Warren Buffett is once again back where he likes to be – running ahead of the market, in an economy where cash is no longer trash.
The 91-year-old billionaire chief of Berkshire Hathaway Inc. BRK-B-N will bask in the glow of his company’s recent gains when he meets with shareholders on Saturday in Berkshire’s first in-person annual general meeting in two years.
But that doesn’t mean the question-and-answer session will be a tame affair. Shareholders are sure to probe Mr. Buffett about where he sees the postpandemic market and economy headed next. They will be particularly interested in clues about how he plans to deploy his enormous cash hoard, which stood at US$144-billion at the end of 2021.
Berkshire’s money mountain has swelled in recent years because Mr. Buffett has shied away from making big deals.
One obstacle has been soaring stock prices, which have made just about everything too expensive for his taste. Another challenge has been ultralow interest rates. They have made it easy for companies to find money elsewhere and reduced their need to tap deep-pocketed investors like Mr. Buffett.
But trends now seem to be shifting in his direction. Berkshire’s share price has gained nearly 11 per cent this year, compared with a 10-per-cent decline in the S&P 500 index.
As tech giants such as Meta Platforms Inc. and Netflix Inc. falter, Berkshire’s more mundane businesses, from insurance to railways, are growing in appeal. Meanwhile, rising interest rates mean that cash-strapped companies could once again come knocking on Mr. Buffett’s door.
The great investor seems to already be seeing pockets of value. In recent weeks, he has revealed stakes in computer-and-printer-maker HP Inc. and oil producer Occidental Petroleum Corp. He has also struck a deal to buy insurer Alleghany Corp. for US$11.6-billion.
Attendees at Saturday’s meeting in Omaha, Neb., will be eager for any hint about what other deals may be in the offing. They will also be searching for clues about how far Mr. Buffett is prepared to go in handing over the reins to a new generation of managers.
Greg Abel, the Canadian executive who has been tabbed as his eventual replacement, oversees Berkshire’s non-insurance operations, but Mr. Buffett has made it clear that he is not yet ceding final authority to Mr. Abel. Similarly, Mr. Buffett’s chief investing lieutenants, Todd Combs and Ted Weschler, continue to run large chunks of Berkshire’s investing portfolio, but it is not clear how much autonomy they have.
Mr. Buffett serves as both chairman and chief executive of Berkshire and his unusual degree of personal control at an advanced age doesn’t sit well with some activists. One shareholder proposal, to be voted on Saturday, calls for Mr. Buffett to be stripped of his chairman’s role. Another demands Berkshire offer greater disclosure on climate risk.
Neither proposal is likely to pass, given that Mr. Buffett opposes them and controls 32 per cent of the company’s votes. However, they could generate some interesting questions.
The biggest question of all will be whether Berkshire can keep up its market-beating performance. It is now ahead of the S&P 500 over the past year, as well as over the past three, five and 10 years.
In a client letter earlier this year, Christopher Bloomstran, president of Semper Augustus Investments Group LLC in Denver, Colo., laid out the case for why Berkshire can continue to outpace the index.
He argues the outlook for the broad market is not all that positive. The huge returns on the S&P 500 over the past decade were largely driven by a remarkable expansion of profit margins and price-to-earnings multiples, according to Mr. Bloomstran’s numbers. Those two hard-to-repeat factors have left the index at frothy levels, with little chance of repeating its stellar performance of the past decade, he says.
In contrast, Berkshire still appears reasonably priced despite its recent gains. Mr. Bloomstran calculates that the company’s B shares – the ones most retail investors buy – are worth about US$404, more than 20 per cent above their current trading level around US$331.
Gregg Warren, an analyst at Morningstar, isn’t quite so enthusiastic. In a report this week, he estimated that fair value for the B shares is US$367. He also cautions that there is considerable hidden risk in the stock. Some of that has to do with Mr. Buffett’s succession, but more of it has to with the enormous size of the company.
“Given its size, Berkshire’s biggest long-term hurdle will be its ability to consistently find deals that not only add value but are large enough to be meaningful,” Mr. Warren writes.
Fair enough. Shareholders will be hoping for signs on Saturday that Mr. Buffett’s empire is still firmly in growth mode.
Full disclosure: The author owns shares of Berkshire Hathaway.
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Ian McGugan