On February 25, the Oracle of Omaha, Mnsr Warren Buffett’s rampaging Berkshire Hathaway (BRK) will deliver its highly anticipated Q4 to a Wall Street which has never looked like it has ever had so much to learn.

But while they come for the annual report, they stay for the traditional, somehow gorgeous, typeset letter Buffett always produces for his shareholders by way of a chairman and CEO’s thoughts on the market, the universe at large and as a considered explanation of how BRK continues, regardless of the competition, to land its punches.

BKR stock gained 3% last year, which easily put paid to to The S&P 500’s 19.5% blunder, thanks largely to the multinational investment conglomerate’s oil and gas positions which took the lead as energy prices surged.

The year before, BKR earned US$276 billion in revenue, while its own circa 48-stock portfolio is valued loosely at the US$300 billion around the end of Q3.

And now a pictogram of what exactly we’re dealing with (everything BKR owns):

Via BKR

 

The Street reckons Berkshire will pull in circa US$35 billion post tax this year, up about 6% from 2022.

The company is valued at US$685 billion. And its balance sheet is beautiful.

This is a bit old (and in French), but the pictures aren’t. And they tell a decent enough story.
 

BKR amid the 10 largest co’s by market cap, May 2022

Via Creative Commons Wikipedia, Author anonymous

Perhaps less known, but most apt to note, is Buffett’s Berkshire has most handsomely outperformed the market when the past three recessions hit.

And the stock is positioned to do so again if a recession hits this year.

That’s the word from UBS, which has come out strongly this week recommending clients get on board the stock which has lagged the major US indices in 2023 thus far.

UBS estimates BRK’s shares are trading at more than a 20% discount to its intrinsic value – a calculation the bank says is based on Buffett’s own methodology outlined in his 2018 annual missive to shareholders.

That’s an exciting number, because it looks pretty much like the ballpark where Buffett has, historically, gone hard on buying back its own shares.

Here’s a revealing historic look at pre-recessionary BRK vs the S&P 500 vs S&P Financial Index:

Via UBS. Source Factset
Source Factset, Via UBS

As the charts suggest, over the past three recessions, BRK’s shares have outperformed Wall Street and the nearby financials, which UBS puts down to its diverse business mix, very strong balance sheet, and substantial liquidity.

UBS currently models a US$7 to US$8 billion stock buyback in the coming 10 months.

 

If it all goes to hell, BRK will outperform

Given the uncertain economic outlook in 2023, UBS believe BRK’s stock can outperform.

Buffett has transformed Berkshire over the past 20 years into a lucrative conglomerate from a company that was largely focused on insurance and investment.

BKR’s profits are getting a boost also from higher investment income on a larger equity portfolio while higher interest income is streaming through huge cash holdings way, way above the US$125 billion mark, as rock solid US Treasury Bills.

A lot of money. And fascinating.

Here’s the explanation for that kind of sideline cash from the Oracle Himself in his last annual corker of a letter to shareholders…

Via Berkshire Hathaway

He goes on to say, (more eloquently than I!) all that bone dry munitions above is available for share buybacks. Obviously it can do many, many things, but the general message is: Ain’t nothing so good to do with cash like that as what we already got.

Just out of interest, here’s the last par from his first available letter for FY77, note the slight difference in M&A positioning, corporate cadence, attributions, typeset, tone and numerical values:

 

Via Berkshire Hathaway 

 

Buy, hold and sold

According to security filings released this week – and unseen in the table below –  BKR snapped up 60 million Taiwan Semi shares (TSMC), only to flog almost all of it (86% of the holding) in the Q4, closing out 2022 with 8.3 million shares, worth less than US$800 million. The news of the stock sale, reported by Barrons, which occurred after the close of trading Tuesday, has helped whittle away confidence in Taiwan Semi which lost 6.6% during the Wednesday session.

Barrons noted that Buffett, whose preferred length of holding a stock is “forever”, has been far more active in this last quarter than usual.

Via CNBC

 

GEICO?

Yup. The Government Employees Insurance Company – a sprawling private US auto insurer with headquarters in, yup, Chevy Chase, Maryland. It’s the second biggest auto insurer in the States, after something Communist sounding… like State Farm?

UBS says that fundamentally, BRK’s re/insurance operations should be relatively insensitive to a slowdown in the economy and the fundamental backdrop is favourable with increasing rates on commercial lines and “hard” reinsurance pricing and improving margins at GEICO as price increases “catch-up” with prior loss trends.

Property catastrophe reinsurance rates are up more than 30% in the US from New Year’s Day this year. In the last “hard” market for property catastrophe reinsurance in 2006, Berkshire Hathaway Reinsurance Group (BHRG) grew premiums by more than 25%.

UBS says GEICO should also see underwriting margin improvement in 2023 as price increases begin to offset elevated loss trend (personal lines).

 

BTW, let’s not forget BYD

Buffett’s steady right-hand Charlie Munger is doing the rounds ahead of the earnings call, turning up as ever on Wednesday at the annual meeting at the Daily Journal Corporation, where Munger’s a director.

Charlie says making a stake in the Chinese EV carmaker BYD was among the best of the many great investment decisions he’s made.

BYD is currently the world’s top-selling EV brand, and Munger had BKR going in hard back in 2008.

“I have never helped do anything at Berkshire that was as good as BYD… BYD is so much ahead of Tesla in China. It’s almost ridiculous.”

BYD delivered 1.86 million cars in 2022, a x3 beat on the previous 12 months. Tesla delivered 1.3 million cars globally making BYD easily the world’s top selling EV maker and China’s enviro-savvy middle class has been snapping up models which only go for as little as US$15,000.

BKR snapped up 225 million in BYD stock at a little more than US$1 a pop about 14 years ago, during the Beijing Olympics.

At BYD’s peak just ahead of the June market wobble, Berkshire Hathaway’s speculative investment was just shy of being worth US$10 billion.

Charlie and Warren began trimming their BYD stake a little later. Culling almost half their position from 20.5% in the first week of August.

Following another scale back sale last week, that position is down to 11.87% now. The always excellent at the South China Morning Post reckons the cash profit for BKR so far is circa US$2.6 billion.
 

A wall of blue

As the ultimate go-to, hold-the-line blue-chip defensive stock, BKR is following in the wake of a feisty Wall Street so far this year after US traders came rushing out of the blocks with a surprise taste for risk and apparently pockets full of smokies.

That’s a turnaround from stodgy 2022, when BKR dug in its heels, leant heavily on some smart energy plays and most handily topped the S&P 500 index.

Which is why UBS is telling its people there are much worse places to be if things get funky.

BRK has proven itself to be “an effective steward of its capital long term and carries a substantial cash balance.”

The Swiss bank says any accretive acquisitions or higher than expected share buybacks could also prove to be an additional BKR price catalyst this year.

Certainly, BKR is a lot more sexy since its overweight equity holdings led by Apple (AAPL) are up so sharply. That’s been pumping Berkshire’s book value after an poor run for APPL has been transformed into a 20% gain this year with the share price at circa US$155.50, including a 3.4% gain by the close on Friday last, following news of its solid Q4 was digested.

 

BKR never falls far from the APPL tree

The Apple rally this year has lifted the value of Berkshire’s holding in the iPhone maker by US$25 billion. Berkshire holds about 900 million Apple shares based on its third-quarter holdings statement, its latest, with Apple accounting for more than 40% of Berkshire’s equity portfolio of over US$300 billion.

In the past two decades, Berkshire’s utility unit has mushroomed in size and is worth about US$90 billion. The company also bought the Burlington Northern Santa Fe railroad which is probably worth around US$130 billion based on the market cap of its similarly sized rival Union Pacific (UNP). Buffett also bought the Apple holding starting in 2016, and it’s worth around US$140 billion.

But let’s also take a moment to doff the hats to Occidental Petroleum (OXY). OXY was the hero of the Buffett portfolio last year; it’s 2022 performance saw a pretty decent annual return of circa 117%

Berkshire’s stake? Just a few bucks shy of US$12 billion.

Other notable winners in the Berkshire portfolio for this year are Bank of America (BAC) and American Express (AXP).

The two largest Berkshire holdings are Coca-Cola (KO), which I’m drinking now, and Chevron (CVX). Last year Chevron gained 53%. And Berkshire’s Holding Value was a measured US$23.8 billion.

Yet Berkshire stock is behind the S&P 500 over the past 20 years with a 10.1% annualised return against 10.3% for the index.

Over the past five years, Berkshire stock has risen 8.3% every year, again lagging the 10.5% yearly return on the S&P 500, and it’s also playing catch up to the index over the decade, with a 12.3% annual return vs. 12.7% for the index.

That’s a pat on the back for the loopiness of the wider stock market itself, and the very loopy growth of tech plays like Apple (APPL), Tesla (TSLA) and Amazon  (AMZN) which have dominated markets with their stunning outperformances.

 

Big and small

The other thing to consider is just what a beast BKR has become.

And turning on a dime when you’re a tonne of gold is not easy. There’s challenges in Berkshire’s size in 2023. The Oracle has deftly and somewhat easily topped the S&P 500 for some four straight decades.

He took the reins back in 1965 when Berkshire was much smaller, the Beatles were just starting and his stock-picking was in the words of everyone, phenomenal. It’s been tougher lately to make a mark like that, but The Oracle from Omaha and his steady right hand, (Vice Chairman) Munger reckon Berkshire can outperform in the years ahead.

Berkshire also is the closest thing to an index fund among blue chips, given its diversified businesses and investments. With its cash-rich balance sheet and earnings power, Berkshire offers sleep-at-night comfort that has long appealed to retail investors.

Buffett, pressing 93, continues to take home his petty annual pay of just US$100,000 a year.

Berkshire’s class A shares are down 0.6% to US$469,000, and are about 0.1% lower year to date, compared with an 8.6% total return (including dividends) on the S&P 500.

As Investopedia amusingly, but accurately, notes:

Investors interested in buying into Warren Buffett’s Berkshire Hathaway have two options: Class A stock (BRK-A) and Class B stock (BRK-B). The two types of shares each provide access to the famous conglomerate, but they have important differences. The main difference between the two types of shares is their price.

You can go for the A share, but…

Berkshire Hathaway (BRK/a US): A defensive play in an uncertain economic environment

UBS Recommendation: Buy / Price Target: US$542,568 (And B Share at US$362*)

*Berkshire’s more-liquid class B share was down 0.6% last Friday to US$310.40. But up about

… well, take a look below.

 

BKR.B from circa 1996

Via Morningstar