What has Berkshire Hathaway been doing ahead of its annual meeting?

30 Apr, 2020 01:52
source: Singularity Financial

Singularity Financial Hong Kong April 30, 2020 – by David Lee

Warren Buffett has kept quiet during the pandemic crisis, fueling speculation about what the famed investor’s Berkshire Hathaway conglomerate has been doing ahead of its annual meeting this weekend.

Even as the coronavirus pandemic sparked an unprecedentedly swift drop in equity markets this year, Buffett maintained his characteristically upbeat tone.

The progress of mankind has been incredible

“The progress of mankind has been incredible. And that won’t stop,” Buffett told Yahoo Finance’s editor in chief Andy Serwer in a March 10 interview at Berkshire Hathaway’s headquarters in Omaha, Nebraska.

While U.S. history is riddled social and economic turmoil, the country always seems to come out on top. “We haven’t forgotten how to make progress in this country. And we haven’t lost interest in making progress,” he added. “And that will benefit to varying degrees of all kinds of people, I think, around the world. But there will be interruptions.”

Berkshire has been known for generally maintaining long-term stakes in its holdings, reaffirming Buffett’s own core beliefs in what he calls the “American tailwind.”

“If you stick around long enough, you’ll see everything in markets,” Buffett said. “And it may have taken me to 89 years of age to throw this one into the experience, but, you know, the markets, if you have to be open second by second, they react to news in a big-time way.”

“Things can always change tomorrow,” Buffett added. “And markets will be down 50% occasionally in your lifetime, if you live long enough. And overall, stocks are a very good place to be, but never on leverage.”

Warren Buffett & the “Big Four” airlines

Chris Bloomstran, head of Semper Augustus Investments, dedicated more than 50 pages to Berkshire analysis in his latest letter to clients. SAI held about $60 million worth of Berkshire stock at last count, making it the fund’s biggest holding. He spoke to Business Insider by telephone and email at the end of last week.

Berkshire owned between 8% and 11% of the “big four” airlines — American, Delta, United, and Southwest — at the end of December. It sold $390 million worth of Delta and Southwest stock a few weeks ago, and that may have been just the start.

“I wouldn’t be surprised to see the investments in the airlines either gone or greatly eliminated,” Bloomstran said.

As governments across the globe continue to restrict travel, and millions of people stay at home to slow the spread of the coronavirus, demand for air travel has plummeted. Delta’s passenger numbers have plunged 95%, forcing it to slash its flights by 85%.

The result is that airlines face a deeply uncertain future, even after accepting billions in grants and loans from the US Treasury. In exchange, the government demanded warrants allowing it to purchase the airlines’ shares at a discount in the future — a strategy inspired by Buffett’s bailouts during the financial crisis.

Berkshire is mainly focused on weathering the “worst typhoon that’s ever happened,” Buffett’s longtime partner, Charlie Munger, recently told The Wall Street Journal.

The “big four” airlines never called Buffett before they accepted government bailouts, and “the phone is not ringing off the hook,” Munger told The Journal last week.

The slump in demand for Buffett’s services isn’t surprising, Bloomstran said.

“If Buffett’s going to provide capital, he’s going do it on Berkshire’s terms, which is costly,” he explained. “Why would an airline go to Berkshire Hathaway when they’ve lobbied the government to give them the money for free?”

Berkshire Hathaway’s share buybacks

Warren Buffett’s Berkshire Hathaway may have spent billions on share buybacks and other stocks during the market meltdown, hedge fund chief Bill Ackman said on the The Knowledge Project podcast.

“I’m surprised they haven’t done anything yet that’s visible, but my guess is they’ve been buying stocks a lot,” the Pershing Square Capital pointed out. “The big opportunity for Berkshire is Berkshire itself,” Ackman added, given it was a “cheap stock” before the downturn and is now a “real bargain” at less than $190 for a Class B share.

Buffett has repeatedly underscored the value of share buybacks over the years, arguing they benefit shareholders and sellers, are less risky than acquisitions and more efficient than dividends, and can signal that executives prioritize their shareholders’ interests.

“I hope that he’s purchased a lot of his own shares and I hope he’s deployed capital in other companies as well,” Ackman said on the podcast.

How are some of Berkshire’s portfolio companies doing?

See’s Candies, one of Buffett’s favorite companies, had to announce furloughs of staff in early April due to the coronavirus pandemic, Bloomberg reported. Now, the company is testing whether or not it is safe to open some of its shops, according to the report.

Justin Brands, a shoemaker, has shuttered outlets throughout Missouri, Bloomberg reported. The company also closed two separate production factories in the state and furloughed as many as 161 workers, local paper Springfield News-Leader reported in early April.

Railroad company BNSF is expecting a decline in rail traffic in the first quarter of the year, Bloomberg reported, citing data from the Association of American Railroads and Bloomberg Intelligence.

Manufacturing company Precision Castparts has also taken a hit, Bloomberg reported. The company in April said that it would temporarily halt operations in its Portland, Oregon, plant due to a reduction in customer orders.

A few of Berkshire Hathaway’s companies have benefited amid the pandemic, including one of the earliest in the portfolio, Geico insurance. As shelter-in-place guidelines have taken hold across the US, they’ve greatly reduced the number of drivers, and therefore accidents taking place, on the road, Bloomberg reported.

Lubrizol, a chemical company, has been able to adapt during the coronavirus pandemic and keep staff on board. Currently, it’s ramping up production of a chemical used in hand sanitizer, as well as prioritizing products used in medical manufacturing, according to Bloomberg. In addition, the company announced Monday that it is contributing to Nike’s efforts to provide full-face shields to frontline medical workers.