Warren Buffett turns 91, prepares Berkshire Hathaway for a new economy

Warren Buffett walks around the exhibition hall as shareholders gather to hear from the multi-billion dollar investor at Berkshire Hathaway’s 2019 annual meeting.

Scott Morgan | Reuters

Ahead of his 91st birthday on Monday, Warren Buffett took steps to ensure that Berkshire Hathaway – and its subsequent successor – are better positioned to benefit from a technology-driven economy.

The operating business of the conglomerate is a patchwork of companies that focus on the traditional backbone of the economy, from railroads to batteries, insurance, home textiles to retail. Because of its old economy orientation, Berkshire has missed the explosive growth of the Amazons of the world over the years. But the “Oracle of Omaha” shows its openness to investments that deviate from Berkshire’s old core economy in order to adapt to the new world.

Berkshire’s exposure to technology stocks has grown to 45% of its portfolio thanks to its massive stake in Apple, according to InsiderScore.com. His Apple investment, which was first purchased in 2016, has soared to over $ 120 billion, making it by far his largest stake. Ten years ago, Berkshire’s top holdings, other than IBM, had very little technology exposure.

To bet on growth, Berkshire has carried out initial public offerings and pre-IPO investments, which the legendary investor once derided. It is widely speculated that Buffett’s investment lieutenants Todd Combs and Ted Weschler orchestrated these bets, which break with Berkshire tradition.

Zoom In Icon Arrows pointing outwards

“There’s been a pretty significant shift in the investment portfolio. Now it’s really aligned with the new economy,” said James Shanahan, Berkshire analyst at Edward Jones. “It has given Todd Combs and Ted Weschler a lot more flexibility and ability to get their fingerprints into the business.”

Berkshire invested in Brazilian fintech StoneCo within days of its IPO in 2018, and that stake has grown to more than $ 700 million thanks to a doubling in its share price since its market debut. That year, Berkshire also bought a stake in India’s largest digital payments start-up, Paytm, which has filed for an IPO.

In the third quarter of 2020, the conglomerate bought Snowflake shares valued at $ 250 million at the IPO price and an additional 4.04 million shares from another shareholder at the debut price. In June 2021, Berkshire made a pre-IPO investment of $ 500 million in the parent company of Nubank, a digital bank based in Brazil.

Buffett, the pioneer of buy-and-hold investing, had loudly voiced his aversion to buying companies during their market debut. Buffett previously likened buying hyped IPOs to trying to win lotteries, arguing that it isn’t a solid foundation on which to invest. The last major public offering Buffett bought before the recent uproar was Ford’s debut in 1956.

CNBC Pro Stock Pick and Investment Trends:

“The stock portfolio is more dynamic today than it was 10 or 15 years ago with the Todds at the top,” said Cathy Seifert, Berkshire analyst at CFRA Research. “They’ll surely dip their toes in the water and nibble on some new economy stocks. Unless you have some dedication to doing this, alpha is hard to generate, especially given the large-cap bias they are having tend to have. “

While Berkshire increased its tech exposure to around 45%, it recently got out of some of its big financial bets, including JPMorgan Chase, Wells Fargo, and PNC Financial. The conglomerate still held significant stakes in American Express and Bank of America at the end of June.

$ 100 billion question

For die-hard Buffett watchers, they ask the same question year after year – when will he finally make this “elephant-sized” acquisition? Given his disciplined approach to values, the answer may be disappointing to many.

“I think what stopped him from doing anything too aggressive is that he almost doesn’t want this last deal he makes – which he’ll be remembered for – to be a disaster,” said Greggory Warren, Berkshire analyst at Morningstar. “He doesn’t want to cripple the next guy running the show by buying something that might not help him.”

Berkshire’s cash stack stood at $ 144 billion at the end of June, still near a record despite the company’s massive buyback program.

For decades, companies, along with private equity firms, have thrown themselves at Buffett, who was one of the biggest moneyed whales. However, unlike quick-turnover leveraged buyouts, Berkshire has always been a long-term buyer that also gives companies the autonomy to run their business.

However, private equity has hit record lows in interest rates in recent years, and companies are being wooed by a flood of new buyers from special-purpose vehicles with potentially more attractive offers for going public.

Market valuations are close to pre-dotcom bubble levels in the early 2000s. In particular, the utilities and transmission segment that Berkshire wants to be a consolidator in has gotten very expensive as these stocks have become the names of choice for high yield investors, according to Morningstar’s Warren.

“The fact that Berkshire didn’t close a blockbuster deal I don’t think investors will hold onto it,” said Seifert. “I think they still trust his judgment and acumen, especially given the recent reviews.”

Record buybacks

Instead of doing business, Berkshire focused on returning capital to shareholders. The company bought $ 6 billion in the second quarter. Berkshire bought a record $ 24.7 billion of its own shares last year.

Zoom In Icon Arrows pointing outwards

“It took a long time,” said Warren. “The only alternative for them, if they don’t want cash to grow any further, is to keep buying back stocks. That is probably the best option for short-term excess cash until we have some sort of correction in the market.”

Thanks in part to the share buyback, Berkshire’s Class B stock quickly cleared the pandemic damage and has returned to an all-time high. Shares rose about 23% in 2021.

Buffett started a buyback program in 2011 and has long preferred to buy stocks and businesses of other companies directly. At the 1999 annual meeting, Buffett said he would not buy back Berkshire stocks unless they were “quite dramatically undervalued.”

In 2018, the company’s board of directors announced a lift of its buyback limit to allow purchases if they felt the price was “below Berkshire’s intrinsic value.”

“I think he’s doing a good job navigating and returning capital to shareholders. He understands that his legacy will be judged not just by what he’s done in the first 50 years, but also over the last five Years he’s in charge, “said Warren.

Did you like this article?
For exclusive stock selection, investment ideas and global CNBC livestream
Sign up for CNBC Pro
Start your free trial now

Comments are closed.