkshire Hathaway’s value. 

The issue is size. Berkshire really is an empire. At $643 billion, Buffett’s company has to grow by $120 billion to match the performance of the S&P 500. And right now, Berkshire has $145 billion in cash to put to work to boost its returns. 

Water, Water Everywhere…

Twenty years ago, there were over 8,000 publicly traded companies. Today, there are a bit over 4,000. Which means there are fewer opportunities for investors to grow their money. But fewer choices also means the risk is greater. First off, companies are bigger, so they have further to fall if things go wrong. 

But more importantly, more and more investors are piled into fewer and fewer companies. That’s why Amazon trades for $3,200 a share and is now valued at $1.7 trillion!

For the record, Berkshire Hathaway does own some Amazon stock. The company bought $1 billion worth of shares in 2019. I can hear the boardroom discussion now: “Well, that’s $1 billion invested, only $144 billion more to go!”

And that’s the problem that Buffett faces. How do you grow a $500 billion company by 20% a year? You gotta add $100 billion in value this year, $120 billion next year, and so on…

Of course, these challenges aren’t news to Warren Buffett. He knows full well that he isn’t going to beat the S&P 500. And the fact that he can’t invest in the truly innovative companies of today means that his risk is actually a lot higher than it seems. Consider the case of Verizon…

The Worst 5G Stock   

We all know 5G will be a pretty big deal when it finally gets rolled out. Apple (NASDAQ: AAPL), for instance, is looking at a super-cycle of growth as every human on the planet gets a new 5G phone. And of course, we all know that Buffett owns a nice chunk of Apple stock. 

Chipmaker Qualcomm (NASDAQ: QCOM) is another company that will benefit greatly from 5G, as every 5G device on the planet will have a Qualcomm chip in it (sorry, Intel, you’re screwed).

Right now 159 funds own QCOM. None of them are Berkshire Hathaway. And it’s partly because Qualcomm is valued at $167 billion. Unless Buffett took a 10% stake, Qualcomm is kinda too small for the Berkshire behemoth. 

And so to get in on the 5G windfall, Buffett has to buy stocks like Verizon…

Now, I don’t have anything against Verizon… wait, yes, I do. A lot, actually…

Verizon trades for $55 right now. You know where it was in 2017? $45. That’s a 22% gain in five years, ladies and gentlemen. Not. Very. Good.  

Go back a little further, to 2013, and it was… oh, between $45 and $50. Hmmm, sure looking like Verizon has been dead money for darn near a decade. 

Last year, Verizon had to spend $40 billion for new spectrum to carry its 5G offerings. That $40 billion was debt and raised Verizon’s debt load to $179 billion. 

That’s right, Verizon is a $240 billion company with $179 billion in debt. If every penny of profit went to paying off that debt, Verizon would finally be profitable in… Q4 2029.  

And finally, Verizon isn’t growing. In its earnings report, connections grew to 94.6 million, up from 94 million the previous year. (So you know, Verizon doesn’t report the number of users, because one user may have more than one account. It reports “wireless connections” to better reflect its paid user base. Which is barely growing, because the cellphone market is the epitome of a saturated market.) 

So I have no problem telling you that Verizon is not a very good place for your money. At least if you want that money to be more money in a few years. 

Qualcomm? Yes. I think a 50% return over the next 12 months is not an unreasonable expectation at all. 

But if you really want a company that could double or triple as 5G services get rolled out, here’s the one I’m recommending to my Wealth Advisory readers. It owns most of the 5G backbone. It licenses that backbone to the likes of Cox, Comcast, and, yes, Verizon. And best of all, it trades for $12 a share and you can buy it while it is largely unknown.

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.