Warren Buffett has famously said that investors “should be fearful when others are greedy and greedy when others are fearful.”
With financial markets in turmoil, the Berkshire Hathaway CEO has the opportunity to follow his own maxim and make what could be some lucrative investments as he did during the 2008-09 financial crisis.
Berkshire (BRK/B) had $128 billion of cash and equivalents on its balance sheet at the end of 2019, giving Buffett ample wherewithal for investments.
A patient Buffett is being vindicated after allowing cash to build on Berkshire’s balance sheet in the face of investor calls to pay a dividend or buy back more of its own stock. Berkshire was also inactive in purchasing equities or entire businesses last year.
There are plenty of things that Buffett could buy: blue-chip stocks like Alphabet (GOOGL), Microsoft (MSFT), Visa (V), and Costco Wholesale (COST). It is also possible that Buffett could provide rescue financing to companies in the hard-hit travel industry. There has been speculation that Buffett might make an investment in Boeing (BA).
Buffett, 89, often does his rescue deals through convertible preferred stock that is senior to common shares, pays a high dividend, and comes with an equity kicker that gives Berkshire upside participation if the common stock rallies. A Berkshire financing can be useful to a struggling company because it comes with the imprimatur of Buffett.
During the financial crisis, Buffett did just that, buying $5 billion of 10% convertible preferred stock from Goldman Sachs Group (GS) and $3 billion of 10% convertible preferred from General Electric (GE). While not a rescue deal, Buffett agreed to buy $10 billion of Occidental Petroleum (OXY) 8% preferred stock last spring with equity warrants, as Occidental sought financing for its bid for Anadarko Petroleum.
It is also possible that Buffett might buy an entire company. Cruise industry leader Carnival (CCL), for instance, now has a market value of about $10 billion after a plunge in its stock this year, capped by a 31% drop on Thursday, to $15.
Given the rout in airline stocks, there has also been talk that Buffett might buy an airline given that Berkshire already owns about 10% of the four leading U.S. carriers: Delta Air Lines (DAL), American Airlines Group (AAL), United Airlines Holdings (UAL), and Southwest Airlines (LUV). Berkshire recently added to its stake in industry leader Delta.
Buffett, however, said in a CNBC interview in February that it was unlikely that Berkshire would buy an airline, citing regulatory reasons including Berkshire’s ownership of a large stake in American Express, which has a credit-card partnership with Delta.
Asked about a purchase of a major airline, here’s what he said:
“It’d be very unlikely that we would do that. I’m not saying it’s impossible. But— it’s complicated.”
Buffett does only friendly deals, so any merger would come after the company invites Berkshire to bid.
Berkshire is taking its own lumps, however, in its large equity portfolio, which totaled about $250 billion at the end of last year. Some of Berkshire’s wholly owned companies, including the Burlington Northern Santa Fe railroad, are also exposed to a weaker economy.
Barron’s estimates that the Berkshire equity portfolio is down by about $50 billion since year-end 2019, led by its big holdings in such financial companies as Bank of America (BAC), Wells Fargo (WFC), American Express (AXP), and JPMorgan Chase (JPM). Apple is the largest holding, accounting for about 30% of portfolio. It is down about 13% this year, against a decline of around 23% for the S&P 500 index.
Berkshire’s class A shares were down almost 7% Thursday, to $272,000.
The company’s book value ended 2019 at around $261,000 per class A share. Book value is likely to be lower now because of the stock market’s decline. We estimate book value is now around $240,000 a class A share.
Based on that estimate, Berkshire would be trading at less than 1.2 times book value—low by the standards of recent years but understandable in the context of the big market decline this year.
Berkshire’s fans think the stock is attractive here, given the relatively low valuation, the company’s strong balance sheet, and its ability to make investments when others may be unable to do so. This gives Berkshire a kind of “optionality” that most companies lack.
One advantage that Buffett provides to companies seeking financing is a quick decision—often in hours. These deals sometimes take shape over the weekend.
One Berkshire watcher thinks Buffett should also give added money to his investment lieutenants, Todd Combs and Ted Weschler, who both run about $15 billion of the equity portfolio.
This is the kind of panicked market that Buffett relishes and may never see again.
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