Buffett buys up big amidst recession fears. One cheap ASX share I'm backing, plus why I'm dissatisfied despite a huge one-day windfall

Warren Buffett splashes billions even as recession fears grow.

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1) Wall Street rallied overnight Tuesday on hopes of a soft landing for the world's most important economy.

"US producer price growth stepped down in October by more than expected in the latest sign that inflationary pressures are beginning to ease," reports Bloomberg.

Bullish investors are hoping inflation has peaked, meaning the Federal Reserve will moderate the pace of its interest rate hikes.

The S&P 500 Index (SP: .INX) has jumped 6.5% higher in just the past four trading days, whilst the NASDAQ-100 Index (NASDAQ: NDX) has soared almost 10% higher in the same period.

Here in Australia, markets have been a little more subdued, partly because the ASX hasn't fallen as far as US indexes, partly because the S&P/ASX 200 Index (ASX: XJO) is dominated by big miners and banks, and partly because the RBA has already shown its hand by easing the pace of interest rate rises. 

The ASX 200 index is now down a very modest 3.9% over the past 12 months.

2) Not everyone is convinced it's all plain sailing ahead, and the Federal Reserve will be able to pull off an economic soft landing. From Bloomberg…

"Markets appear to be pricing in a best case scenario of a soft landing and falling inflation triggering a Fed pause," Venu Krishna, head of US equity strategy at Barclays Plc. 

"In our view, this is not a given and remains a low probability scenario – these are just a few data points on inflation and it needs to be sustained. Even if the Fed eventually pauses, it might not be able to prevent a shallow recession."

3) Recession or not, soft or hard, Warren Buffett is buying, the Sage of Omaha taking a roughly $US5 billion stake in Taiwan Semiconductor Manufacturing Co (NYSE: TSM), the chip supplier to companies like Nvidia, Qualcomm and Apple

Marketwatch headlines the story with…

"Warren Buffett's chip-stock purchase is a classic example of why you want to be 'greedy only when others are fearful.'"

According to Bloomberg

"TSMC shares at home in Taiwan had dropped 28% this year through Monday's close, as demand for chips has slowed with the economic downturn and investors fretting about oversupply. The company said in October it pulled back on capital spending to about $US36 billion this year, which would still be a record high, down from at least $US40 billion planned previously."

The 92 year old Buffett has famously said his ideal holding period is forever, a period which will encompass many economic cycles. Such thinking has served him well, given his net worth of over $US100 billion, the vast majority of which was accumulated later in his life, courtesy the power of compounding returns.

4) Conventional wisdom, perhaps built up over the 30 years since Australia had a "proper" recession is that the lucky country will once again keep growing in 2023 and beyond. 

Unemployment remains low, immigration is starting to pick up again and commodity prices are high. The banking sector, as demonstrated by Commonwealth Bank of Australia (ASX: CBA) saying yesterday that credit quality indicators improved in the most recent quarter, remains strong.

Pushing against that goldilocks scenario are falling house prices, high inflation, higher interest rates and weak consumer confidence.

What's it all mean? It's a given the Australian economy will slow next year. 

The International Monetary Fund (IMF) has forecast economic growth will slow from 3.7% this year to just 1.7% in 2023-24 as those headwinds hit our shores. But, according to the AFR, it warned "that a deeper plunge in global growth than forecast, more persistent inflation, and a faster-than-expected decline in house prices could push the economy off course."

"Australia is expected to steer clear of a recession, but with significant downside risks."

5) What's all this mean for stock market investors?

We've already seen what Warren Buffett thinks.

As for a mere investing mortal like myself, it certainly doesn't change my view that consumer discretionary stocks – largely retailers – are likely in for a tougher time ahead.

The market always looks forward, and such pessimism could already be priced into a number of retail stocks. 

JB Hi-Fi Limited (ASX: JBH) shares trade on just 9 times earnings and a fully franked dividend yield of 7.3%.

Nick Scali Limited (ASX: NCK) shares trade on 10 times earnings and a fully franked dividend yield of 7.2%.

Super Retail Group Ltd (ASX: SUL) shares trade on 10 times earnings and a fully franked dividend yield of 10.8%.

I'm happy to sit on the sidelines and watch the action play out for those companies. In really tough times, a halving of profits is absolutely possible, turning the share price from cheap to expensive, and dividends can be cut to zero. 

One consumer discretionary stock I'm playing for the coming economic slowdown is Best & Less Group Holdings Ltd (ASX: BST). 90% of its items sold retail for less than $20 and their average selling price is a modest $8.33.

Babies and kids grow, and as they do, need replacement clothes, so there's a repeat purchase element to the Best & Less business… unlike JB Hi-Fi where you can live with your TV for an extra year, or Nick Scali where you can live with your current sofa for a few more years.

Recent commentary from US discount retailer Walmart strengthens the case for a company like Best & Less with Chief Financial Officer John Rainey saying Walmart is winning new business from higher-income shoppers searching for bargains amid a challenging economic environment.

Best & Less shares trade at less than 9 times earnings and on a fully franked dividend yield of 9.1%.

6) Yesterday saw a nice payday for the Jackson Portfolio, with microcap MSL Solutions Ltd (ASX: MSL) share price jumping 70% higher on an all-cash takeover agreement. 

There's plenty of value in the microcap sector, if investors are willing to stomach the volatility and lack of liquidity

And there are plenty of value traps too, some of which I've found, to my cost, although position-sizing and downside protection has limited my losses. The key, as with any investing, is to buy quality companies that have at least some sort of competitive advantage and have at least an element of recurring revenue. 

MSL Solutions – a company that operates point of sale solutions at major sporting arenas – fits the bill nicely, given the long-term nature of its contracts. 

If only I'd backed myself more, taking an even bigger position. That's investing, where the fear of the unknown can impact your decision making, and where, despite a large monetary gain, you can still be dissatisfied. I'll get over it!

Motley Fool contributor Bruce Jackson has positions in Best&Less Group Holdings Ltd and MSL Solutions Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, Nvidia, Qualcomm, Super Retail Group Limited, and Taiwan Semiconductor Manufacturing. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has positions in and has recommended Super Retail Group Limited. The Motley Fool Australia has recommended Apple, JB Hi-Fi Limited, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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