Paul Morigi
For this short Thanksgiving week, I decided to focus on Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) and three of the newest equity holdings. These included Jefferies Financial (JEF), Louisiana-Pacific (LPX), and a large stake in Taiwan Semiconductor (TSM). Berkshire is a well-known company, but it is one that I expect I will be thankful I bought in the coming years.
Investment Thesis
Berkshire is still the ultimate sleep well at night financial holding. Shares have bounced around all year but are up slightly YTD (3%). I think they still offer a margin of safety today for investors looking for a diversified large cap company with a bulletproof balance sheet. In Q3 they continued to put cash to work, and they are now able to get some yield on the cash pile on the balance sheet with the rise in interest rates. They bought back about $1B of stock in Q3, and I think that will likely continue unless shares rip higher.
New Stakes
This week I have written articles on the three new additions. Instead of going over all of them again, I will provide links below. Taiwan Semi is by far the largest of the three, but they are all cheap and pay a solid dividend.
Q3 Update
Outside of the new positions, Berkshire has continued to put cash to work in 2022. There was some selling to go with the buying, but they were a net buyer of stocks for a total of $3.7B. They continued to add to the large energy positions in Chevron (CVX) and Occidental Petroleum (OXY). I’m curious to see what happens with these positions as they have quickly become a meaningful chunk of the equity portfolio over the last couple years. I’m bullish on energy despite the economic uncertainty because the supply and demand imbalance looks favorable for oil prices and the energy sector equities in general.
They also added to stakes in RH (RH), Celanese (CE), and Paramount Global (PARA). On the selling side, they trimmed their bank holdings in U.S. Bancorp (USB) and Bank of New York Mellon (BK), holding Bank of America (BAC) steady. They disposed of STORE Capital (STOR), which is being acquired, and trimmed Activision (ATVI), which has its own pending acquisition with Microsoft (MSFT). Kroger (KR) and General Motors (GM) also saw some selling, while the rest of the portfolio was kept steady.
A $1 Trillion Conglomerate?
In a year that some of the largest stocks have gotten smoked, Berkshire has continued to chug along. The operating businesses have had their ups and downs this year, which is natural due to changing economic conditions, but shares are up 3% YTD. When you look at all the different pieces of the company, I still think shares are undervalued. Berkshire has a $685B market cap today, and buying shares gets you an incredible mix of stocks, bonds, cash, and subsidiaries.
- An Equity Portfolio worth $300B
- A Cash & Cash Equivalent Pile over $100B
- Burlington Northern Sante Fe
- Berkshire Hathaway Energy
- A Massive Insurance Subsidiary
- Various other subsidiaries
Berkshire is unique in its ability to generate cash from various investments and subsidiaries on a massive scale. It won’t happen overnight, but I think it’s only a matter of time before Berkshire has a $1T market cap. Another reason that investors like Berkshire is the shrinking share count due to buybacks.
Buybacks
Berkshire continued to repurchase its stock, with another $1.05B in Q3. While this isn’t nearly the same rate as it was earlier in the year, I’m expecting some buybacks to continue over the next couple years. I am surprised that they weren’t more buybacks in Q3 to be honest, especially since shares were trading between $270 and $300, but they are starting to get better interest rates on the cash pile, so that could be part of the decision.
What Are The Risks?
In my mind, Berkshire is one of the lowest risk stocks available to investors today. However, the main risk I can picture is some massive catastrophe where Berkshire’s insurance operations are on the hook. If something like that happens, it will be a loss worth billions, but with Berkshire’s balance sheet should be able to handle it. If they can’t handle it, we will likely have bigger problems to worry about than losing money in stocks.
The other risk that I hate to point out is what happens to the company after Buffett and Munger are gone. I think the company will be fine and continue to grow in the coming decades, but the idea of losing two leaders that have been steering the ship for so long is tough to consider. Everyone knows they aren’t going to be around forever, and I do think the company will be different when it isn’t being run by the people that built it. With that said, I don’t think it has a material impact on the long-term bullish thesis for Berkshire.
Conclusion
Many contributors write frequent articles on Berkshire, and there are plenty of valuable insights to glean on different pieces of the conglomerate. There is a lot of coverage on Berkshire’s equity holdings, as there should be with Buffett’s long term track record of outperformance. I wanted to cover each of the new holdings in detail because they all look like attractive investments with a margin of safety.
If you follow podcasts or YouTube videos on macroeconomics and the investing environment, there is a lot of uncertainty for what the next year will look like. This creates uncertainty for new holdings like Louisiana-Pacific in the real estate sector. The semiconductor industry has had a rough 2022, but Taiwan Semiconductor is considered the best of the bunch, despite the added complexity from geopolitical tensions with China. Rising interest rates combined with sticky inflation have created a tough environment for investors, but Berkshire is well-equipped to handle an economic downturn.
Berkshire is still the ultimate sleep well at night financial stock with its impressive balance sheet, large equity portfolio, and diversified exposure to different sectors of the economy. While expecting a $1T market cap might seem overly bullish, it’s a question of your time horizon and risk tolerance. I still think the risk/reward for Berkshire is skewed to the upside, and the risk is limited in my opinion. I plan to hold my shares for a long time, and investors with a long-term time horizon can expect solid results from Berkshire.
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