Is Berkshire Hathaway Ready To Rally?
Positive Patterns: Is Berkshire Hathaway Ready To Rally?
individualinvestor.com
By Bob Howard (7/12/01)
(Talk to Bob on his 'Positive Patterns' message board.)
updated at 9:00 a.m., 7/12/01 Berkshire Hathaway (NYSE: BRK/a - Quotes, News, Boards) topped out in price ($83,000) in mid-1998. In the next year and a half, Berkshire lost one-half of its value, falling to the $41,000 area by late February of 2000.
During this time, Warren Buffett was widely derided by many in the investment community. He was too old, he had ignored tech stocks, he had lost his touch; in short, it was over for him.
Relative newcomers mocked Mr. Buffett as a has-been, as a relic of another era. Even some financial editors suggested that investors be kind to Mr. Buffett and point him towards the nearest retirement home, rather than steer their retirement funds his way.
Mr. Buffett is now having the last laugh, and these days he is as feisty and as cash-flow rich as ever.
In the last two years, Mr. Buffett has made many acquisitions, mostly in the private sector. But nothing comes close in size and importance to Berkshire than the 1998 acquisition of General Re, one of the largest re-insurance companies on the planet.
Since the acquisition, General Re has delivered a sub-par performance. There has been some suggestion that Mr. Buffett made a boo-boo here, and that General Re is going to be an albatross around the neck of Berkshire Hathaway.
We think there is some good news ahead for General Re and for Berkshire shareholders. The insurance premium cycle, after many years of rough sledding has recently been turning to the upside, and the price rises are sticking.
This is good news for General Re. Higher insurance premiums at the insurance level mean higher re-insurance premiums for General Re.
It will take a while for the cycle to catch up with General Re. Watch the third and fourth quarter of this year for signs of improvement. Our prediction would be that for fiscal year 2002, General Re makes a strong contribution to the already bulging bottom line at Berkshire Hathaway.
Buffett's recent statements about the stock market have received a lot of attention, particularly his skepticism about future returns for stock market investors.
Mr. Buffett was recently quoted as saying that those expecting 15% annual returns in the stock market over the next 10 years are dreaming.
We think that statement needs a closer look. Many times in the past, Mr. Buffett has told Berkshire Hathaway investors to temper their expectations of his future performance. Yet, his track record is one of under-promising and over-delivering.
We believe any close inspection of Mr. Buffett's track record would convince most he is not just any investor. He is one of the very few with a track record of beating the market averages.
There are two other ways to play Berkshire Hathaway besides the "A" stock. First is the "B" stock, which sells around the $2,350 neighborhood.
Also there is Wesco (AMEX: WSC - Quotes, News, Boards) , a company that Berkshire Hathaway owns an 80% interest in, and trades in the $320 neighborhood. While Wesco is not an exact replica of Berkshire Hathaway by any stretch of the imagination, it is an interesting company that we think is worth closer inspection.
This, for Buffett, is business as usual. His track record has been built (to the surprise of many) by purchasing stock in seemingly ordinary, boring companies: American Express (NYSE: AXP - Quotes, News, Boards), The Washington Post (NYSE: WPO - Quotes, News, Boards), Coke (NYSE: KO - Quotes, News, Boards), Gillette (NYSE: G - Quotes, News, Boards), etc.
One new area of interest for Mr. Buffett these days is buying distressed situations, something he has avoided before. Most recently he has partnered with Leucadia (NYSE: LUK - Quotes, News, Boards) to buy control of Finova (NYSE: FNV - Quotes, News, Boards) , a finance company that has fallen into chapter 11 bankruptcy.
The new holding company is called Berkadia, and suggests there may be more of this to come in the future.
Technically speaking, the next few months should be watched closely. If Berkshire can break $75,000 on the A shares or $2,400 on the B shares, that would signal a strong technical breakout to the upside. As most of the market has been taking it on the chin, Berkshire-Hathaway has been rallying, closing Wednesday at $70,400.
Last week's strength may suggest that General Re will soon be posting some very strong earnings numbers to the Berkshire Hathaway picture in the next few years.
Bottom Line:
Warren Buffett is a person to be studied. Even if you decide not to buy stock in his company, we believe he can help every investor be a better investor.
Bob Howard, a former stockbroker and money manager, is the publisher of Positive Patterns, a newsletter aimed at investors looking for long-term investment ideas. He also manages II's Positive Patterns Message Board, where he welcomes your comments or questions. Bob's e-mail address is pospattern@aol. |
