Author Topic: berkshire - cheap?  (Read 80845 times)

Cigarbutt

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Re: berkshire - cheap?
« Reply #310 on: December 08, 2018, 10:01:35 AM »
If one looks at the last 20 to 25 years, the comment about the relative balance between cash and bonds held versus reserves is relevant as the ratio has remained quite stable (although Mr. Buffett did modify the balance to some extent in 2001-2 and 2008-11). But this balance did not seem to apply earlier when it looks like Mr. Buffett did use float for equity investment leverage (even if, in some years, like the early 80's, the float could be quite costly). Why?

If one looks at relative "excess" or alpha return from the equity portfolio held or BRK itself versus the market over the last 10-year segments going back to the early days, the "excess" has progressively come down and some of this convergence is due to size but Mr. Buffett, in the last 20 to 25 years, has refrained from using float as leverage in a big way to help maintain the excess returns. Why?

From a risk-based capital and regulatory point of view, it appears that there was ample room to do so although not in an unlimited way.


nickenumbers

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Re: berkshire - cheap?
« Reply #311 on: January 17, 2019, 12:35:00 PM »
Why do you all think that BRK has not enjoyed a bit of a pop in 2019 like the S&P and other indexes have?

Is it that there has not been enough news flow specific to BRK, or do you think everyone is still worried about the investment holdings of AAPL going down in the portfolio?

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thepupil

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Re: berkshire - cheap?
« Reply #312 on: January 17, 2019, 12:41:49 PM »
I think divining reasons for very short term out/underperformance is hard.

 If I had to put a reason to it, it would be that Berkshire outperformed in 4Q 2018, so some short term mean reversion is potentially at work.

4Q2018 Outperformance

Against SPX      +9%
S&P Financials  +9%
AAPL               +25%
BAC                 +11%   
Union Pacific    +10%  (BNSF)
Progressive      +10%  (Geico)

YTD 2019
Against SPX     -7-8%
Financials        -9%
AAPL               -1%
BAC                -19%
Union Pac       -14%
Progressive     -6-7%
« Last Edit: January 17, 2019, 12:45:26 PM by thepupil »

SHDL

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Re: berkshire - cheap?
« Reply #313 on: January 17, 2019, 01:05:51 PM »
Why do you all think that BRK has not enjoyed a bit of a pop in 2019 like the S&P and other indexes have?

Is it that there has not been enough news flow specific to BRK, or do you think everyone is still worried about the investment holdings of AAPL going down in the portfolio?

Because my frivolous bet against Jurgis angered the investment gods?   :P

No but more seriously, even BRK behaves in a strange way from time to time and those tend to create interesting trading opportunities.  My favorite is when it sells off with the financial sector for no good reason just because it's a big component of XLF and other ETFs.

Jurgis

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Re: berkshire - cheap?
« Reply #314 on: January 17, 2019, 01:08:24 PM »
Why do you all think that BRK has not enjoyed a bit of a pop in 2019 like the S&P and other indexes have?

Is it that there has not been enough news flow specific to BRK, or do you think everyone is still worried about the investment holdings of AAPL going down in the portfolio?

Because my frivolous bet against Jurgis angered the investment gods?   :P

No but more seriously, even BRK behaves in a strange way from time to time and those tend to create interesting trading opportunities.  My favorite is when it sells off with the financial sector for no good reason just because it's a big component of XLF and other ETFs.

Just to bring everyone in context I privately proposed to adjust the bet to start at 1/1/2019. I honestly swear I did not look at BRK/SP500 performance since 1/1 and did not try to tilt the bet in my favor.  8) Peace.

Edit: Actually I still haven't looked, so I don't even know if I was tilting it in my favor or against me.  ::)
« Last Edit: January 17, 2019, 01:11:02 PM by Jurgis »
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alpha

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Re: berkshire - cheap?
« Reply #315 on: January 17, 2019, 01:23:17 PM »

As others have said trying to rationalize short term moves is a waste of time.

If I had to guess ... maybe some investors have soured after Buffett made a very public bet on Apple right before it announced profit warning and slowing sales forecast.

Viking

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Re: berkshire - cheap?
« Reply #316 on: January 17, 2019, 01:49:37 PM »
Why do you all think that BRK has not enjoyed a bit of a pop in 2019 like the S&P and other indexes have?

Is it that there has not been enough news flow specific to BRK, or do you think everyone is still worried about the investment holdings of AAPL going down in the portfolio?

Here are my guesses for BRK underperformance YTD:
1.) AAPL and financials big price decline in Q4 and upcoming substantial hit to Berkshire BV when year end results are reported in Feb. Headline will be ugly.
2.) AAPL profit warning (caused immediate decline in BRK) and concern about AAPL results going forward and potential impact on Berkshire BV.
3.) flight to safety reversing: as thepupil mentioned, BRK dramatically outperformed in the Dec panic, and now it is underperforming as investors shift to riskier stocks.

The good news:
1.) since the start of the year, financials are on fire and we all know they are twice the size of AAPL in the BRK portfolio.
2.) AAPL, re-priced in the portfolio at $155, is now cheapish. It could go a little lower but the big decline is behind us. At some point in the next year or two Apple will launch a must have phone and when they do sales and profit will hit new records and the company will be valued over a billion $. At $155 this is a great long term hold for BRK. Having said that, i do think 2019 could be a very difficult year for Apple. China may be a big problem, and may persist for a year or two. And the current lineup of iPhone’s looks uninspiring with the result that people will hold on to their current phone a little longer on average (which will impact unit sales and profits. Fortunately, Apple does have a pretty good track record of recognizing mistakes with the iPhone lineup and making the proper course corrections the following year.
3.) at the end of Q3 BRK had $100 billion in cash. BRK bought $25 billion in stocks in Q3. With the decline in stocks in Q4 i would expect more than $25 billion in new stock purchases in Q4. Perhaps big additions to APPL, JPM etc. If so, this will meaningfully increase earnings power of company.
4.) BRK buying back its own stock: I expect more commentary from Buffett about this in this years annual letter. Given the size of APPL and financials, and the investment portfolio in general, we could see large swings in BV from quarter to quarter. Buffett has his own idea of intrinsic value of BRK and it obviously doesnot swing so dramatically quarter to quarter. Perhaps we will see BRK buy back its own stock at 1.4x BV when it feels the stock portfolio is being undervalued by Mr Market (resulting in BV being understated).
5.) as the US banks have communicated, the US consumer and economy continues to perform well. We can expect the Berkshire op co’s to report very strong results.
6.) tax reform: BRK was one of the big winners and the benefits of tax reform will continue into future years. The stock price today is trading close to where it was trading in Nov of 2017 when tax reform was being discussed. Bottom line is it does not look to me like Mr Market Is valuing Berkshire higher even though its future after tax earnings will be much higher as a result of tax reform.
7.) long term bond yields look like they have peaked and may be headed lower. All things being equal this will allow for a higher PE to be attached to stocks (in general).
8.) as volatility returns to the market, Mr Market may start to value ‘stalwart’ (bond like) stocks like BRK a little higher.
9.) insider buying: $20 million purchase by Jain in Dec likely around $192 is encouraging.

BRK looks attractively priced at current levels. I buy it in place of holding a bond. When it runs up 5-7% i am happy to sell. Rinse and repeat.
« Last Edit: January 17, 2019, 08:51:08 PM by Viking »

Viking

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Re: berkshire - cheap?
« Reply #317 on: January 17, 2019, 04:34:44 PM »
Another interesting tidbit of information. It really is amazing the amount of cash BRK and Apple are sitting on. And the US financials are over capitalized, unable to aquire, and forced to return +100% of earnings to shareholders. Clearly, Buffett is hot for companies that are cash machines and return most of it to shareholders in a tax efficient way (while still growing their businesses).

BRK has about $100 billion in net cash; about 20% of its market cap ($489 billion). It is generating about $25 billion in free cash flow per year. It recently raised the threshold for stock buybacks. Buffett really does need to find a use for this excess cash.

BRK’s single largest equity position (worth $40 billion), Apple has $130 billion in net cash and a market cap of about $740 billion. It is earning about $55-60 billion per year. It is already buying back significant stock and this will continue. (It says it wants to get to cash neutral down the road). It is paying a dividend that is currently yielding 2%. Stock buyback = +5%? This is yielding Berkshire a total return of +7% in a very tax efficient way. Year after year.

BRK’s largest equity group (worth $80 billion), the big US banks have lots of excess capital and as a result will be buying back 5-7% of shares outstanding over the next year. They all pay solid dividends in the 2-3% range. This is yielding BRK a total return of 8-10% in a very tax efficient way. Year after year.

So Apple and Financials, worth about $120 billion, will be yielding BRK about 8% or $9.6 billion per year moving forward. In a very tax efficient way. Looks like Buffett likes buying cash machines that return it to shareholders mostly via buybacks and dividends. Oh, and these businesses continue to grow their top line and total profits.
« Last Edit: January 17, 2019, 04:41:19 PM by Viking »

shalab

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Re: berkshire - cheap?
« Reply #318 on: January 19, 2019, 01:08:44 PM »
WEB and Munger do buyback at 207. It is safe to say no one understands BRKA valuation better than these two gentlemen. My son and I did some calculations last week, looks cheap even today.

market cap: 500B
Look through stock portfolio (Q3): 180 B
Cash and short term: 115 B
net value: 205 B.

BNSF: 100B (comp UNP)
Geico: 50 B (comp PGR)
Berkshire energy: 60 B (comp Duke energy)

Total: 210 B

Net value: -5 B

Remaining businesses are for free.



Why do you all think that BRK has not enjoyed a bit of a pop in 2019 like the S&P and other indexes have?

Is it that there has not been enough news flow specific to BRK, or do you think everyone is still worried about the investment holdings of AAPL going down in the portfolio?

Here are my guesses for BRK underperformance YTD:
1.) AAPL and financials big price decline in Q4 and upcoming substantial hit to Berkshire BV when year end results are reported in Feb. Headline will be ugly.
2.) AAPL profit warning (caused immediate decline in BRK) and concern about AAPL results going forward and potential impact on Berkshire BV.
3.) flight to safety reversing: as thepupil mentioned, BRK dramatically outperformed in the Dec panic, and now it is underperforming as investors shift to riskier stocks.

The good news:
1.) since the start of the year, financials are on fire and we all know they are twice the size of AAPL in the BRK portfolio.
2.) AAPL, re-priced in the portfolio at $155, is now cheapish. It could go a little lower but the big decline is behind us. At some point in the next year or two Apple will launch a must have phone and when they do sales and profit will hit new records and the company will be valued over a billion $. At $155 this is a great long term hold for BRK. Having said that, i do think 2019 could be a very difficult year for Apple. China may be a big problem, and may persist for a year or two. And the current lineup of iPhone’s looks uninspiring with the result that people will hold on to their current phone a little longer on average (which will impact unit sales and profits. Fortunately, Apple does have a pretty good track record of recognizing mistakes with the iPhone lineup and making the proper course corrections the following year.
3.) at the end of Q3 BRK had $100 billion in cash. BRK bought $25 billion in stocks in Q3. With the decline in stocks in Q4 i would expect more than $25 billion in new stock purchases in Q4. Perhaps big additions to APPL, JPM etc. If so, this will meaningfully increase earnings power of company.
4.) BRK buying back its own stock: I expect more commentary from Buffett about this in this years annual letter. Given the size of APPL and financials, and the investment portfolio in general, we could see large swings in BV from quarter to quarter. Buffett has his own idea of intrinsic value of BRK and it obviously doesnot swing so dramatically quarter to quarter. Perhaps we will see BRK buy back its own stock at 1.4x BV when it feels the stock portfolio is being undervalued by Mr Market (resulting in BV being understated).
5.) as the US banks have communicated, the US consumer and economy continues to perform well. We can expect the Berkshire op co’s to report very strong results.
6.) tax reform: BRK was one of the big winners and the benefits of tax reform will continue into future years. The stock price today is trading close to where it was trading in Nov of 2017 when tax reform was being discussed. Bottom line is it does not look to me like Mr Market Is valuing Berkshire higher even though its future after tax earnings will be much higher as a result of tax reform.
7.) long term bond yields look like they have peaked and may be headed lower. All things being equal this will allow for a higher PE to be attached to stocks (in general).
8.) as volatility returns to the market, Mr Market may start to value ‘stalwart’ (bond like) stocks like BRK a little higher.
9.) insider buying: $20 million purchase by Jain in Dec likely around $192 is encouraging.

BRK looks attractively priced at current levels. I buy it in place of holding a bond. When it runs up 5-7% i am happy to sell. Rinse and repeat.
« Last Edit: January 19, 2019, 01:12:44 PM by shalab »

rolling

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Re: berkshire - cheap?
« Reply #319 on: January 19, 2019, 02:20:01 PM »
WEB and Munger do buyback at 207. It is safe to say no one understands BRKA valuation better than these two gentlemen. My son and I did some calculations last week, looks cheap even today.

market cap: 500B
Look through stock portfolio (Q3): 180 B
Cash and short term: 115 B
net value: 205 B.

BNSF: 100B (comp UNP)
Geico: 50 B (comp PGR)
Berkshire energy: 60 B (comp Duke energy)

Total: 210 B

Net value: -5 B

Remaining businesses are for free.


   
You are double counting geico cash and investments. Cheap, but not that cheap.
My usual portfolio: Highly concentrated (up to 3 or 4 positions) in smallcaps and microcaps.