Tempting Buffett

I did an interview yesterday afternoon with WBBM News Radio 780 in Chicago. The hosts, Kris Kridel and Sherman Kaplan, wanted to discuss Berkshire Hathaway (BRK.A). The stock is down about 15% year to date—not the kind of performance one would ordinarily expect from a company run by Warren Buffett.

Berkshire, of course, if heavily invested in the insurance business. Although it owns more than 70 subsidiary companies, many of the non-insurance companies, such as Fruit of the Loom and Jordan’s Furniture, are rather small. Most are dwarfed by the likes of GEICO and General Re.

Buffett warned at this year’s shareholders’ meeting that the insurance business would be quite difficult this year. Berkshire just can’t command the kinds of premiums it did in the recent past. Buffett also warned that Berkshire stock will not generate the kinds of returns it did in the past.

Berkshire also owns more than 40 publicly-traded stocks, but just four stocks account for more than half the value of this portfolio. This group, referred to as the Big Four, consist of Coca-Cola (KO), American Express (AXP), Wells Fargo (WFC), and Procter & Gamble (PG). Each of these stocks is down more than 15% year to date.

Given Berkshire’s heavy exposure to the finance industry, it is rather impressive that the stock is down only 15%. Compared to the likes of AIG (AIG), Citigroup (C), and the investment banks, Berkshire is doing quite well.

Buffett is sitting on a boatload of cash. Many observers have been wondering when he will put some of that money to work. We know he likes to buy when others are selling. Given, the extent of the sell-offs witnessed lately, perhaps Buffett is getting at least a little tempted. But is he willing to invest in the financial stocks that have gotten killed? With Citigroup, Fannie Mae (FNM), Freddie Mac (FRE), AIG, Lehman Brothers (LEH)(, Merrill Lynch (MER), and a host of others, there is a lot to choose from. Unless Buffett is completely bearish on the future of America, chances are he is thinking hard about buying one of these companies.

Comments

[RogerDodger:]

"The stock is down about 15% year to date—not the kind of performance one would ordinarily expect from a company run by Warren Buffett."

The company could be doing great, that has nothing to do with the price of the stock.

"In the short run, the market is a voting machine but in the long run it is a weighing machine." -Warren Buffet

2008 Jul 03 05:08 AM

[jimmy smith:]

also, if you think Buffett will buy Lehman or Merrill you don't know Buffett very well. he was burned once and won't likely be back. he hates, HATES, Wall St.!

2008 Jul 03 10:05 AM

[maz:]

Agree that the comment on the stock being down 15% not being the kind of performance to be expected from Buffett is ludicrous. Anyone who has followed Berkshire for any length of time knows that the shares often go down quite a lot - just like any other stock!

Now if you'd said "value" instead of "price" that would make more sense

2008 Jul 03 10:21 AM

[Ishortyou:]

time to buy some berkshire stock!

2008 Jul 03 10:37 AM

[RogerScott:]

I think he is buying more of 2 or 3 of his big four. I think AXP is one of them. We will know soon.

2008 Jul 03 11:30 AM

[kotika98:]

the rumor that he was buying AXP or about to make a bid for the whole thing were circulating when it was at 50 bucks. Where are the rumor mongers now at 39?

2008 Jul 03 01:43 PM

[Vijay Singal:]

Hi Vahan:

Do you have an estimate of BRK.A's intrinsic value? A range will do. If the stock trades at a discount, is it worth owning?

2008 Jul 06 07:14 PM

[EbayObserver:]

"Unless Buffett is completely bearish on the future of America, chances are he is thinking hard about buying one of these companies."

This is nonsense; it should be changed to "Unless Buffett completely understands the company and its business, chances are he is NOT going to buy any one of these companies."

2008 Jul 08 10:35 PM