‘EM­BAR­RASS­MENT OF RICHES’: WHAT NEXT FOR BUF­FETT AND BERK­SHIRE HATH­AWAY?

▶ In­vestor has $128 bil­lion to play with but ques­tions re­main about where even greater growth will be found

The National - News - - BUSINESS IN DEPTH -

War­ren Buf­fett’s third quar­ter in many ways marked a new peak.

To start, Berk­shire Hath­away’s op­er­at­ing profit topped its best lev­els.

That was lifted by record earn­ings from BNSF rail­road, his big­gest ac­qui­si­tion yet. Gains on his stock bets pushed the con­glom­er­ate’s 2019 net in­come to a stag­ger­ing $52 bil­lion (Dh190.98), mak­ing Berk­shire the most prof­itable pub­lic com­pany in the world.

And the leg­endary in­vestor now has more cash than ever to play with: $128 bil­lion. That is the record which has Berk­shire’s stock lan­guish­ing as in­vestors grap­ple with a ques­tion amid all the su­perla­tives: what comes next?

“Berk­shire has sort of an em­bar­rass­ment of riches,” says Cathy Seifert, an an­a­lyst at CFRA Re­search. “That cash might be burn­ing a hole in their pocket and it’s pru­dent for them to be care­ful, but at some point, it al­most be­comes a bur­den to the ex­tent that it’s go­ing to drag down their over­all re­turns.”

Mr Buf­fett, 89, has built the most valu­able pub­lic com­pany out­side the US West Coast with ma­jor busi­nesses in in­dus­tries from en­ergy and in­sur­ance to car deal­er­ships and jew­ellery. Now he faces the rare is­sue where he can write a sin­gle cheque for $10bn and face ques­tions on whether he is be­ing ag­gres­sive enough.

Mr Buf­fett’s cash pile climbed again in the quar­ter, and his liq­uid­ity brings him po­ten­tially lu­cra­tive deals like cri­sis-era bets on Gold­man Sachs Group and Gen­eral Elec­tric, and the third quar­ter’s $10bn in­vest­ment in Oc­ci­den­tal Petroleum that al­lowed a deal with Anadarko Petroleum.

But deals spurred by tur­moil are harder to find with the S&P 500 In­dex hit­ting fresh highs. And Berk­shire has not kept pace this year. Berk­shire’s Class A shares are up 5.7 per cent this year, short of the 22 per cent gain in the S&P 500.

The pe­riod also pro­vided ex­am­ples of the lim­its Mr Buf­fett faces in try­ing to put cash to use to con­tinue the out­sized growth that made him fa­mous. He has pushed fur­ther into fi­nan­cial stocks, but in his two big­gest stakes, he is right around reg­u­la­tory caps on bank own­er­ship. With Bank of Amer­ica, he ap­plied for per­mis­sion to po­ten­tially boost his hold­ing; on Wells Fargo, he sold shares in the quar­ter.

Mr Buf­fett has con­ceded that the im­me­di­ate prospects for buy­ing up busi­nesses isn’t good amid “sky-high” prices. But he said he still hungers for an “ele­phant-sized ac­qui­si­tion”.

The bil­lion­aire ben­e­fits from be­ing se­lec­tive on what deals he chooses, even if it means he spends time wait­ing around with $128bn sit­ting in cash and Trea­sury bills, says share­holder Thomas Russo.

“The Oc­ci­den­tal thing came to Berk­shire, no one else, for a rea­son – they wanted his stamp,” says Mr Russo, who in­vests in Berk­shire through his com­pany Gard­ner Russo & Gard­ner. “That stamp is only valu­able if peo­ple think that the in­vest­ments that he makes have been well-scrubbed, rather than rushed through.”

While Mr Buf­fett has been stymied on the large ac­qui­si­tion front in re­cent years, he has been able to put some money to work in the stock mar­ket. In re­cent years, Berk­shire’s snapped up shares of JP Mor­gan and Ap­ple. One of Mr Buf­fett’s in­vest­ing deputies even pur­chased shares of Ama­zon this year. But there are lim­ited stocks that even have the po­ten­tial to move the nee­dle.

There are about 55 US com­pa­nies Mr Buf­fett could in­vest $10bn in and re­main un­der his pre­ferred 10 per cent own­er­ship thresh­old. He al­ready

He faces the rare is­sue where he can write a sin­gle cheque for $10bn and face ques­tions on whether he is be­ing ag­gres­sive enough

owns a stake in 13 of them and has pre­vi­ously bet on at least an­other eight. About a dozen of the com­pa­nies would be con­sid­ered tech­nol­ogy in­vest­ments, a sec­tor Mr Buf­fett’s started to ven­ture into af­ter years of try­ing to avoid the in­dus­try.

“The an­chor of size is just an enor­mous is­sue,” says Paul Lountzis, pres­i­dent of Lountzis As­set Man­age­ment which over­sees more than $200 mil­lion in­clud­ing in­vest­ments in Berk­shire stock. Mr Lountzis said Mr Buf­fett’s track record and abil­ity to adapt re­as­sures him. Still, “he’s so big now, where’s he go­ing to put things? And where can things go from here? It’s a real chal­lenge”.

And such siz­able stakes can make Berk­shire less nim­ble.

Mr Buf­fett ac­knowl­edged as much with this year’s strug­gles at Kraft Heinz, as he said in Fe­bru­ary ditch­ing a stake of more than $10bn would be com­pli­cated. “You dance like an ele­phant, not like some guy on Danc­ing With The Stars,” Mr Buf­fett said.

As cri­sis-era bets such as his eq­uity de­riv­a­tive wagers have started to run out, Mr Buf­fett’s sought other ways to de­ploy cap­i­tal. Berk­shire’s board loos­ened its buy­back pol­icy last year. That’s al­lowed him to re­pur­chase $2.8bn over the course of 2019. Those moves have been rel­a­tively modest – JP Mor­gan spent more than $6bn on net re­pur­chases in the third quar­ter alone – but it is a marked change for an in­vestor that’s pre­ferred to spend his money buy­ing op­er­at­ing busi­nesses or snap­ping up stocks of other com­pa­nies.

The widest per­for­mance gap be­tween Berk­shire and the S&P 500 in re­cent years could give Mr Buf­fett more in­cen­tive to jump into the mar­ket for his own stock.

“There isn’t a lot of op­por­tu­nity” for big deals, says Jim Shana­han, an an­a­lyst at Ed­ward Jones. “All the more rea­son to ques­tion, given the valu­a­tion for the stock, why they haven’t been more ag­gres­sive in the mar­ket buy­ing back their own shares. It could rep­re­sent the best use of cash and it could rep­re­sent the eas­i­est path for them to use cap­i­tal.”

Bloomberg

War­ren Buf­fett, left, has built the most valu­able pub­lic com­pany out­side the US West Coast. Berk­shire Hath­away is the par­ent com­pany of BNSF Rail­way, right

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