Stock of the Day - February 23, 2009 - BRK-A

Berkshire Hathaway, Inc. (BRK-A)

Berkshire Hathaway (BRK-A) is one of the most interesting companies and stocks on Wall Street.  The company is run by CEO Warren Buffet, one of the richest men in the world.  Berkshire is considered to be a holding company, which means that it does not produce goods or services itself, but it owns shares and has ownership stakes in other companies.  Berkshire owns a mix of more than 60 companies, including insurance companies, furniture companies, restaurants, jewelry companies, and many other types of businesses.  The company also owns huge common-share stakes in many publicly traded companies, but its biggest three investments include Wells Fargo (WFC), Coca-Cola (KO), and American Express (AXP). 

Berkshire Hathaway’s stock is the most expensive stock in the United States, even at its currently extreme low levels.  In December 2007, each share of Berkshire was trading at $151,650!  Today, the stock is trading at 5-year lows at around $76,000 per share.  Warren Buffet’s personal fortune is highly correlated to Berkshire’s stock price, as much of his wealth comes from owning shares of Berkshire.  Buffet’s wealth from Berkshire stock is currently worth about $32 billion, down drastically from $62 billion in March 2008!

The 4^th quarter of 2008 was extremely tough for Berkshire’s stock portfolio, as its overall investment portfolio lost 25% of its value.  The company’s three biggest stock holdings fell 70% in the 4^th quarter, and this huge drop in stock price for the three companies cost Berkshire an estimated $11 billion.  Concern about Berkshire’s stock portfolio has been one of the biggest reasons for the company’s own drastic fall in stock price. 

Berkshire Hathaway is a very tough company to analyze, as there are so many different pieces to its business.  Because the company owns so many businesses and makes much of its money through investing in the ever-changing stock market, it is hard to evaluate the company as a whole.  Berkshire also has a massive insurance business, and this business is one of the biggest ways that the company brings in cash.  Through the insurance premiums that Berkshire charges its clients, it uses the extra cash to invest in the stock market and buy ownership stakes in other companies. 

Economic times like these are usually the exact times that Warren Buffet takes advantage of bargain stock prices and distressed companies in need of cash.  Buffet is famous for being able to find undervalued and stable companies that bring in very nice returns over the long term.  Now that stock prices have been so beaten down, Warren Buffet is using all of his company’s extra cash in order to make wise investments in companies that have been unfairly crushed.  But, Buffet invests in companies differently than the average investor.  Because he has so much money, and because companies believe that receiving money from Warren Buffet will bring them positive publicity, Buffet gets extremely favorable deals when he invests money in companies.

In the past few months, Berkshire Hathaway has invested over $10.9 billion with a guaranteed return of 10.6% through preferred stock dividends and fixed income deals.  Some of the companies that Buffet has invested in recently include Goldman Sachs (GS), General Electric (GE), Harley Davidson (HOG), Tiffany’s (TIF), and Swiss Re Bank.  Just to give a couple examples of the kinds of deals that Buffet has been getting for Berkshire Hathaway as a result of his investments, one must only look to his investments in Harley Davidson and Swiss Re.  He lent $300 million to Harley for 5 years at an interest rate of 15% per year, and he lent $2.6 billion to Swiss Re at a guaranteed return of 12%.  So, as you can see, Warren Buffet is really setting up Berkshire Hathaway’s cash situation nicely for the future.  He is taking advantage of companies that are desperate for some cash by lending large sums of money to them in return for great interest rates.  While Berkshire might be losing cash today, the great deals that Buffet has been making will help Berkshire continue to rake in huge returns for many years to come. 

Berkshire Hathaway still has a lot of free cash flow left to take advantage of great deals in the market and to lend out money to cash-strapped companies in return for unusually high interest rates.  Although it is hard to argue against Warren Buffet, as he is considered one of the greatest investors to ever live, his short-term performance on his stock purchases have been extremely shaky.  His bad investments have led to Berkshire’s enormous fall in stock price, but many investors will argue that the short-term is irrelevant, and Buffet’s investments will thrive in the long term. 

As ridiculous it is to say that the most expensive stock in the U.S. is cheap at $76,000, I really think it is.  Times like these, when stock prices have been depressed and greatly deflated, are when Warren Buffet is famous for setting himself up extremely nicely for the future by taking advantage of undervalued stocks.  Berkshire Hathaway will be making very nice returns from its loans to companies such as Goldman Sachs and General Electric for many years to come.  And, while the short term has been rough for Berkshire’s stock portfolio, it would be foolish for me to doubt Buffet for the long term.  The man is an investing genius, and it would be ridiculous to say that he has lost his investing touch after one rough quarter, especially considering how unbelievably successfully he has been for so many decades.  Buffet will continue to use Berkshire’s ample free cash flow to make wise long-term investments, and Berkshire’s stock will eventually thrive once again.  

Niki Pezeshki

College Trillionaire