In recent years, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has criticized his company’s poor performance relative to the benchmark. S&P 500. But the fact is, Buffett is one of the best investors of all time, if you look beyond his recent performance.
According to the 2019 Berkshire Hathaway Shareholder Letter, Buffett has led his company to an average annual return of 20.3% over the past 55 years. That compares to a 10% compound annual return for the S&P 500, including dividends, over the same time period. This 10.3% annual gap may not seem like a lot nominally, but it has led Berkshire Hathaway stocks to exceed the benchmark by more than 2,700,000% since 1965.
Suffice it to say that when Warren Buffett buys or sells stocks, Wall Street and retail investors tend to pay close attention. That’s what makes the last three weeks so exciting.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Buffett just went shopping for $ 10.5 billion
Between July 5 and July 22, Warren Buffett and his team deployed more than $ 10 billion of the company’s capital.
During the first week of July, Berkshire Hathaway announced that it would acquire a variety of natural gas transmission pipelines and storage assets from Dominion Energy (NYSE: D) for $ 9.7 billion. This effectively includes paying $ 4 billion for the assets and assuming $ 5.7 billion in Dominion debt linked to these assets.
For Dominion, the disposal of these transmission and storage assets will allow it to focus almost exclusively on its utility operations. The approximately $ 3 billion in cash received from Berkshire Hathaway, after tax, will be used to repurchase the company’s common stock, which can have a positive impact on earnings per share and perceived investor appeal.
As for Berkshire Hathaway, it more than doubled its stake in the interstate transmission of natural gas in the US from 8% to 18% and became a cash cow in the process. It also doesn’t hurt that Berkshire has acquired a 25% stake in the liquid natural gas (LNG) export, import and storage facility at Cove Point, Maryland. This is one of only six LNG import / export points in the US.
Image source: Getty Images.
But that is not all.
Last week, a presentation by the Securities and Exchange Commission shows that Buffett’s company acquired just over 33.9 million additional shares of Bank of America (NYSE: BAC) between July 20 and 22. The cost of these purchases amounts to $ 813.3 million, and increased Berkshire’s ownership in BofA to almost 982 million shares (11.3% of all outstanding shares). BofA is Berkshire’s second largest holding company Apple, in terms of market value.
It’s no secret that the Oracle of Omaha loves banking, and Bank of America certainly seems to be his favorite. It is arguably the most sensitive to the interests of large banks, making BofA a huge beneficiary once the Federal Reserve begins raising rates in 2023.
Plus, Bank of America has done an amazing job controlling your expenses interest-free in the last half decade. By emphasizing its digital banking and mobile applications, BofA has seen a steady increase in retail banking transactions completed online, allowing it to close some of its physical branches and reduce its expenses.
Image source: Getty Images.
The bad news: it took Buffett 4.5 years before he finally pulled the trigger.
While it’s great news to see Buffett unfurling his company’s war chest, it’s equally disturbing to note that it took the Oracle of Omaha approximately 4.5 years to get part of the Berkshire capital up and running.
Following the acquisition of Precision Castparts in January 2016, it took until July 5, 2020 for Berkshire Hathaway to announce another decent-sized acquisition. By staying idle, Buffett’s company has seen its cash accumulation grow to $ 137 billion, at the end of March 2020. Although having cash is not inherently bad, it is not good news for a conglomerate like Berkshire Hathaway, which historically He has managed to earn a living investing his capital and acquiring attractive businesses.
Even after deploying $ 10.5 billion in the past three weeks, there is still no guarantee that the Berkshire Hathaway cash pile has shrunk. Buffett noted during the company’s annual virtual shareholder meeting in early May that it had eliminated more than $ 6 billion in shares in April and has since sold additional positions. Along with the cash flow generated by the company’s approximately five dozen businesses, Berkshire could still have close to $ 137 billion in cash and marketable securities when the dust calms down.
Buffett’s unwillingness to pull the trigger on a bigger deal or to be more aggressive on the investment front appears to be a silent warning to Wall Street and investors. Buffett may not believe in the timing of the market, and he certainly would not bet against the US economy in the long term. But his inaction in the past four years more strongly suggests that he doesn’t see stocks as attractively valued.
Image source: Getty Images.
It also doesn’t help that Buffett has a very limited scope of research to work with. To be clear, what Buffett does, he does exceptionally well. But his focus has always been on the financial sector and consumer staples. Because technology and biotechnology have outperformed in recent years, and Buffett has little or no experience in these areas, he has been left idle on the sidelines.
Perhaps the only true value that Buffett sees right now is his own company. Over a seven-quarter period, starting in mid-2018, Buffett and his team repurchased more than $ 7 billion in Berkshire Hathaway stock. As long as Buffett and his right-hand man Charlie Munger see Berkshire as trading at a considerable discount to its intrinsic value (this being a somewhat arbitrary term), perhaps the only guarantee is that Buffett will continue to spend to buy back the shares of his own company. .
It’s decent news for Berkshire Hathaway shareholders, but it’s not a very warm prospect for US stocks.
