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It is probably the best time in a decade to buy Berkshire Hathaway

As markets continue to collapse, many investors are eagerly awaiting some indications from legendary investor Warren Buffett (Trades, Portfolio), who has solid experience in hunting for business during times of difficulty.

For more than a year, markets have been perplexed by the abnormal cash balance of Berkshire Hathaway Inc. (NYSE: BRK.A) (NYSE: BRK.B) and whether Buffett would have ever had the chance to complete a large acquisition with that money, since there seemed to be no way the markets would enter the territory early.

However, what many thought was impossible has happened, and both the S&P 500 and the Dow are trading more than 20% below their recent highs, according to Bloomberg data. This has improved the prospects of a large acquisition and successfully completing one could be a catalyst that pushes the share price of the conglomerate upwards.

Most of the largest acquisitions or investments in Berkshire history were completed before 2016. The lack of billions of dollars in investments since then, apart from the $ 10 billion granted to Occidental Petroleum (NYSE: OXY), has raised doubts. that Buffett and Charlie Munger (Trades, portfolio) have lost the touch of finding interesting investment opportunities.

Source: Reuters

This inactivity has already pushed the company’s cash balance to a record high of over $ 125 billion. According to GuruFocus data, cash allocation has never been higher.

Source: GuruFocus

With this huge amount of liquidity, there is no doubt that Buffett is closely monitoring current developments to identify misplaced bets. The recent investment in Delta Air Lines is proof of this. In September 2018, Buffett wrote in the Financial Times, “A simple rule dictates my purchases: being afraid when others are greedy and being greedy when others are scary.”

As evident from his recent investment activities, the guru lives according to what he has supported for more than fifty years. Shiller’s price-earnings ratio reached a recent high of around December 31, 2019, but has since contracted following the drop in stock prices over the past two months.

Source: GuruFocus

The historical average for Shiller’s price-earnings ratio is 17, and the ratio of more than 23 to 13 March may prompt investors to wait for a better opportunity. However, GuruFocus data reveals that both the energy sector and the financial services sector are trading below this average, which is an indication of the opportunities available in some market segments. This is an ideal set-up for Buffett who is doing great, as there is a lot of money available for him.

The 10-year bull race that began in 2009 has allowed average investors to earn a lot on their investments. The growth and possible outperformance of passive strategies are a classic example. Fund managers who have set aside large amounts of money and time to beat the markets could hardly do it due to the extraordinary performance of the broader market. Overvalued companies with inflated share prices continued to rise and valuable investors, including Buffett, were unable to beat the market.

Source: Financial Times data as of June 2019

Although the performance has been lackluster in recent years, Berkshire may have a return as investing in the current market will not be so easy. Historically, Buffett’s success was closely tied to his ability to hold his head high during turbulent market periods and bargain hunting. With the huge amount of money available today, the guru will likely end up betting on companies with interesting growth prospects at an affordable price. Securing some of these deals will help Berkshire publish higher returns.

Empirical evidence indicates that Buffett has found some of his best bets in adverse market conditions. For example, the investment in American Express (AXP) in 1963 has increased by 1,000% in a decade. However, he was brave enough to invest in the company when the world’s largest credit card issuer suffered from the Oil Oil scandal.

Berkshire’s investments in large banks such as JPMorgan Chase and Bank of America are two more examples since these were made at a time when every investor shunned the financial services sector.

The guru is likely to find some good deals between this chaos created by the Covid-19 pandemic and the oil price war between Saudi Arabia and Russia. This will act as a catalyst for Berkshire’s share prices to offer stellar returns in the coming years.

At the end of 2019, Berkshire had 70 million shares of Delta Air Lines and added 976,000 more in late February, according to company documents. In addition, Berkshire held 21.9 million shares of United Airlines Holdings (NASDAQ: UAL) and 42.5 million shares of American Airlines (NASDAQ: AAL), which is a clear indication of the guru’s rise in prospects for this sector. However, the share prices of all these companies have fallen dramatically since the beginning of this year.

Source: Yahoo Finance

This catastrophic drop in the market value of airlines is a result of the drop in demand for global travel and leisure activities in the next two quarters. However, the long-term outlook has not changed materially for any of these companies. Buffett may be interested in increasing his participation in all these aircraft operators due to this apparent evaluation error.

The energy sector could also be a leading candidate due to short-term pressure on oil prices. However, in the long run, most oil companies with solid fundamentals are likely to offer attractive returns as the demand for energy commodities will increase along with the expected growth of the global economy. There is no acceptable and accessible substitute for crude oil and this will ensure the success of large oil and integrated companies.

According to GuruFocus data, the energy sector represents only 0.53% of the guru’s portfolio, but this does not exclude the possibility that Buffett is betting on this troubled sector. Recently last year, Berkshire invested $ 10 billion worth of Occidental Petroleum preference shares and, under the terms of the agreement, Buffett received 80 million warrants for the purchase of Occidental ordinary shares at the price of exercise of $ 62.50. At the close of the market on Thursday, shares were trading around $ 12.

Carl Icahn (Trades, Portfolio), in a statement released on March 12, confirmed that he had increased his western stake to 10% during the recent drop in prices and that he is attempting to make some changes to the company’s board of directors. Berkshire may also be interested and, in any case, many energy companies negotiate at very cheap valuation multiples. Even if there is no love from the market, Buffett may view things differently, as he has done for many decades.

There is a reason why Warren Buffett (Trades, Portfolio) is considered the greatest investor of all time; he invested in unpopular and unloved sectors when everything was stacked against him. The guru proved correct on many occasions, making him a household name.

Today, the new coronavirus and uncertainty about oil prices have plunged the markets. If there is an investor who would like to take this opportunity to do the right thing, it is Buffett. Even though the Berkshire Hathaway stock price has not worked as expected in recent years, the current market turbulence could make it an inflection point. With over $ 125 billion in liquid assets, the conglomerate is well placed to seize some great opportunities.

Disclosure: I don’t have any titles mentioned in this article.

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