On Burlington Acquisition and 'Blue Chip' Companies

One of the great things about writing our daily MarketToday newsletter is the ability to view the market as an observer. To spend the day reading other’s views and watching the ‘great dance’ that occurs every day between buyers and sellers.

On certain days, the screen is all green as it seems every stock is headed higher, it always reminds me of the saying, “A rising tide lifts all boats.” Other days, the screen is all red, as sellers try to dump every stock they own, reminding me of the classic video with comedians John Fortune and John Bird explaining the “Subprime Banking Mess.”

The line that always makes me smile is,

Market participants don’t know whether to buy on the rumor and sell on the news, do the opposite, do both, or do neither depending on which way the wind is blowing.

Since the market hit lows last March, almost all stocks have recovered from their 52-week lows. The interesting thing to watch is the days where the screen is not “all green” or “all red”. The stocks that are green or red reflect investors' interest in risk. When investors are scared, they sell off riskier assets and rush to the good ‘ol blue chips. When investors feel confident, they scoop up the risky companies and let the blue chips languish. Many companies who rightfully are classified as ‘blue chips’ have not recovered to their 52-week highs, but are quietly building their business and expanding their dominance.

Our long-term portfolio subscribers have been picking up some great ‘blue chip’ companies at attractive prices in the last year. It is always exciting to find a ‘high flyer’, a stock that returns double or triple in a year or two, and we have a few. They can reward you, but they can fall like a three-year old out of bed.

When you troll the back alleys looking for the ‘story stock’ that promises fantastic returns you accept the risk that some of these bets won’t end well. I have heard, but cannot attribute a statistic that causes great concern, over half of all public companies will go broke. I am very cautious buying ‘story stocks.” You should be too. One of the secrets to increasing wealth is to not lose money. High flyers may be fun but the party can turn into a nightmare when they fall like autumn leaves. Stay with the best, you will sleep better and your portfolio will grow.

Berkshire Hathaway (BRK.A) announced Tuesday morning the agreement to purchase Burlington Northern Santa Fe (BNI) for $100 per share in cash and stock. The deal values the company at $44 billion, BRK’s largest acquisition ever. The deal includes assuming $10 billion in debt carried by BNI. Buffett reportedly made one offer, because that was all he could afford. BNI has been valued at $79 to $95 by analysts; the enterprise value of the stock (according to the company) was $103.16

By noon, three law firms had released contact information for shareholders to participate in a possible class action suit. The law firms are “investigating possible breaches of fiduciary duty by the Board of Directors of Burlington Northern Santa Fe. The company may not have adequately shopped itself around before entering in this transaction. Berkshire may be underpaying for Burlington, thus unlawfully harming Burlington shareholders.”

Word of the day sent in by subscriber A.A.
Barratry—The practice of stirring up of groundless lawsuits.

Disclosure: Long BRK.B

Comments

[Mad Hedge Fund Trader]

uyt You’ve got to hand it to Warren Buffett, who never does anything half heartedly. The stunning news that his Berkshire Hathaway (BRK/A) is paying $44 billion for the 73.4% of Burlington Northern Sante Fe (BNI) he doesn’t already own, a 30% premium, had punch drunk traders picking themselves off of the floor. The other rails rocketed, like Union Pacific (UNP), CSX (CSX), and Kansas City Southern (KCSR). The deal is the Oracle of Omaha’s largest in his career, and took the BNI board all of 15 minutes to approve. For me this deal speaks volumes about the long term trends in the US economy as seen by its greatest investor. It screams Commodities! Commodities! Commodities! Rails can only prosper moving bulk freight from the heartland to ports on the three coasts, which foreigners are buying in ever larger quantities at ever higher prices. It also says the coal industry isn’t going anywhere soon, as it accounts for 70% of all rail traffic, so you can kiss Cap & Trade goodbye. Buffet let loose of some fascinating statistics about the enormous productivity increases the industry has accomplished. In the last 25 years, it cut employment from 500,000 to 175,000, while increasing freight by 60% and reducing track by 40%, and now accounts for 40% of the total goods moved in the country. Railroads are the greenest transportation out there, a ton of freight requiring only a gallon of fuel to move 470 miles. When I was growing up, my big goal in life was to become a train engineer. Maybe it’s time for me to revisit that aspiration. And I promise not to text while driving!

2009 Nov 04 01:10 PM