Constellation: Buffett's Smart Buy

Amidst the craziness in financial markets right now, there's only one thing that's certain: When it comes to valuations, nobody knows anything. Morgan Stanley (MS) can be cheap one day at $30 a share and then expensive the next day at $20: Everything is incredibly fluid, and trying to make long-term investment decisions in the eye of a hurricane is a great way to lose a lot of money very fast.

For that reason, I admire Warren Buffett's decision to sit this crisis out on the sidelines and not give in to the temptation to try to buy financial assets on the cheap. Yes, he's a value investor -- but values change over time, and Buffett likes the kind of assets where values rise slowly over the course of years, rather than falling precipitously over the course of minutes.

Which doesn't mean Buffett isn't buying. Quite the opposite: He just plunked down $4.7 billion, in cash, for Constellation Energy. Constellation has very strong real-world fundamentals:

Constellation Energy, a FORTUNE 125 company with 2007 revenues of $21 billion, is the nation's largest competitive supplier of electricity to large commercial and industrial customers and the nation's largest wholesale power seller. Constellation Energy also manages fuels and energy services on behalf of energy intensive industries and utilities. It owns a diversified fleet of 83 generating units located throughout the United States, totaling approximately 9,000 megawatts of generating capacity. The company delivers electricity and natural gas through the Baltimore Gas and Electric Company (BGE), its regulated utility in Central Maryland.

Constellation was being hurt hard by its energy-trading activities, which had enormous liquidity needs and were hurting the company's credit rating. Now that Constellation has all the liquidity and ratings support it needs, it should be a nice little earner for Berkshire Hathaway (BRK.A).

Today's Lesson from Warren, then, if you're looking for such a thing, is that while chaos in the market can be a good buying opportunity, the best such opportunities are often going to arise at one remove from the market itself. Don't buy AIG (AIG) or Morgan Stanley (MS): Buy their counterparties, instead, on the cheap. Just look at where Buffett is buying, compared to how much Constellation would have cost him at any point in the past two years.

Comments

[ringa2:]

This is what happens when you step back from the madness. This is a fairly large generating company that was worth far more than its stock fell to. He got it for about half of what it is worth. This is why he has the money he has. Don't panic look at the bottom lines, buy when you can with minimal risk. As much as everyone said there was high risk with constellation the truth is there isn't that much risk if you have the money to ride the storm. Long term risk is minimal, particularly if you wean Constellation off of its huge commodities trading committments.

2008 Sep 18 03:37 PM

[jimmy46:]

CEG is history, MIR & DYN are at similar cheap prices.

There are other choices for making money

2008 Sep 19 02:54 AM

[Paul Killinger:]

Maybe I'm reading too much into Warren's tea leaves, but it is curious that he just now decided to get into the relatively volatile energy production game. Perhaps he thinks Boone Pickens is onto something, as well, and doesn't want to get left out.

One way or the other, I'm thankful both these good ol' boys are still with us. They're both great at making money, but, more importantly, they have a deep and abiding faith in the future of America!

2008 Sep 19 12:00 PM

[Omaha_farm_boy:]

dear paulk ... you say "just now" ?? perhaps you should check into Berkshires 90% ownership of MidAmerican Energy . HQ in little IOWA, which they've just made into #3 for wind energy -- trailing only the BIG states .. pop and size .. of TX and CA. MidAm being run by David Sokol, who made me $$ as honcho of Cal.Energy -- much into Geothermal. The same guy (Sokol) who's tops EVERYbody's short list for Warren's job as Brk CEO whenever W kicks or retires. MidAm also has energy biz in the Pacific NW and in Scotland.

Again, I wouldn't say "just now" getting in. I'm not selling any Berkshire, fer sure!

2008 Sep 21 01:37 AM

[User 268230:]

You said: "I admire Warren Buffett's decision to sit this crisis out on the sidelines and not give in to the temptation to try to buy financial assets on the cheap."

Since you wrote this, Mr. Buffet apparently just plunked down $5B for Goldman. What do you think?

2008 Sep 23 08:30 PM

[Omaha_farm_boy:]

User, you weren't asking me, I know. BUT, I think Warren is the richest -- and perhaps the smartest -- SOB I've ever met!

An old uncle usta say "If you're so smart, why aren't you rich?" I've seen Buffy and his friend Gates at the same table. I'd guess I'm not the one to argue.

2008 Sep 24 08:06 PM