BARRON'S COVER
By Vito J. Racanelli
And the winner is ... Berkshire Hathaway, knocking the crown off three-time winner Apple. Who's up, who's down, who's on, and who's off
FEATURE | KOPIN TAN
SPECIAL REPORT: WHAT'S NEXT FOR THE MARKETS After a five-week decline, the U.S. stock market has reclaimed some of its lost ground. With the S&P 500 up 12.6% on the year—and bonds, gold, copper and emerging markets all down in double digits—the allure of equities will likely grow.
Apple's reign is over.
Its remarkable three-year hold on the throne of Barron's annual ranking of
the world's most respected companies is history. No longer the apple of the
market's eye, the immensely successful maker of iPads, iPhones, and Mac
computers slipped to third place in the 2013 survey (ticker: AAPL).
And proving that comebacks are possible even for an 82-year-old CEO,
Warren Buffett's Berkshire Hathaway (ticker: BRK/A) came out on top this year,
up from a No. 15 finish in 2012 -- the only time in this ranking's nine-year
history that it finished out of the top five.
The relationship between respect for a corporation and the qualities that
define it -- stock performance being primary among them -- resembles that of the
chicken and the egg. To some extent, then, the market's rekindled fondness for
Berkshire this year has to do with its stock price, up about 25% and double the
rise of the S&P 500 stock index.
Buffett's firm has regained its footing of late and is hitting on all
cylinders operationally, investment-wise, and in its deal-making. Investors we
spoke to attributed their respect to Buffett's record of strong returns,
business acumen, long-term focus, and plain-talking style.
Like this year's winner, both Walt Disney (DIS), at No. 2, and Google
(GOOG), No. 4, rose materially in the estimation of our survey takers, with the
entertainment giant and the global Internet search firm putting in their best
finishes ever.
Disney's powerful brand and track record, combined with no significant
missteps and a surge in profits, have all had a hand in the company's move up
the respect ladder. Google, meanwhile, received points for strong innovation,
the success of its Android mobile-phone operating system, disrupting markets it
chooses to enter -- and generally taking advantage of Apple's stumble.
Having a strong brand name also didn't hurt this year when it came to
entering the top decile, which includes Coca-Cola (KO) at No. 5, up from No. 8.
Five of the top eight in the ranking are owners of the most valuable brands in
the world, according to a recent study done by BrandZ: Apple, Google, IBM (IBM),
McDonald's (MCD), and Coke.
Apple wasn't the only top company to lose face. McDonald's fell to eighth
from third last year, while IBM dropped to tenth place from second.
Each year since 2005,Barron's has surveyed professional money managers
about their views of the world's 100 largest companies by market value. The
latest assessment, conducted in late May and early June with the help of Beta
Research in Syosset, N.Y., elicited responses from 87 investors across the U.S.,
ranging from managers at smaller advisory firms to chief investment officers at
money- management giants overseeing billions of dollars. (The top 100 firms were
considered for ranking based on their respective stock-market values as of April
15 as determined by Dow Jones Indexes.)
Participants were asked to select one of four attributes reflecting their
view of each company: Highly Respect, Respect, Respect Somewhat, or Don't
Respect. A point value was assigned to each response, with the highest accorded
to Highly Respect, and a mean score was tabulated for each company. In the case
of ties, the higher ranking went to the company with the most Highly Respect
votes. The managers also were asked to rank the factors they consider most
important in determining respect for corporations, and were invited to
contribute comments on individual companies.
Some choose to include a mix of traditional financial investment measures.
For example, Craig Giventer of Financial Partners Capital Management uses the
following criteria: Does the firm have a defensible long-term business model,
and is it built to innovate, compete, and grow? And how good is management,
particularly when it comes to capital allocation?
Still other investors use broader and what some might term "squishy"
concepts that are harder to define, such as value to society in general and the
stakeholder approach, which includes treatment of employees and customers, among
other things, rather than just the shareholders' view.
Peter Scholla, a partner at Global Investment Adviser, says that "more and
more, acting in a socially responsible manner and corporate culture are
important" for respect. It's what you do when no one is looking, he says. Still,
Scholla adds that "if I tell my clients a company is doing well on social
responsibility but the stock price hasn't, they will not be happy."
Berkshire and Buffett received high-respect scores from a wide swath of
managers employing a diverse variety of investment styles. The mean score was
3.88, and few gave it Don't Respect votes.
Not many conglomerates receive such praise. Buffett's firm is an unusual,
eclectic mix of operating subsidiaries in insurance, rails, candy, and other
plain-vanilla businesses, combined with large, nonoperational stakes in big-name
firms. Some call it a mutual fund masquerading as a company.
Nevertheless, says Jack De Gan, CIO of Harbor Advisory in Portsmouth,
N.H., " It's a well-conceived business model, owning good basic businesses,
bought at good prices, and managed by great people. A company much to be
respected."
It's hard to top that.
Interestingly, Berkshire owns significant stakes in a number of companies
that also rank high on the list, such as Coke; IBM; American Express (AXP), No.
19; Procter & Gamble (PG), No. 21; Wal-Mart Stores (WMT), No. 23; and Wells
Fargo (WFC), No. 27. The last was the highest-ranked bank in the survey this
year. (More on that below.)
As popular as Buffett and Berkshire seem to be, they aren't without
detractors. His public advocacy that the rich should pay higher taxes still rubs
some the wrong way. "It's difficult to be enthusiastic about a company whose
head wants to increase other people's taxes," grouses Adrian Day of his
eponymous asset-management firm in Annapolis, Md.
The drop in respect for the Cupertino, Calif.-based Apple can be
attributed to a number of issues that have arisen in the past 12 months or so.
Besides a poorly acting stock price -- down 45% from its high, to $390 last
week -- there is a growing feeling on the part of both investors and, perhaps
more importantly, consumers that Apple has lost some of its product mojo.
The success of the Galaxy mobile phones made by Samsung Electronics
(005930.Korea) has torn the cloak of invincibility from Apple's iPhones and in
no small part helped Samsung in this survey, up to No. 18 from No. 36 last year.
Moreover, Apple has had continuing regulatory and tax issues with
Washington, D.C.; gone through patent battles with Samsung; and endured a loud
and distracting debate about what it should do with its prodigious cash. By
comparison, Google is getting more points for innovation lately, and after the
introduction of Google glass, Apple looks rather late to the party for wearable
devices. It's possible that the death of Steve Jobs in 2011 still gives some
investors pause.
In light of the serious troubles Apple has encountered lately, it's a
wonder the company didn't fall further in our ranks. Apple's nonoperational
problems are probably not the biggest bugaboo with investors; it's the company's
flagging product pre-eminence.
Apple has been the dominant player, points out Seth Shalov, a portfolio
manager with MAI Wealth Advisors. But, "Rivals have caught up with it on the
iPhone and iPad. The hope is that the new products will be successful."
"It is a challenge to keep innovating," adds Ichiro Ishiguro, with Hermes
Fund Managers. "How can they keep innovating going forward? . . . It is key to
their value."
Apple's problems have so far proved to be Google's opportunity.
Lately, Google appears to be ahead of the game. Giventer of Financial
Partners Capital, which owns shares of Google, gives it high-respect scores.
"Its dominant position in search has allowed it to innovate and disrupt both
adjacent businesses and markets where they don't have a historical foundation."
Like hockey great Wayne Gretzky, Google "skates to where the puck is going to
be," he adds.
Paul J. Jackson, who runs Paul J. Jackson & Associates in Boston, concurs.
Google challenges existing thinking, and that becomes reflected in the share
price, he says. "Google's eating Apple's lunch."
As noted, Samsung, which uses Google's Android mobile-phone operating
system, has also profited from Apple lapses. "It has out-Appled Apple," quips
Peter Scholtz, president of Scholtz & Co., "with not only products that are
highly competitive but at cheaper prices and with a full array of price points,"
he says. Samsung is that rare conglomerate that looks to innovate, he adds.
Disney's big splash,at No. 2, brought it close to Berkshire, with a mean
score of 3.81. Disney's profit surge has been broad-based, coming from theme
parks and the ESPN cable network, as well as the film studio. Ronald Doyle, a
portfolio manager at MeadowBrook Investment Advisors, gives Disney high praise.
It has "a really good strategy and a tremendous infrastructure to deliver to the
consumer all the brands which are its franchises, whether developed internally
or acquired, such as Lucasfilm."
Among other highly respected companies, Amazon.com (AMZN) dropped to No. 6
from No. 4, though it continues to garner kudos from investors. Meanwhile,
Johnson & Johnson (JNJ) has quietly clawed its way back toward the top, rising
to No. 13 from No. 32.
The health-care giant had stellar respect rankings until 2011, winning
three of four years from 2006 to 2010, but then suffered from a series of
manufacturing and quality-control problems. This year, J&J's stock price is
beating the S&P 500 index significantly, perhaps bringing back some of the
luster and respect that J&J used to earn.
Coming Earnings
Day Quarter Consensus Year Ticker
Estimate Ago
M
MSC Industrl Direct 3Q $0.98 $1.10 MSM
Amer Greetings 1Q 0.00 0.65 AM
Schulman (A.) 3Q 0.65 0.69 SHLM
Mercury Systems 4Q -0.07 0.10 MRCY
T
Constellation Brands 1Q 0.41 0.40 STZ
Acuity Brands 3Q 0.88 0.82 AYI
ZEP 3Q 0.42 0.39 ZEP
W
Int'l Speedway 2Q 0.49 0.52 ISCA
(Earnings are diluted and report dates are tentative. All forecasts and
historical numbers exclude extraordinary items by accounting definitions.)
Source: Thomson First Call
Economic Calender Consensus Estimate
Day
Time Consensus Est Last Period
M
10:00 May Construction Spending 0.6% 0.4%
10:00 June ISM Manufacturing 50.5 49.0
T
10:00 May Factory Orders 2.0 1.1%
W
8:30 May International Trade -40.0 bil -40.3 bil
F
8:30 June Nonfarm Payrolls 165,000 175,000
8:30 June Unemployment Rate 7.6% 7.6%
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