Happy Birthday, Warren Buffett!

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Aug 302012
 

Today is Warren Buffett’s 82nd birthday.  Happy Birthday, Mr. Buffett!

Since this “Warren Buffett” blog was launched on the occasion of Warren Buffett’s 80th birthday on August 30, 2010, today is its second anniversary.  During the past two years there have been over 60 posts on this blog.  I hope visitors to this website have found these posts to be useful.

 Posted by at 3:33 pm

Warren Buffett and the Facebook IPO

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Aug 282012
 

At the Berkshire Hathaway (BRK) annual meeting on May 5, 2012, Warren Buffett stated (in response to a shareholder question):

We should stay away from things we do not understand”.  He (Buffett) “needs to understand competitive position and and earnings power 5-10 years into the future.  BRK has not bought an IPO in 30 years.  IPO’s come to the market when sellers want to sell.  It makes no sense to spend 5 seconds on a new issue.  The idea that a new issue is going to be the cheapest thing to buy among thousands of stocks is crazy.”

This was a clear warning about the upcoming Facebook (FB) IPO on May 18.

Three months after the Facebook IPO at $38 per share, FB traded below $19 a share August 20, a decline of 50%.  Why did this IPO fail?  How can investors avoid a similar situation in the future?

With these questions in mind, I was invited to discuss the Facebook IPO on FOX News Channel 5 (Washington, DC) on August 21.  I mentioned that there was a very large demand for the shares for a company that was difficult to value.  Within an hour or two of the IPO, FB’s price rose from $38 to $42, and then $45.  Thereafter, its price has declined to its current level of about $19.  The supply of shares has also been increasing as early investors sold their shares.  (Insiders, including employees, will be able to sell an additional 1.4 billion shares on November 15, when an important lockup period ends.)

I also discussed FB’s latest quarterly earnings report, which was released on July 26.  FB reported a quarterly loss, slowing growth in revenues, and increasing expenses.  FB derived 84% of its revenues from advertising in its second quarter.

In terms of valuation, at FB’s current price of $19, it is selling at 40 times estimated earnings over the next 12 months.  This compares to corresponding price earnings ratios of 20 for Google, 15 for Apple, and 15 for Microsoft.  Since price earnings ratios are generally correlated with projected growth rates in earnings,  the market today is projecting higher growth rates for FB than for Google, Apple, and Microsoft.

How can investors avoid a similar IPO mistake in the future?  I recommended during my interview that they compare the projected price earnings (P/E)  ratio of the proposed IPO with other recent IPO’s in the same or similar industries.  Are the P/E ratios comparable?  How did the recent IPO’s perform?  Did their prices decline substantially after their IPO’s, or were the prices stable, or did they increase?  If the projected P/E ratio of the upcoming IPO is very high relative to comparable recent IPO’s, perhaps this new IPO should be avoided.

My FOX News Channel 5 live TV interview is available at:

http://www.myfoxdc.com/video?clipId=7635713&topVideoCatNo=233138&autoStart=true

This blog post has been published by Business Insider and Forex Pros:

http://www.businessinsider.com/why-warren-buffett-stayed-far-away-from-the-facebook-ipo-2012-8

http://www.forexpros.com/analysis/warren-buffett-and-lessons-from-the-facebook-ipo-134447

 

 Posted by at 1:20 pm

Warren Buffett Terminates Credit Default Swaps Insuring $8.25 Billion of Municipal Bonds

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Aug 222012
 

A decision made by Warren Buffett during the third quarter of 2012 to terminate credit default swaps insuring $8.25 billion of municipal bonds has raised questions as to why he has done this.  This information was revealed in a recent 10-Q filing with the Securities and Exchange Commission.  Buffett sold these credit default swaps five years ago, just prior to the financial crisis.  They had another five years to expiration, but Berkshire had the option of exiting from them at this time.

One plausible explanation for Berkshire’s exit from these positions at this time is Buffett’s perception of the increasing risk facing municipalities over the next few years as a result of the weak ongoing economic recovery along with the possibility of another recession.

These credit default swaps were the equivalent of insurance contracts which required Berkshire to pay in the event of bond defaults.  These contracts were originally purchased by Lehman Bothers Holdings, Inc. in 2007, more than a year before that firm filed for bankruptcy.

Lehman purchased this default insurance from Berkshire in July, 2007.  It covered bonds from 14 states, including California, Florida, Illinois, and Texas.  Berkshire received $162 million from Lehman, agreeing to pay Lehman if any of the states defaulted on their debt over 10 years.  Berkshire was apparently anticipating that its total payments, if any, would be less than the $162 million it received.  There have been no defaults among the among the $8.25 billion in municipal bonds that were insured by Berkshire.  As a result of the financial crisis, the cost of insuring the states from default is now much higher.

I was quoted in a Wall Street Journal article (August 21) on this topic:

David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business who also owns Berkshire shares, said Mr. Buffett may perceive more risk to municipalities than when Berkshire entered into the positions.

The entire article is available at:

http://online.wsj.com/article/SB10000872396390443855804577601413630604118.html?KEYWORDS=david+kass

This blog post has been published by Forexpros:

http://www.forexpros.com/analysis/warren-buffett-terminates-credit-default-swaps-insuring-$8.25-billion-133875

 Posted by at 4:52 pm

Changes to Berkshire Hathaway’s Portfolio During the Second Quarter of 2012

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Aug 162012
 

In its SEC 13F filing on August 14, 2012, Berkshire Hathaway revealed several significant changes to its equity portfolio that were made during the second quarter.  The largest addition was the purchase of 16.7 million shares of Wells Fargo (WFC) with a current market value of $570 million.  This resulted in an increase of 4% in Berkshire’s stake in the company. The second largest purchase was for 12.7 million shares of Phillips 66 (PSX), currently valued at $525 million.  This increased Berkshire’s holdings by 88%.  The third largest purchase was for 3.3 million shares of DaVita (DVA), currently valued at $325 million, increasing Berkshire’s stake by 55%.

Berkshire’s largest sales during the second quarter were 18.7 million shares of Johnson & Johnson (JNJ) ($1.3 billion, 64% of stake), 13.7 million shares of Procter & Gamble (PG) ($920 million, 19% of stake), and 19.2 million shares of Kraft (KFT) ($780 million, 25% of stake).

Warren Buffett has been adding to his Wells Fargo holdings every year since 2005.   The additions to Berkshire’s holdings in Phillips 66 and Davita were most likely investments by recently hired portfolio managers Todd Combs and Ted Weschler.   The sales of shares in Johnson & Johnson, Procter & Gamble, and Kraft were apparently decisions made by Warren Buffett.

Since the 13F report did not mention that confidential information had been omitted, then most likely Warren Buffett was not accumulating a large position in one or more companies during the second quarter.   Last year Berkshire received confidential treatment while it was accumulating $11 billion of IBM.

 Posted by at 6:16 pm

Warren Buffett Reduces Holdings In Consumer Stocks

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Aug 062012
 

In Berkshire Hathaway’s 2012 second quarter earnings report, Warren Buffett revealed that Berkshire’s holdings in consumer stocks were reduced during the quarter ending June 30.   By comparing Berkshire’s SEC 10Q filings for the first and second quarters, the following can be derived:

Berkshire reduced its equity investments in “Consumer products” from $12.296 billion to $9.843 billion on a cost basis, a reduction of $2.453 billion.  Buffett likely sold some of his shares in Kraft, and/or Johnson & Johnson, and/or Procter & Gamble.  By contrast, Berkshire increased its investments (cost basis) in “Banks, insurance, and finance” by $576 million (second quarter vs. first quarter), and by $414 million (cost basis) in “Commercial, industrial, and other” from the first quarter.   Buffett may have continued to add to his Wells Fargo investment, as he has each year since 2005.  In addition,  Todd Combs and/or Ted Weschler may have established new stakes or added to current investments in the latter two categories.

The quarterly earnings reports do not mention individual investments.  However, Berkshire’s SEC 13F filing due by August 15 will reveal changes to each of Berkshire’s holdings during the second quarter.

I am quoted in a Bloomberg article (August 6) on this topic:

Combs, Weschler

Some of the extra cash may be distributed to Ted Weschler and Todd Combs, former hedge fund managers whom Buffett hired in the past two years to help oversee investments, said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. Buffett told Liu last month that his deputies will probably oversee about $4 billion apiece, compared with $2.75 billion at the beginning of this year.

Buffett may also use the funds to exit some derivatives bets, Kass said in a phone interview yesterday. Berkshire struck a deal after June 30 to cancel about half of the $16 billion in notional protection it sold against municipal and state bond defaults, according to the filing. Buffett’s firm may have to pay the counterparty to retire the obligations, Kass said.

The entire article is available at:

http://www.bloomberg.com/news/2012-08-06/berkshire-s-cash-hoard-swells-as-buffett-pares-consumer-stocks.html

This blog post has been published by Forexpros:

http://www.forexpros.com/analysis/buffett-trims-consumer-stock-exposure-132124

 Posted by at 10:25 am