Last year, Warren Buffett mentioned that Berkshire Hathaway and the future of the company is going to be about expanding and buying big businesses. As Buffett celebrates is golden anniversary as far as running the company is concerned, many investors are beginning to rally behind the idea.
Shares of Berkshire Hathaway, based out of Omaha, which Buffett took over in 1965, are trading at their all-time high. Last year, shares of the company traded for twice as much as the S&P 500 index. The stock even soared after Buffett lost money on IBM and Tesco, to name just a few of the bad investments.
Not that long ago, Berkshire Hathaway was recognized for the way to take advantage of Warren Buffett’s skill at choosing stocks. But things are different these days, and purchasing Berkshire Hathaway shares is more of a bet of Buffett’s ability to acquire great businesses and distribute money through these businesses that he has purchased over the last 50 years, including retailers, electric companies, manufacturers and one of the biggest railroads in the United States, Burlington Northern Santa Fe. Jordan’s Furniture is one of the acquisitions, purchased by Warren Buffett in 1999.
“The market’s realizing it’s more than just that stock portfolio,” noted David Rolfe, who handles $10.5 billion worth of investments – Berkshire Hathaway shares included – at Wedgewood Partners.
The recent outperformance will help the 84-year-old Buffett make his case for the reason why Berkshire Hathaway should stay together when he’s no longer CEO and chairman. He has made a promise to create his vision for the future of the company over the next 50 years this February when he writes the next annual letter to shareholders.
Part of this argument is part of the transition that is already taking place. Geico and National Indemnity already hold many of Berkshire’s stocks and bonds. The income provided by those investments accounts for 1/6th of the nearly $16 billion that Berkshire Hathaway profited during the first nine months of 2014. Just 15 years ago, stock holdings accounted for over 80% of the net income earned by the company.
This shift in focus is a great way to soften the blow when Buffett picks stocks that go sour. In 2014, the Berkshire Hathaway investment in Tesco was down 43% after profit estimates were cut multiple times by the England-based grocer. Buffett called the investment a huge mistake and suffered a $678 million loss.
Berkshire also invested $11.4 billion in IBM, and this stock also put a hurting on the portfolio. The shares were down 14% at the end of 2014, and they are now worth less than what Buffett paid for the shares. This happened after IBM said that they were not going to meet their profit goal for five years.
As the investments began to struggle, Berkshire Hathaway continued its incredible ascent. In August of last year, Berkshire Hathaway Class A shares broke $200,000 per share for the first time. On the year, the stock is up 27%. Berkshire Hathaway market Capitalization, currently at $367 billion, is the fourth largest in the world. They only trail Apple, Exxon Mobil and Microsoft.
Berkshire stock rose higher than Wells Fargo, the largest stockholding in the Berkshire Hathaway portfolio. The bank only went up 21% during 2014.
The most important thing to know is that the businesses owned by Berkshire Hathaway continue to make a lot of money. Burlington Northern Santa Fe railroad managed to increase its earnings during the first nine months of the year in 2014, and this was even after it struggled with delays in service. Underwriting profits were posted by the insurance operations and the energy unit earnings have rose because of the 2013 acquisition of a utility in Nevada. Retail businesses, service businesses and manufacturing businesses also posted higher profits too.
“It’s a wonderful portfolio of companies that was incredibly undervalued,” stated Bill Smead, overseer of $1.1 billion in assets for Smead Capital Management. Many of the positive trends “had not been reflected in the stock a year or two years ago.”
Cash began piling up faster than Warren Buffett could spend it because of the profit that the business was making. At the end of September, the company had $62.4 billion in the company coffers.
Warren Buffett refers to his largest deals as “elephants,” and he did not come by many during 2014. But during the year the subsidiaries of the company have made a number of smaller transactions. They paid $2.7 billion for an electric transmission business in Canada. Buffett put together a deal to acquire the largest private network of auto dealerships in the United States, the Van Tuyl Group. He also provided Burger King with $3 billion in financing money to purchase Tim Hortons.
Some of last year’s largest acquisitions didn’t really cut into the pile of cash, because Buffett swapped stock holdings for the businesses. That’s what happened when in February he purchased from Phillips 66. From Graham Holdings, he traded shares for a TV station. And Procter & Gamble were given shares in order to purchase Duracell from the company.
Investors provide latitude to Warren Buffett to hold onto that much cash because they know that he has proven time and time again to spend it wisely, said Nomura Holding’s Cliff Gallant. The reputation and size of the company also provide ample opportunity to see deals that others do not.
“It’d be irrational to think I can do better than him,” Gallant said. “Cash is more valuable in his hand than in mine.”