Friday, April 10, 2009

Buffett Watch: Kass Buys Berkshire

Doug Kass

04/09/09 - 09:25 AM EDT
This blog post originally appeared on RealMoney Silver on April 9 at 8:39 a.m. EDT.

After the close of trading, Moody's (MCO Quote) stripped away Berkshire Hathaway's (BRK.A Quote) Triple-A rating. This move, following Fitch's downgrade last month, is almost laughable in its timing. But, if nothing else, investors have become inured to untimely moves by the ratings agencies.

As to the effect on Berkshire Hathaway's balance sheet and income statement, it is negligible. Gross debt expenses will only rise slightly -- thanks to the company's still large cash hoard and given the fact that Berkshire is overcapitalized (both absolutely and vis-à-vis other insurance companies). Importantly, Berkshire has structured its derivative contracts ingenuously in the fact that it did not have to provide additional collateral when the major world stock market indices dropped precipitously; it simply recorded non-cash charges.

The irony is that the Moody's downgrade has coincided with:

    1. a substantial improvement in the value of Berkshire's investment portfolio; and

    2. a reversal in some of the losses from Buffett's foray into shorting puts on the major world indices.

As it relates to Berkshire's common shares, I have been conspicuously negative toward the composition of Buffett's investment portfolio and what I described as his "style drift" regarding the foray into derivatives. My concerns peaked regarding the plight of Berkshire Hathaway's shares with a column I wrote as the U.S. stock market was bottoming in early March, "Buy American? I'm Damned!"

At the same time, I qualified that view with the notion that I admired Buffett's remarkable long-term record; from my perch (and from many others'), he is the single greatest investor in modern financial history. I have often written that both Cassandras and Polyannas are attention-getters, not money-makers.

My day job is to deliver superior investment returns to my clients, and, in order to provide alpha, flexibility is a necessary reagent, so is a contrarian streak, logic of argument and strong financial dissection and analysis. When conditions change, as they appear to be doing now -- see this morning's Wells Fargo (WFC Quote) news -- opinions must change, and opportunities must be embraced. This is especially true in the case of Berkshire Hathaway as the considerations that led to my shorting of Berkshire Hathaway's shares at around $145,000 a share have now reversed, and, with the shares today trading under $90,000 a share, I have begun to accumulate a long position in Berkshire Hathaway.

My current estimate of Berkshire's investment portfolio value is now in the neighborhood of about $73,000 a share, so I am paying less than 3.5 times after-tax operating earnings for the non-investment assets of Berkshire Hathaway.

If we triangulate Buffett's own view of intrinsic value of Berkshire (in the letters to shareholders in the 1990s), the intrinsic value of today stands at about $115,000 a share , or nearly 30% higher than its share price. And, as I expect the world's stock markets to advance smartly from current levels (and for financial stocks like Wells Fargo to lead the way), the value of the company's investment portfolio and its intrinsic value will likely be much higher by midyear. (This morning's $3 premarket rise in Wells Fargo's shares equates to more than a $1 billion increase in value in Berkshire's investment portfolio.)

Moody's move yesterday was classic in it's timing; the horse has already left the barn.

No comments:

Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.