Berkshire Hathaway (BRK) bought nearly $1bn of its own shares in August, according to its third-quarter earnings report.
Stock buybacks have helped fuel the market’s record highs in 2018 and have the added benefit of also lowering a company’s share count, so boosting its earnings per share. This is, however, the first time the fund has bought its own shares in six years. It’s also the first major investment in almost three years, leading some analysts to peg the move as a signal that the current market climate is ripe for finding bargain stocks.
Berkshire, which has its largest stakes in Coca-Cola [KO], Apple [AAPL], Wells Fargo [WFC], Bank of America [BAC] and American Express [AXP], and is headed up by Buffett and his vice chairman Charlie Munger, loosened its rules on stock buybacks in July. Munger is known for buying stocks at a discount, and the purchase of Berkshire stocks suggests that Munger feels that not only Berkshire is trading at a bargain price, but the companies it holds are too.
The financial sector has risen as a result of the conglomerate’s activity, with the suspicion Berkshire has continued to buy its shares beyond September.
The value of Berkshire’s investments as of 30 September is $207bn, up from $179bn at the end of June. The last time Berkshire bought its own shares was in 2012. Shares have soared 143% since that last buyback, while the Dow has rallied 94%, suggesting Buffett’s confidence in his own company has wider ramifications for the market.
Increase in BRK share price since previous buyback
Is BRK a sure bet?
Market Watch editor Tomi Kilgore says: “The Class B shares shot up 4.7% to post a sixth straight gain, and enough to pace the gains among its financial peers, while the Class A shares gained 5%. Considering how well the stock has performed since the last time the company repurchased shares, it’s no wonder when Buffett bets on himself, investors listen.
“The company reported over the weekend net income for the quarter to 30 September that more than quadrupled to $18.54bn from $4.07bn.
“Since Berkshire Hathaway adopted new accounting standards, earnings in the latest quarter include $11.4bn in unrealised gains and losses resulting from changes in the fair values of its equity investments, while results prior to January 2018 recorded unrealised gains and losses in other comprehensive income.”
“When Buffett bets on himself, investors listen.” - Market Watch editor, Tomi Kilgore
Scott Rothbort, founder of Lake View Asset Management, added: “When you look at the holdings within Buffett’s portfolio, they’re benefitting from all of those companies buying back stock, and I think Warren Buffett realises that... I’m willing to bet that within the next quarter, he is going to buy a $25-50bn company.”
Bite of the Apple
The buyback comes hot on the heels of Apple, Berkshire’s largest holding, losing $150bn from its market cap since October. Berkshire’s owns 5.22% of the world’s most valuable company.
Apple stock is still up 17% this year, though some of Berkshire’s other main shares (Wells Fargo and Bank of America) have suffered.
Time to buy?
There certainly are a number of signals that the current market is prime for picking up bargains. Some analysts are however cautioning against getting over excited by the buybacks. Berkshire’s spend of just under $1bn is only about 1% of its available cash, which makes up almost 15% of its assets currently, suggesting that the firm senses better opportunities could arise in the future.
Furthermore, it’s worth noting that trade issues remain a major impediment to global growth. Business and consumer confidence has fallen as uncertainty regarding the US, China and the EU has put a hold on major spending plans.
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