Warren Buffett during an interview with CNBC’s Becky Quick on Feb. 24, 2020. It found the billionaire investor to be another year of shying away from breakthrough acquisitions even after sudden market money and breakthrough acquisitions in an expensive market Cash on hand.
Gerald Miller | CNBC
Warren Buffett’s Berkshire Hathaway made some big purchases in 2020, but Buffett’s biggest purchase speaks to the huge challenge the company will continue to face: there was nothing it could find at a better price than its own stocks.
Berkshire bought back more than $ 18 billion in treasury stock through October last year, almost double what Buffett had spent on his next-largest acquisition. The $ 10 billion deal with Erdion Energy for natural gas assets, including the debt it acquired, was the largest acquisition since 2016. By the big word – he deserved it – he was not going to do a share buyback to shore up the stock the big buyback sends a signal from Buffett that he believes the stock is undervalued.
“If he bought a portfolio company for $ 18 billion, or bought $ 18 billion in public company stock, we would consider it significant,” said James Shanahan, an analyst at Edward Jones who has the buybacks by October 18, Estimated $ 4 billion and claims a positive outlook on Berkshire stocks.
“There are few better places for Berkshire to reallocate its capital than to invest in itself with share buybacks,” says Lawrence Cunningham, author of several books on Warren Buffett and Berkshire and Professor at George Washington University. “The price was right. The disclosure was clear. Pure investment rationality.”
While Buffett is properly leveraging the buybacks, the size, which has been larger than any M&A acquisition since the Precision Castparts deal in 2016, is one reason Berkshire has struggled with the wider market in recent years Keeping Up: Investors Don’t See That Buffett is able to place the bold bets that have made his name and the fortunes of many Berkshire shareholders.
Over the past two decades, Buffett has done reasonably well against the index and the S&P 500 in 12 calendar years between 1999 and 2020. Although the years that Berkshire has lagged included some large margins and caused the company to underperform the index for the past 5, 10 and 15 years, according to S&P Global.
In 2020 Berkshire Hathaway stocks were up but not by much (2%) versus an S&P 500, which gained over 18% and reinvested dividends, according to S&P Global. Overall, the two-year maturity of 2019 and 2020 was one of the largest gaps between Berkshire and the broader U.S. stock market in recent history, with Buffett outperforming the index return by an overall 37%.
At least in the short term, investor sentiment is against the company because market forces are working against it. The market Buffett is facing is marked by record lows – which the Fed has signaled will remain the norm for some time to come – which are providing cheaper debt to fund acquisitions by competitors like private equity that are now none Cash reserves need a Berkshire’s. As a result, asset prices in the market have increased.
“Nobody disputes its decades-long track record of using cheap electricity intelligently to create tremendous value over time. He has done this repeatedly, but now capital is cheap for everyone,” said Meyer Shields, a KBW analyst. “It diminishes your advantage. It was a secret sauce element, but maybe it’s best not to buy anything.”
According to Shields, who has long been critical of Berkshire Hathaway and who has been banned from being invited by analysts to the company’s annual meetings, Buffett rightly cannot overpay and is still punished by investors for making this decision. “It mainly comes down to evaluating acquisition opportunities, and other than a few crashes, I don’t see huge opportunities for acquisitions in the future. We’re sticking to the idea that they have a lot of capital, but everyone has too.”
Between the outbreak of the pandemic and the virtual annual meeting in May – wo Charlie Munger in particular, has been replaced by Berkshire Hathaway Energy’s head Greg Abel as the counterpart to Buffett, which will again be the case this year as speculation centers on Abel as the first post-Buffett CEO – the frustration with the pace investment activity increased. Buffett was unusually anxious when others were scared too.
“It was fair for them to worry about the impact of the pandemic. But people were nervous because they saw no opportunity … and they didn’t see attractive stocks to buy, and they didn’t even buy their own stocks back, just cash hoarding and people were worried about what he would do with it, “Shanahan said.
As of March, no one had an overview of what the pandemic death rate would be or what the government would be doing, and Berkshire’s long-term history shows that Buffett has cash during periods of risk. “There could have been some disappointments, but he was consistent,” Shields said, even when it wasn’t about buying back Berkshire stock.
The distressed investments Buffett was able to make in the last financial crisis in 2008 were not repeatable during the pandemic as the government acted quickly to stimulate the economy and support ruined industries.
“This time, government support was swift, and so much faster than it was in 2008,” Shanahan said.
The only investment that ultimately helped build investor confidence from the summer onwards was the increased buyback activity disclosed. “They became aggressive with the buybacks from June to October. There isn’t that much competition to buy back your own stock,” Shanahan said.
Cunningham expects more of this: “Additional Bonus: Get rid of the short-term Berkshire shareholders like Bill Ackman in favor of the true believers. … expect more reruns.”
Berkshire’s last reported $ 145 billion in cash needs to be moved to keep the stock moving.
“The worst that can happen is they don’t put capital in. I would like a lot more money to be put in. It’s a big driver of profit and market cap,” Shanahan said. “However, there are very few acquisitions above $ 20 billion. … Capital that goes beyond cash generation will drive the stock and the easiest way to do that is through buybacks.”
Precision Castparts was a $ 37 billion deal in 2016.
In recent years, Buffett has made it clear that assets are so expensive that he prefers to focus on buying more shares in public companies. However, this had the unintended consequence that some of his minor missteps with these public holdings of stocks became more noticeable in 2020.
Berkshire sold the large stake it had recently built in airline stocks, including American, delta, United and southwestEarly in the second quarter of 2020, possibly near lows. By the end of the second quarter, Berkshire was a net seller of stocks. The reduced holdings of financial stocks, including investments in Goldman Sachs, Wells Fargo, JP Morgan, PNC, M&T Bank and Bank of NY Mellon – which should, in a broader sense, attract more investors as the public equity portfolio is more oriented towards technology and consumer trends – contained some questionable timing decisions.
“The airline’s stocks have been chaotic. He certainly sold at a bad time and liquidated bank stocks at bargain prices. JP Morgan is up a lot,” Shanahan said. “That was a time mistake. It was the right time for the airlines, but the wrong time.”
Buffett has loaded Bank of America as its No. 1 bank stock for the future. “Bank of America was a homerun,” Shanahan said of the investment agreement, which was first signed in 2011, when Berkshire acquired $ 5 billion in bank preferred stock and $ 700 million in common stock for over a decade bought a decade at a price of around $ 7 per share. which currently traded over $ 30.
“Getting rid of some of the financial data was my biggest frustration,” said Greg Womack, president of Womack Investment Advisers, who held Berkshire as a core portfolio stock in many client accounts. “The timing wasn’t always the best … but I don’t think they are that concerned with the technical details.”
With the investment decisions made more than years ago by hedge fund managers, Ted Weschler and Todd Combs, more in the hands of the company, timing decisions may change more in the future, analysts and investors say. In the recent past, the stock portfolio Berkshire manages has changed significantly.
At the end of 2018, the portfolio was still “handcuffed by financial stocks,” Shanahan said.
Even with Apple Berkshire’s in-house executives, who can buy billions of dollars in their own discretion, have been underweight technology, and that has proven to be a great investment in Buffett’s technology after his IBM stumble, and that has grown so much over the past year as its largest equity stake that’s one reason it left the S&P 500 behind.
“These portfolio managers, tasked with trying to outperform the market, did not own any stocks in the top performing sector,” Shanahan said. “Financials like Wells Fargo and the US bank have set them to underperform in 2019 and 2020. It’s difficult to beat the market when you have a high percentage of value stocks. They have action seized. “
Since the end of 2018 Berkshire’s stock portfolio Exposure to financials has decreased from 49% to 28% while technology has increased largely due to Apple. Technology and consumer stocks now make up nearly 50% of public company holdings. Include stocks that have appeared in recent years Amazon, T-Mobile and a handful of health stocks last quarter.
“Tech, communications services, healthcare. It’s starting to feel like a new economy and more like the market,” Shanahan said. In the September 2020 quarter alone, Berkshire announced $ 7 billion in new technology, communications and healthcare positions. Healthcare Stock Davita is a major holding company in Berkshire, but the company hasn’t invested much in the health sector in the past compared to other sectors.
The most surprising new portfolio direction was Berkshire’s first US IPO investment. Snowflake, which turned out to be the largest tech software IPO in history.
“Tech Investing Buffett used to think he didn’t get it. The industry is now easier to understand and inevitable,” said Cunningham. “But these companies [Apple, Snowflake] There are still very many Berkshire companies run by long-term strategic thinkers who want quality shareholders. “
Snowflake may have been an investment by Todd Combs, who Shanahan says signed the paperwork for the deal and is also behind Berkshire Hathaway’s investment in a Brazilian credit card company Stonecowhich took place just a few days after the IPO at the end of 2018.
A very Buffett-like deal in support of Scripps’ acquisition of ION Media was led by fellow manager Ted Weschler, through which Berkshire invested $ 600 million in preferred stock (8% dividend on cash, 9% on deferral).
With prices high in the US market, Berkshire bought just over 5% stake in Japanese conglomerates Itochu, Mitsubishi, Mitsui, and Sumitomo & MarubeniAccording to Shanahan, he’s frustrated with the lack of opportunity in the US. And Berkshire issued yen-denominated bonds at around 1% total to fund the transaction. “Very unusual. Berkshire hasn’t invested much in international stocks in the past,” he said, adding that deals can be scaled up to nearly 10%.
Buffett also ended his remaining ownership in the newspaper business in 2020 and while it wasn’t surprising, it was noteworthy in light of Buffett’s longer history of never selling companies he acquires could also signal the next era of Berkshire management after Buffett that some philosophies are allowed to change.
“They do IPOs and selling operating companies, which they would not have done in the past, and investing in international stocks, and ready to buy back stocks at an accelerated pace. A lot has changed, “said Shanahan.
For the first time, Berkshire also invested in gold – a commodity Buffett has long criticized – despite buying gold mining stocks Barrick Gold rather than the metal directly. Still, the market viewed the move as a significant reversal as gold mining companies tune in to the underlying price of the metal.
“It looks like they’re building a little hedge there,” says Womack. “I wouldn’t be surprised if you complemented this position.”
The big changes in the stock portfolio could be another big surprise in 2021. Berkshire recently announced that confidential information has been omitted from its 13F report, which lists the latest stock purchases and sales. In the past, it meant Berkshire was building a large position in a public company and wanted government approval to complete their purchases before the information was released.
Shanahan noted that the value of the stock portfolio as of September 30, 2020, excluding Kraft Heinz, was $ 245 billion and it could only be around $ 220 billion. Part of this difference could be related to buying more shares in Japanese trading companies. However, this is a strategy Berkshire has used in the past in building a large position in a company like IBM, and there are even other options in a more expensive U.S. market, like the depressed energy sector, though Berkshire has had a few energy stocks in recent history has sold.
The existing operating companies in Berkshire have short term potential without an important new position. Berkshire Energy, in particular, should grow faster than many other subsidiaries as electricity demand increases and many of the other wholly owned companies Covid adversely affects, from reduced shipping to higher insurance claims and restaurant closings to retail store closings, harming Brooks and other businesses Other retail brands under the Berkshire umbrella could see better results in 2021, though Shanahan believed insurer Geico and Burlington Northern Railroad held up well in 2020.
Buffett may still get an opportunity to make some important moves with his company’s money. “We’ll still see a lot of companies in financial trouble in the next few years if they refinance debt and are already overfunded. Cash is still king and he knows it,” said Womack. “We’ll see a lot more companies become even more attractive, and I think that’s why Buffett is waiting for his time. Smart money can be cash-intensive.”
Timing of the other kind is an issue for investors today, especially newer ones, Womack said, and that has implications for the idea of investing in Berkshire. “There are so many opportunities these days for investors to grow and tactically manage and stay on the upside … and we are in a tactical environment. Investors want to be tactical rather than passive, so a new investor may not sit down on a BRK like before. “
In 1999, the performance gap between Berkshire and the S&P 500 reached nearly 40%, but in hindsight that was a buy signal. After 1999, Berkshire had one of the best stretches in recent history over the S&P 500, gaining about 30% over a period of years that saw the index drop nearly 40%.
“Back in 2000, it beats the S&P many times over,” said Womack. “If the S&P drops significantly, Berkshire could do better.”
Barron is noted in a recent call for investment on Berkshire: “It was worth buying Berkshire after previous periods of underperformance.”
That was a bet made by at least one major investor in 2020: Warren Buffett.