Buffett's Sokol Resignation Letter Could Contain a Hidden Warning to Investors

 |  Includes: BRK.A, BRK.B, IOSP, NEU
by: NakedValue

Warren Buffett's surprise announcement of David Sokol's resignation shook the financial community. Not only was the departure sudden, it also occurred under the shadow of possible wrongdoing. Sometimes, a good investor has to ignore the headlines and focus only on investing relevant information. In this case, David Sokol's departure may have greater implications, but nothing is clear at this point. What is clear is that hidden in the Buffett's letter is a comment that could have implications for other investors.

During Buffett's brief chronology of events leading to the Lubrizol (LZ) buyout, he states, "... Dave brought the idea for purchasing Lubrizol to me on either January 14 or 15. Initially, I was unimpressed, but after his report of a January 25 talk with its CEO, James Hambrick, I quickly warmed to the idea."

Short of providing non-public information, it is hard to believe that anything Hambrick could have told Buffett would change his outlook on the company's underlying business or industry. It seems far more likely that something about the CEO himself impressed Buffett enough to change his mind. This quote seems to suggest that this investment is very company specific and is not a signal of Buffett's bullishness of the entire industry.

This is an important point because investors have rushed to Lubrizol's competitors and pushed up the stock prices of NewMarket Corp and Innospec Inc assuming that Buffett's Lubrizol purchase validated the cheapness of these names. This is a believable story considering that NewMarket Corp (NYSE:NEU) has a forward P/E of 11.12 and a return on assets of 17% while Innospec has a trailing P/E of 10.75 and a return on assets of almost 10%. In reality, it's clear that Buffett was drawn to more than the statistical cheapness that he would have observed after his initial look at Lubrizol. NEU and Innospec (NASDAQ:IOSP) may be great investments at the current prices, but based on Buffett's recent letter, investors should not blindly buy into these stocks thinking that they are riding the Oracle of Omaha's coattails.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NEU, LZ, IOSP over the next 72 hours. NakedValue.com does not receive compensation to write about any specific stock, sector or style.