Blog Archives

By recently looking at the S&P 500 in regards to largest market capitalization, we learned that Berkshire Hathaway has now earned the number three spot and has taken over for Google Inc., according to information presented by The Online Investor.

If you are an investor, it’s really important to keep your eye on market capitalization for a whole host of reasons. But the biggest reason of all is that it truly allows you to compare a company’s stock to the value credited by the stock market.

New investors often make a simple mistake. They’ll see one company’s stock trading at $20, and then another company’s stock trading at $10, and think that the company whose stock trades for $20 is worth twice as much as the other business. That is an incorrect comparison. In order for it to work, you must know how many shares exist for each company.

But when you factor in the share counts and compare market capitalization, this provides a true comparison and gives you the ability to get a real-world value for both stocks.

Berkshire Hathaway’s current market capitalization is now $260.10 billion. Google’s market capitalization is only $255.40 billion. But, the price of Berkshire Hathaway Class A shares cost over $150,000 more per share than Google. That doesn’t mean the company is worth 150,000 times more than Google.

Market capitalization is also important because it shows where a company is placed in terms of its size when comparing it to other businesses in its peer group. An example is comparing a standard pickup truck to another standard pickup truck. It wouldn’t be fair to compare a standard pickup truck to a compact car.

This can also have an immediate impact on which ETFs and mutual funds are willing to purchase the stock.

As an example, some mutual funds specifically only invest in small cap stocks, so that is where they focus. The S&P MidCap index is also another example. In essence, this fund takes the 100 biggest companies on the S&P 500 and it removes them. It only focuses on the up-and-coming smaller 400 companies.

So the market capitalization of a company is very important, and this is especially true in relation to other businesses. That’s why it’s very valuable to rank companies this way on a daily basis.

The shareholders of Berkshire Hathaway may have been seeing glimpses into the future without Buffett for some time now. Most of the deals that Berkshire Hathaway made last year were not directly involving the 82-year-old billionaire investor. They either started with one of the two investment managers Buffett recently hired over the last few years, or they started with one of the subsidiaries. No matter what way you look at it, Berkshire Hathaway did quite well during 2012.

Buffett will release his annual letter to shareholders this Friday afternoon, which is later on today.

The author of Warren Buffett’s Successor: Who It Is and Why It Matters, Jeff Matthews, tells us that last year’s deals are very comforting because they show how Berkshire Hathaway could work once Buffett is no longer there.

“It’s very reassuring. This didn’t used to happen,” said Matthews.

The main thing shareholders will miss most about Warren Buffett is his fantastic judgment and excellent connections. Take the 23.3 billion dollar deal to purchase a portion of H.J. Heinz, a Pittsburgh-based company.

No matter what kind of deal is being made by Berkshire Hathaway, the annual letter written by Warren Buffett is possibly the best read document throughout the entire business world. This is all because of his incredible record of accomplishment and his excellent ability to explain complicated matters in plain English.

There’s no question that shareholders are wondering about the future of the former textile manufacturer known as Berkshire Hathaway. Buffett is getting up there in years. He also recently suffered from prostate cancer, although it wasn’t life-threatening and he seems to have gotten through it quite nicely.

Some of the biggest dollar value deals Berkshire Hathaway made last year are:

Repurchasing $1.2 billion worth of Berkshire Hathaway Class A shares and purchasing $1.5 billion in mortgage loans from Residential Capital.

They also made a $4 billion deal to cover CIGNA Corp.’s insurance losses, and received a $2.2 billion premium in exchange.

Other deals were made but the terms have not been disclosed. Analysts tell us that the Oriental Trading Co. acquisition, as well as the Prudential real estate network will not likely be a major boost to Berkshire Hathaway’s bottom line by themselves.

The only Berkshire Hathaway deals that Warren Buffett likely initiated are the share repurchase acquirement, the acquisition of Oriental Trading Co. and potentially the deal with CIGNA. The rest of the deals started elsewhere. But there’s no question that Warren Buffett signed off on each and every one of them.

Buffett seems to enjoy all of the speculation revolved around who will eventually run the company. Meyer Shields, KBW analyst, said that Buffett probably won’t help narrow down the competition because of his enjoyment of the speculation.

If you follow the company as an investor, you might look upon these four people as the strongest potential candidates: Greg Abel, CEO and President of MidAmerican; Burlington Northern Santa Fe CEO Matt Rose; Ajit Jain, head of the Berkshire Hathaway reinsurance division; and CEO of Geico, Tony Nicely.

Buffett told us that his son Howard, also a member of the Berkshire Hathaway board, is ideally suited as the company chairman.

Berkshire Hathaway also hired two hedge fund managers, Ted Weschler and Todd Combs, who will eventually be able to run the entire Berkshire Hathaway portfolio. They each manage portfolios worth around $4 billion. Buffett continues to make the majority of the investments on behalf of Berkshire Hathaway as he searches for large acquisitions.