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Invest in the Early Days of Berkshire Hathaway

Brad’s Note: As I write, the S&P 500 is down almost 20% since the start of the year. Plenty of companies are feeling the hurt. But some are better equipped to withstand this market downturn than others.

Here are Intelligent Income Daily, we remain focused on our goal of finding the safest and most reliable income plays to help you sleep well at night and reach your financial goals… regardless of market conditions.

That’s why today, I’m going to hand things off to my analyst, Stephen Hester. He’ll share how taking a page from the playbook of one of the most successful companies ever could be an income opportunity for smart investors to survive today’s economy.

As investors, we have important decisions to make. Where we allocate capital matters, and so does when. Good opportunities don’t wait around. And that’s especially true when markets are volatile.

Yesterday, Brad wrote to you about Warren Buffett – arguably the most successful investor of all time – and his company, Berkshire Hathaway.

Buffett’s strategy during bear markets is one that fully aligns with ours. I’ll tell you more about it below. But it’s important to note that mindset has lent heavily to Berkshire’s success over the years.

Now, while we think the Berkshire model and its focus on buying dividend-paying companies is great… Berkshire itself doesn’t pay a dividend. And at its current stage, it’s out of reach for average investors.

That’s why today, I’ll share a company that’s following the same playbook, pays a healthy – and growing – dividend, and is still in its early stages. Getting familiar with it now could help you follow the Berkshire model and take advantage of a volatile market.

Berkshire’s Proven Roadmap to Success

What makes Berkshire Hathaway so special?

It counts well-known companies like GEICO and Coca-Cola among its best investments. Its owned both for over 25 years. But as great as those companies are, they’re only trees. Here’s what I mean.

What makes Berkshire Berkshire is buying shares in high-quality, recession-resistant companies at great valuations. That’s it. The rest is noise.

Over the years, Berkshire has bought railroads, candy companies, and many others. But they all follow the same pattern if you look closely. That’s the forest.

But Berkshire doesn’t present the same opportunity it once did. Buffett himself has said the best days for his company are behind it. It’s simply too big to achieve the market-crushing returns of the past. Even in this beat-up market, its valued at over $600 billion.

So, where should income-focused investors look for a good investment that can survive today’s bear market?

Brad recently interviewed a CEO running a very interesting business. And it’s following a similar track…

Following Its Lead, and Still In the Early Innings

It’s called Franchise Group (FRG) and owns many brands… some you’ve probably heard of.

Franchise Group owns simple businesses. The individual brands get most of the attention from analysts, but they’re missing the forest for the trees. Franchise Group’s success is based on its playbook, not individual players.

That playbook is acquiring proven business models at cheap valuations and applying Franchise Group’s model. Sound familiar? It should.

Since its founding in 2019, it purchased:

  • The Vitamin Shoppe for $208 million.

  • American Freight in 2020 for $450 million in cash.

  • In 2021, when many companies were still scared on the sidelines, Franchise Group purchased Pet Supplies Plus for $700 million.

  • Sylvan Learning for $81 million.

  • And Badcock Home Furniture for $580 million.

All focus on necessity products and services. The business model of buying great franchises in durable sectors is clearly working.

Since 2019, Franchise Group’s strong financial performance allowed the dividend to increase from $0.25 to $0.625 quarterly, or 150%. And don’t forget that there was a pandemic and lockdowns throughout most of that period. Its other financial metrics are similarly strong.

The benefit for us is that, unlike Berkshire, Franchise Group is in the early innings. And its market cap is $1.3 billion – that’s 0.02% of Berkshire’s.

It’s hard to pull the trigger on new investments, even great ones like Franchise Group, during market turmoil. Fortunately, the crazier markets get, the better the opportunity for Franchise Group. That reminds of me of an old saying: most millionaires are made in bear markets. 

We think Franchise Group is a hidden gem that’s perfect for these troubled economic times. And if Berkshire Hathaway’s history is any clue, Franchise Group may mint many millionaires, and a bear market will only help long term.

Happy investing,

Stephen Hester
Analyst, Intelligent Income Daily