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Published: August 19, 2009
As shares of Berkshire Hathaway Inc. (NYSE:
BRK.A, BRK.B) plunged over the past year, it became fashionable
to ask whether or not Warren Buffett had lost his touch.
In June, financial advisor and CNBC contributor Dennis Gartman
even called Buffett “an idiot.”
But now that Berkshire has rallied more than +35% from its March
lows, the only idiots to be found are those that ever doubted
the world’s second-richest man’s business savvy. Indeed, many of
the moves Buffett made during last year’s market melee are
paying off in a big way.
Take, for instance, his $5 billion investment in Goldman Sachs
Group Inc. (NYSE: GS). Berkshire last September agreed to buy $5
billion in perpetual preferred Goldman shares that pay 10%
interest. In addition, Berkshire received warrants giving it the
right to buy $5 billion worth of Goldman’s common shares at any
time over the next five years at a price of $115 per share.
Critics lampooned that deal when shares of Goldman Sachs fell to
a 52-week low of $47.41 in November. Since then, however,
Goldman’s stock has rocketed more than +240% to close recently
at $160.25.
If Berkshire cashed in it’s warrants today, it would make a +40%
profit or about $2 billion. But Warren Buffett has always been a
long-term investor, which makes that highly unlikely.
"We will hold the warrants," Buffett said on Fox Business
Network. "Every instinct in my body tells me that we will
want to hold those warrants until they’re very close to their
expiration date. The preferred pays us the dividend and the
warrants are going to make us the money."
While Berkshire waits, the $5 billion in preferred Goldman
shares pay an annual interest of $800 million in dividends.
Berkshire’s total stake in Goldman is now worth more than $9
billion -- $4 billion more than the company paid for it --
according to University of Louisiana finance professor Linus
Wilson.
Berkshire’s investment in BYD Co.
Ltd., a Chinese producer of both
cars and specialized batteries, has
also paid off. Berkshire’s
MidAmerican Energy Holdings Co.
agreed last Sept. 26 -- just three
days after the Goldman deal was
announced -- to pay roughly $230
million for a 9.89% stake in BYD.
MidAmerican bought 225 million
shares of BYD at a HK$8 a piece.
Those shares have since risen +430%
to close yesterday at HK$42.40,
handing Buffett a paper profit of
about $1 billion.
Berkshire reported second-quarter
profit of $3.3 billion, up from
$2.88 billion a year earlier. The
boost was largely attributable to
derivative gains, which soared to
$2.36 billion from $689 million the
year prior.
Berkshire’s book value rose +11.4%
in the second quarter, to $73,806 a
share, and Barron’s estimates that
it already could have increased
since to around $79,000 now.
What Buffett’s Buying
So if Buffett’s supposedly cold hand
has suddenly turned hot, how can
investors benefit? Simple: By
following the leader.
A 2007 study by two university
professors titled “Imitation is the
Sincerest Form of Flattery” showed
that buying what Buffett has bought
- even a month after his purchases -
is a pathway to superior returns.
"The market … appears to under-react
to the news of a Berkshire stock
investment since a hypothetical
portfolio that mimics Berkshire’s
investments created the month after
they are publicly disclosed earns
positive abnormal returns of +14.26%
per year,” the study said.
And according to a regulatory filing
disclosed Aug. 14, Berkshire is
reading the tealeaves on healthcare
reform. As of June 30, the company
had loaded up 1.2 million shares of
Becton Dickinson & Co. (NYSE: BDX),
a maker of such medical equipment as
scalpels, catheters and syringes,
while winding down its positions in
healthcare insurers. Berkshire cut
its holdings in WellPoint Inc.
(NYSE: WLP) by 27% to 3.5 million
shares and sold 3.4 million shares,
or 24%, of its UnitedHealth Group
Inc. (NYSE: UNH) stock.
“If the government is going to open
health care to more people, demand
for health care supplies would
increase,” Gerald Martin, a finance
professor at American University’s
Kogod School of Business told
Bloomberg. “The plan that’s
going through Congress could be a
real negative to the health
insurers, but the people who provide
the supplies could really benefit.”
Berkshire also increased its
holdings in Johnson & Johnson (NYSE: JNJ), the world’s largest maker of
health-care products, by 14% to 36.9
million shares. The purchase of J&J
shares marks the second straight
increase in the size of Berkshire’s
stake, according to Bloomberg.
All of the biggest holdings listed
in Berkshire’s filing gained in
value in the second quarter.
American Express Co. (NYSE: AXP)
rose +71% in the period, Wells Fargo
& Co. (NYSE: WFC) rose +70%, and
Burlington Northern Santa Fe Corp.
(NYSE: BNI) jumped +22%. Berkshire’s
single largest holding, The
Coca-Cola Co. (NYSE: KO), rose +9.2%
in the three months ended June 30.
-- Jason Simpkins
Managing Editor
MoneyMorning.com
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