What's Weighing on Buffett's Stock?
By ROBERT D. HERSHEY Jr. -- January 17, 1999
Warren E. Buffett, the investment sage, has often
said he welcomes market declines because they put
some good-quality merchandise "on sale," letting him
shop for bargains.
These days, however, it is the price of Buffett's own
company, Berkshire Hathaway, that has been reduced, and
some people are wondering why.
It's not they think that Buffett, 68, the investment
legend, has lost his touch. But how to explain that
Berkshire's class A shares have lost more than 7
percent of their value, to $65,000, in just the first
two weeks of the year? And that they are down 22.6
percent from their all-time peak of $84,000 last June
22? (Class B shares, which cost much less but give
holders no voting rights and are not convertible to A
shares, have fallen at a similar pace, and are now at
$2,128.)
Not to worry, say those who follow Berkshire most
closely. Yes, two of its biggest holdings, Coca-Cola
and Gillette, have suffered from economic turmoil
abroad. But this is the wrong way to look at Berkshire,
according to Robert Hagstrom, portfolio manager for
Legg Mason Focus Trust and a Buffett aficionado.
Indeed, Berkshire is often misperceived by casual
investors, including the arbitragers who swarm to
merger deals, as little more than its huge portfolio of
publicly traded stocks, concentrated -- at last report,
which means the 1997 annual report -- in eight issues.
(In addition to Coke and Gillette, those are American
Express, Freddie Mac, Wells Fargo, Disney, Citigroup
and Washington Post.)
"It is not correct to analyze a closed-end investment
company," said Hagstrom, whose fund has 22 percent of
its assets invested in Berkshire. The main business of
Berkshire is in property and casualty insurance; the
"float" generated by these subsidiaries including
Geico, the seventh-biggest auto insurer, is then
invested elsewhere -- in stocks and directly into other
Berkshire operating businesses.
Investors say Berkshire's relative weakness is mostly a
temporary result of its $22 billion acquisition,
announced last summer of General Re, the giant
reinsurance company.
As it turned out, General Re stockholders did not jump
at the chance to become Buffett's investment partners
by exchanging their shares for those of Berkshire. That
has led to some weakness in Berkshire shares.
Thomas A. Russo, a partner at Gardner Investments in
Lancaster, Pa., which has long held sizable Berkshire
stakes, said: "The real impact is from the massive
rotation of owners. You're now asking insurance
investors to own a company that has a lot of other
things," including a portfolio of stocks now carrying
high price-earnings multiples and an increasingly large
stable of other interests ranging from candyand
furniture to, more recently, pilot-training and
executive jets. In his view, the pressure on the stock
from the exodus of these owners is temporary.
A Wall Street analyst who spoke on condition of
anonymity, however, estimated that only about one-third
of General Re holders will wind up keeping Berkshire
stock.
Disenchantment spread when Standard & Poor's chose not
to include Berkshire in its 500-stock index, the widely
used benchmark whose components are must buys for index
funds. Lack of liquidity was seen as the reason --
expensive Berkshire shares do not trade much -- though
rumors persist that S&P may reconsider. A spokesman for
S&P declined comment on Thursday.
Another factor weighing on Berkshire's price is
softness in the world reinsurance market as
overcapacity forces down rates. But Hagstrom, Russo and
others regard the acquisition of General Re as nothing
short of a coup. General Re's huge size figures to add
flexibility to Berkshire's insurance operations as well
as to throw off huge amounts of cash that can be
invested.
Geico, which flirted with bankruptcy in the 1970s, is
thriving as never before. As a low-cost provider of
insurance, it could become the industry's
second-biggest company, trailing only State Farm, in
five to seven years, according to Alice Schroeder, a
Paine Webber analyst.
Christopher C. Davis, portfolio manager of Davis New
York Venture fund and Selected American Shares, are how
the insurance properties are valued and what
opportunities there are for Berkshire to invest the
float they generate.
Davis has long admired Buffett without owning Berkshire
itself. Now he counts himself a Berkshire bull and is
keeping shares he has received in exchange for General
Re he stock.
Martin Sosnoff, chief investment officer for
Atalanta/Sosnoff Capital, has reservations. He argued
recently in Forbes magazine that the collapse of world
oil prices has significantly dimmed Berkshire's
prospects by threatening political disruption for Third
World producers and undermining their ability to buy
Coke.
Buffett fans don't agree. "He'll make more money for
his shareholders in a bad market," Davis said. "In a
high-flying market he may have to bide his time."
Copyright 1999 The New York Times Company |
