Is this Warren Buffett’s Favorite new Stock?
It’s become one of my favorite stocks. I like to call it my “Cadillac” investment for 2012. I’ve even selected it as one of my “Top 5 Stocks for 2012.”
The company is buying back billions of its stock. It’s expanding furiously into growing markets. And it just announced its tenth consecutive year of record sales.
Just days ago Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) announced it added 16.1 million shares of this stock to its holdings, taking its total to 20.3 million shares, a position worth more than $975 million.
But Buffett isn’t the only one who is backing up the truck to load up on shares… George Soros just added over 474,000 shares to his portfolio, too.
But this isn’t an investment reserved only for financial gurus. Regular investors like you and me can pull back the curtain and buy this “forever” idea, too. My advice: Buy it, forget about it and hold it forever.
I’m talking about DirecTV (Nasdaq: DTV).
You likely know DirecTV already. Based in El Segundo, California, DirecTV is the world’s largest provider of pay television services. Its satellite dishes sit on the roofs of 32 million subscribers worldwide.
But besides being #1 in its industry, what is it about DirecTV that has so obviously grabbed Buffett and Soros’ attention?
#-ad_banner-#Well for one, DirecTV is the “Cadillac” of cable and satellite providers. Let me explain…
In the U.S., DirecTV targets the premium end of the market by offering exclusive programming, specifically sports programming. These premium offerings attract high-end, loyal customers willing to pay a little extra for subscriptions like NFL Sunday Ticket, NCAA Mega March Madness and NASCAR HotPass.
I count myself as one of those customers. Even though there are cheaper cable options in my area, I pay a premium for DirecTV. After all, I’m a Chicago Bears fan living in the middle of Texas, and come September, I want to be able to see every Bears game. The only way to do that: Pay a little more to subscribe to DirecTV’s NFL Sunday Ticket.
DirecTV dominates the high-end of the pay television market just like Cadillac dominates the high-end of the U.S. auto market. They are both “best-in-class” brands focused on quality, innovation and a little bit of luxury. They are the brands people turn to when they want more than just the basics — they want to reward themselves.
And that’s the kind of “best-of-class” market dominance I want to invest in for the long run because it translates into “pricing power.”
Competition gets way more aggressive if a company doesn’t have these premium offerings. Providers like Time Warner Cable (NYSE: TWC), Comcast (Nasdaq: CMCSA) and DISH Network (Nasdaq: DISH) largely compete on price. If a cable provider tries to raise rates, subscribers threaten to switch. Same goes for when a competitor cuts rates — customers will insist their current provider match the deal or they’ll cancel.
DirecTV’s exclusive sports programming, reputation for quality and loyal high-end customers serves to insulate the company from the competitive churn at the lower end of the sector.
But if I had to guess, I’d say that Buffett and Soros are eyeing something much bigger than the U.S. cable market…
My hunch is that Buffett and Soros are buying the massive growth opportunities south of the border, in Latin and South America.
It’s simple. In countries like Mexico and Brazil, if someone wants TV, the signal almost always has to be beamed in via satellite. There’s little by way of cable and fiber infrastructure that transmits cable signals in America.
So while premium programming drives DirecTV’s pricing power in the U.S., its pricing power in Latin and South America is driven by the lack of other options.
DirecTV is taking advantage of the opportunity by aggressively expanding via its DirecTV Latin America division and ownership in Sky Mexico.
In fact, DirecTV just announced the all-time largest annual net gain in new subscribers in Latin America — 3.7 million new customers signed up in 2011. DirecTV Latin America 2011 revenues grew 42% when the record subscriber growth was paired with a 8.1% increase in average revenue per subscriber.
With stats like that, it doesn’t take the expert investing skills of Buffett and Soros to see why DirecTV stock could go higher in the months and years ahead. (For more details on DirecTV, I’ve profiled it the recent presentation I put together on my “Top 5 Stocks for 2012.” You can read the entire profile here.)
But DirecTV’s pricing power and expansion into growing markets is still only part of the reason investors such as Buffett and Soros are drawn to this stock.
The last piece of the puzzle? The company just announced that it’s bumping up its existing share buyback program by another $6 billion in 2012, which should create significant shareholder value.
Management continues to target a $5 earnings per share goal in 2013, and if the company achieves the $5 target, that puts DirecTV’s current forward P/E ratio at roughly 9.0x, an incredible value. No wonder Buffett — the world’s greatest value investor — is buying this stock like crazy.
Add in the $6 billion stock buyback plan authorized for 2012, and you’ve got all the ingredients for a true “Cadillac” investment. After all, strong, growing companies that take care of their shareholders tend to do better over the long-run. And you don’t have to be a Buffett or Soros to understand that.
Risks to Consider: Of course, with investing there’s never a surefire thing. Even the seemingly strongest companies aren’t guaranteed to deliver see a positive return.
Action to take –> But that said, if you invest in companies with a pricing advantage, aggressive plans for expansion and shareholder-friendly policies, then I think you have a great chance of making money in the long run.
[Note: As I said above, I selected DirecTV as one of my “Top 5 Stocks for 2012.” But it’s far from the only stock my staff and I found that has the traits described above. For more on this select list of five companies, you can read the research my team and I put together by visiting this link.]