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Three Terrific Tips from Titan Tilson

Tuesday - 5/14/2013, 3:47pm  ET

At last week's Value Investing Congress, brainchild of Kase Capital's investing titan Whitney Tilson, the keynote presentation by Tilson highlighted three stocks he still loves: Netflix , Berkshire Hathaway , and Hertz Global Holdings .

These three are close to 52 week highs and the Street seems to love them, too. And why not, when each has been heading steadily higher?  However, none of these has a dividend yield, and multiples are extended.  What is Tilson thinking?

The battleground stock of the year

Aside from Apple and Herbalife, there are few more widely debated stocks than Netflix.  The rage is all about how many subscribers it can attract and how much it will have to keep paying for content.

A stock that has a trailing P/E of 528.54 and is already up 179% over the last year may leave investors scratching their head. Margins aren't so hot, with both profit and operating margins in low single digits: 0.65% and 2.23%, respectively.

Netflix has competition from Amazon Prime, Coinstar's Redbox,   Blockbuster, now owned by Dish Network, Hulu, and even Google with its plans to monetize YouTube with paid subscriptions. The short interest is creeping back up as well; of the company's 56 million shares outstanding, 8 million are short. What is the method behind Tilson's madness?

Carl Icahn told CNBC on May 10 he still holds all his shares of Netflix despite having a triple bagger. Tilson has also made pots of money on Netflix, and yet he thinks he can make more because of its strong content deals like the most recent one announced with Walt Disney for exclusive rights to two of its more popular children's shows and non-exclusive rights to three more. That's in addition to a multi-year deals for access to films from Marvel, Pixar, and Lucasfilms, all owned by Disney.

Netflix has had a very successful foray into original programming with House of Cards, which is the most-watched program on Netflix.The company is also running the fourth season of cult fave "Arrested Development," available for binge-viewing of all 15 episodes this Memorial Day weekend.

These two original series are making Netflix more"sticky" and keeping subscribers from dropping out. These new series put paid to the argument about Netflix attracting new subscribers. As for the other argument about paying up for content, Netflix has been playing hardball with major content provider Viacom, choosing to drop its contract rather than pay inflated prices.

Titan and the Oracle of Omaha

Tilson doesn't have to twist the arms of value investors on Berkshire Hathaway and Warren Buffett, its Chairman and CEO. The stock hit a 52 week high on May 10. Berkshire Hathaway describes itself as an investment manager and insurer with insurance and finance-related products contributing 37% of earnings. Of course it's much more, owning such diverse companies as Dairy Queen, Helzberg Diamonds, Fruit of the Loom, Burlington Northern Santa Fe Railroad, homebuilder Clayton Homes, NetJets, and Pampered Chef, the home party business.

It also has a lucrative mortgage business and a 50% interest in Leucadia's Berkadia Commercial Mortgage (more about Leucadia here). Not to mention Buffett's big buy of Heinz.

Revenues has had an easygoing climb from $136 billion in 2010 to $143 billion in 2011 to $16 billion in 2012. Through March the company has already made $43.87 billion, so it looks like the ascent continues. Earnings per share so far this year of $2.08 look to be in line to improve over 2012's $6.29 full year EPS.

If you could only own one stock the consensus seems to be that Berkshire Hathaway should be it. Despite the stumble with Lubrizol a few years ago the company has shrugged off any taint of scandal. From last summer's low $80's the stock is above $110 and it's a low beta stock of .29.

Buffett is number one on the list of most valuable CEOs in terms of pay to performance, and the stock's record climb made millionaires from early  investors. Owning shares also gets you invited to the annual investor's meeting as eagerly anticipated by value investors as Jimmy Buffett concerts are by Parrotheads.

With a tiny short interest of .10% (and what are those people thinking?) aside from the obvious fuss over succession as Buffett and right hand man Charlie Munger are both in their 80s, what are the risks to Berkshire?

Any risk would be macroeconomic in nature. With housing surging, the railroads doing great, and a slowly improving economy there would be little downside barring a general market downturn.

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