Buffett Business Model Looks Broken

| About: Berkshire Hathaway (BRK.A)


Many Berkshire units are being disintermediated by the Internet, and others are threatened.

Warren Buffett's golden touch with investments like IBM looks tarnished.

Can you really short Berkshire Hathaway? Should you?


Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has long been a gold standard for investors, and CEO Warren Buffett the value investors' oracle.

But the bear has come for Buffett.

Over the last year Berkshire is down over 14%. But more important, its recovery from the August lows was anemic, and this week it crashed decisively below those levels, trading below $190,000/share as Wednesday trade opened.

Looking at a list of Berkshire subsidiaries it's hard to find winners and easy to find threats.

GEICO has been disintermediating the purchase of car insurance for years, but now disintermediation may be coming for the property-casualty lines, like General Re, Guard Insurance, and U.S. Liability. Investors hungry for yield are looking for a way in to these highly profitable lines, and the Internet almost guarantees that someone is going to "Uber" them.

Buffett is being hammered by the twin scourges of deflation and disintermediation. Deflation hits commodities and other assets. Disintermediation gives small competitors an opportunity to go direct to consumers and make control of distribution channels worthless. Companies like Bombas and Duluth Trading are using the Internet to kill Fruit of the Loom with high-quality goods that don't need stores.

Many of the companies Berkshire owns are subject to such disintermediation. Justin boots? H.H. Brown shoes? Helzberg diamonds? Clayton Homes? Companies without distribution can get around any of them, with a quality pitch and a warehouse. Buffett buys companies and lets their experienced managers run them, but experience in this Internet-selling environment is over-rated.

The only thing that is working is fierce, constant cost-cutting, as demonstrated by his friends at 3G Capital. Kraft-Heinz (NASDAQ:KHC) is still doing pretty well.

Even Warren Buffett's golden touch with investments no longer looks so golden. Early this week the company announced it had invested even more heavily in Philips66 (NYSE:PSX), the oil refinery and marketer, and now holds a stake of nearly 13%. It's going nowhere fast. Buffett is well-known to have invested heavily in IBM (NYSE:IBM). They reported what looked like a good quarter this week, but the stock was hammered anyway.

The price/earnings multiple of Berkshire is now down below 14, at a time when the market is trying to hold a P/E of 16. The stock is worth only 62% more than the annual sales of about $194 billion, and the growth rate is continuing to slow - revenues were up just 6.5% for 2014, and while that will accelerate this year (revenues were $189 billion for the first three quarters of 2015) net income is rising only because of one-time events like the Kraft-Heinz deal.

The model, in short, looks broken. The company looks old, and tired. Buffett is 85 and no one lives forever. The bear is stalking both Buffett and the stock, and the bottom has not yet been reached.

Time to short?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.