This Misunderstood Sector Is Full of Buffett's 'Free Puffs'

Doc's note: There's a reason Warren Buffett's annual shareholder's letter is one of the most widely read commentaries in the financial world. Investors want to know what Buffett is thinking about the markets and what he's doing with his money.

But few folks talk about how Buffett grew his fortune. In today's issue, originally published in Altimetry Daily Authority, Joel Litman explains the kinds of companies that helped Buffett become a billionaire…

Everyone wants to talk about Warren Buffett's current strategies...

Yet nobody seems to care about how he got so successful.

People often forget that Buffett's best decade isn't right now... or any time in recent memory. It was from 1957 to 1969, when he achieved an average return of 29.5% and a cumulative return of 2,794.9%.

And it was all thanks to one specific approach... what he called the "free puff" strategy.

Buffett's mentor, Ben Graham, compared a certain type of company to finding a lit cigar butt... with free puffs remaining.

In 2014, Buffett actually said...

The many dozens of free puffs I obtained in the 1950s made that decade by far the best of my life for both relative and absolute investment performance.

As a lover of cigars myself, I've been a longtime fan of this description.

So when I saw a rare setup taking shape – similar to the one that helped Buffett achieve the best performance of his life – I knew I had to jump on it.

More than 250 stocks are now trading for less than the sum of their parts...

They're what we call "net net" companies. Their shares are so cheap that their current assets – cash on hand, receivables, inventory, minus all their debts – are worth more than their total market value.

Put simply, you could buy these companies... send everyone home... sell off all the assets... and still end up with some cash at the end of the day.

If this sounds like it shouldn't be possible, that's because it normally isn't. Less than 1% of the stocks in the market ever end up in this situation.

These are the kinds of investments that Buffett and Graham used to build their fortunes... And the recent surge in interest rates has led to a record number of them.

It's already an extremely rare situation. We haven't seen this many net-net stocks in a quarter century.

And that's not where the opportunity ends today...

You see, the bulk of today's net-net stocks is concentrated in one small, misunderstood subsector.

I'm talking about biotech.

Money flooded into biotech during COVID-19. Part of the rally was due to the race for a vaccine. And part of it was because the Federal Reserve hammered down interest rates during the pandemic.

Biotech giants like Moderna (MRNA) and Novavax (NVAX) skyrocketed thousands of percent. And then, the Fed stepped in again... and sent rates soaring.

The biotech industry got washed out. It was the sector's worst run this century.

We're now seeing a situation where more than two-thirds – or 402 of the 600 listed biotechnology stocks – have fallen by 80% or more.

And nearly half of the net-net opportunities in biotech are trading for less than their cash on hand.

We call this a negative enterprise value, or "negative EV" for short.

Here's the thing... The majority of these companies should not be shut down and sold for parts

Many of these biotech companies are harnessing the power of AI and other technologies to eliminate months or years of tedious trial and error. They're discovering new drugs and medicines faster than ever before.

And these companies are trading as though all that innovation is worthless.

Situations like these simply don't happen in a normal economic environment...

These are even better deals than the kind of net-net stocks you could have bought alongside Buffett at the beginning of his career.

You're essentially buying the company with its own cash. You don't sell anything. You keep all the other assets and any drugs it's developing... for free.

And you have a pile of cash left over.

In the past 25 years, 639 companies in my team's database have gone negative-EV at some point. Roughly 40% soared between 100% and 981% after doing so.

And 72 of those companies – more than 10% – have gone up anywhere from 1,000% to as high as 352,000%.

Of course, there's no guarantee we'll see those types of results this time around. But this sort of opportunity only appears once or twice in a lifetime.

And we intend to take full advantage of it...

I just released a brand-new report detailing my top five negative-EV biotech stocks... plus a "Watch List" of eight more that look promising.

But the situation is moving fast.

So if you're ready to buy – or even just want a more detailed look at this market anomaly – I urge you to listen to the full story right here.

And remember... when you see a lit cigar with free puffs remaining, you take it.

These types of opportunities don't come around often. And they can set you up for years – if not decades – of investing success.


Joel Litman