Buffet Set to Potentially Purchase Preferred Stock Once More Following 14-Month hiatus
Berkshire Hathaway, the multinational conglomerate helmed by investing legend Warren Buffett, has been experiencing a series of significant financial moves. After writing down its Kraft Heinz investment by $5 billion, following a $3 billion impairment charge in 2019, Berkshire has been net sellers of stocks for 11 consecutive quarters.
Despite these developments, Buffett's strategy remains focused on pricing rather than timing purchases. The recent sell-off of Berkshire shares, sparked by the second-quarter earnings report, has made the shares more attractive for Buffett to consider buying.
However, several factors could influence Buffett's decision to re-enter the market for Berkshire Hathaway stocks. One such factor is the attractive valuation. If Buffett perceives that the stock is undervalued relative to its intrinsic value, he may see it as a bargain and choose to invest.
Another factor is the positive business outlook. Improved performance or prospects for Berkshire’s subsidiaries and investments could justify increasing ownership. Buffett may also be looking to deploy cash into buying Berkshire shares rather than external investments, as part of a strategic capital allocation strategy.
Stability or improvement in economic conditions that enhance Berkshire's future earnings potential could also play a role. For instance, Buffett may want to use a significant chunk of cash to bolster the railroad business in the near future due to the potential threat from the Union Pacific and Norfolk Southern merger to Berkshire’s Burlington Northern Santa Fe.
Currently, Berkshire Hathaway shares trade for a price-to-book ratio of about 1.5, which is lower than the strength of Berkshire's balance sheet suggests it should trade for. The insurance business of Berkshire Hathaway experienced a drop in underwriting profits due to big payouts from California wildfires, leading to a nearly 4% decrease in total operating earnings last quarter.
Buffett's history shows that he favors repurchasing Berkshire shares when the market price is significantly below intrinsic value. This strategy was outlined in his 1994 letter to shareholders, where he stated that Berkshire should buy stocks trading below their intrinsic value. In 2018, the board of directors updated Berkshire’s share repurchase policy to allow Buffett to buy back shares if they traded below their intrinsic value.
Between 2018 and May 2024, Buffett spent $78 billion buying back shares of Berkshire Hathaway. However, there is no current indication that Buffett is buying Berkshire shares now; rather, he has been focused on adjusting holdings in external stocks like Apple and Bank of America.
In conclusion, while Berkshire Hathaway has faced challenges, the potential for attractive valuations, positive business outlook, strategic capital allocation, and favourable market conditions could prompt Warren Buffett to start buying Berkshire Hathaway stocks again. The book value per share of Berkshire Hathaway has climbed, with a 2.1% gain from the first quarter and a 10.9% increase from a year ago, indicating a strong foundation for potential growth.
- Warren Buffett, known for his strategy that focuses on pricing over timing purchases, may see the recent sell-off of Berkshire Hathaway shares as an opportunity for investing, given the attractive valuation and the stock's undervaluation relative to its intrinsic value.
- Considering the improved performance or prospects of Berkshire Hathaway's subsidiaries and investments, Buffett might opt to increase ownership as part of a strategic capital allocation strategy, aiming to deploy cash into buying Berkshire shares instead of external investments.
- The stability or improvement in economic conditions could enhance Berkshire's future earnings potential, making it more appealing for Buffett to consider investing, especially in view of the potential threat from the Union Pacific and Norfolk Southern merger to Berkshire’s Burlington Northern Santa Fe, where he may want to bolster the railroad business with a significant chunk of cash.
