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Recently, 35,000 persons gathered in Omaha, Nebraska to hear homilies and witticisms from Warren Buffett and Charlie Munger during Berkshire Hathaway Inc.’s annual meeting. As usual, the renowned investing duet didn’t disappoint.
Still, the share price of Berkshire Hathaway is down substantially over the past year. Some observers have said Buffett and Munger are losing their touch.
But every time doubts have arisen in the past, they have bounced back. This leads one to wonder if now is a good time to go bottom-fishing for a piece of their much revered company. It’s certainly a much better value than before: the market price of the company’s stock is down by over a third while book value is down by much less.
One problem with buying Berkshire shares is succession risk. Buffett is 78 and Munger is 85. They can’t be expected to be around forever. Indeed, this eventuality was a main reason bond-rating agencies Fitch and Moody’s stripped Berkshire of its triple-AAA credit rating earlier this year.
Another problem with owning Berkshire at this time is the heavy weighting of its portfolio in the financial sector. The business models that gushed earnings prior to the financial crisis seem unlikely to return to their former glory.
It’s hard to see some product lines, such as asset-backed securities, regaining anytime soon the popularity they once had. In addition, legislators and regulators will likely corral financial innovation and other aggressive practices. Lastly, as I mentioned in a blog post, many people may find it morally distasteful to invest in the companies that inflicted so much harm on society by unleashing the financial crisis.
What Buffett devotees can do, alternatively, is invest in selected stocks in Berkshire’s portfolio (as disclosed quarterly in 13F forms filed with the U.S. Securities Exchange Commission). Just pick the ones you like. You may also be able to put together a portfolio at a cost less than what Buffett paid: a number of Berkshire holdings are currently selling at prices below their average purchase prices (even after the buying panic of the past two months).
According to Berkshire Hathaway’s most recent 13F filing, the three biggest purchases of common stock in the fourth quarter of 2008 were: Nalco Holdings Co., Burlington Northern Santa Fe Corp., and Ingersoll-Rand Co. Ltd. (the purchase of Constellation Energy would have been No. 1 on this list but the company was recently taken over by a French firm). *
Nalco Holdings is the No. 1 provider of water-treatment services to industrial and institutional markets. The company is also aggressively marketing its wares in emerging countries and has won contracts in China, Russia, etc. Its portfolio of patents may also have some appeal: for example, the Bright Water product, patented in 2002, boosts recovery rates for oil wells by sealing permeable parts of the underground chamber.
Burlington Northern is the second largest railway company in the U.S. It has 32,000 miles of track spread over two-thirds of the United States. Upgrading of networks and energy price trends since industry deregulation has improved competitiveness against other modes of transportation.
Ingersoll-Rand designs and manufactures a range of industrial and commercial products, a third of which are sold in international markets. Its portfolio of brand names include Trane (climate control systems), Hussmann and Thermo-King (food storage and transport-refrigeration equipment), and Club Car (golf carts). The story seems to be that these high-quality brand names, some recently acquired, will yield steadier recurring revenues as well as opportunities to gain market share.
* The investments last fall in Goldman Sachs, General Electric and other privately arranged transactions weren’t purchases of common shares or opportunities available to ordinary investors. So, for purposes of this article, they weren’t considered.
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