In their seminal, eponymous 1997 debut album, Third Eye Blind sang of “Losing A Whole Year.” When I look at a chart of Berkshire Hathaway’s (BRK.B) performance versus the S&P 500, I believe that Warren Buffett has lost a whole five years. According to the excellent work of Jim Bianco at Bianco Research, the ratio of Berkshire’s total return to that of the S&P 500 now sits at about 1.5, its lowest level since 1995. Bianco’s research clearly shows a pattern of underperformance that has accelerated since November 2018 and taken another leg down as the Nasdaq (of which Berkshire is obviously not a part) has posted a blistering recovery since the Covid-19 lows on March 23rd.
The stock market can be fickle, and as people who know nothing about equities and equity valuation take potshots at Warren Buffett’s performance, I choose not to question the acumen of the Oracle. But, I do question his actions, or specifically inaction over the past five years.
Berkshire has not announced a significant (greater than $5 billion) acquisition since the August 10, 2015 announcement of the purchase of Precision Castparts for a value of $37.2 billion. So, we are nearing the five-year anniversary of Berkshire’s purchase of PCP, and I can’t help wondering, what the hell has been going on in Omaha for the past half-decade? They are just not doing anything, and I think the market’s frustration is clearly shown in the underperformance of BRK.
Berkshire’s 10-Q filing for the March quarter showed a behemoth with $129 billion of cash and short-term investments on the balance sheet. Obviously Berkshire has a sophisticated treasury system, but if you were to ascribe a 0.0% return on that cash, you would only be off by a few basis points with the Fed’s once-and-future zero interest policy back in full effect.
The existential problem for Berkshire, and why I have never owned the stock, is that since the company has never paid a dividend, shareholders do not benefit from that cash. With interest rates at these levels, Berkshire’s balance sheet doesn’t either.
So, Berkshire’s operations – railroads, GEICO, McLane food services, all the way down the list to Dairy Queen – are saddled with a very lazy asset. Yes, Berkshire’s securities portfolio has shown handsome returns. On March 31st, Berkshire valued that portfolio at $180 billion, with the following composition:
Approximately 69% of the aggregate fair value was concentrated in five companies (American Express Company – $13.0 billion; Apple Inc. – $63.8 billion; Bank of America Corporation – $20.2 billion; The Coca-Cola Company – $17.7 billion, and Wells Fargo & Company – $9.9 billion).
The unrealized gains in that portfolio (67.5 billion) are much less important than the cost basis of $113 billion, which reflected less than a $3 billion increase from its value on December 31st. Why wasn’t Berkshire buying with both hands during the Covid-19 plummet? Buffett noted (and the SEC filings confirm) that Berkshire blew out of its airline holdings during the crash. I do not disagree with Buffett that the prospects for that industry have been permanently altered by the virus. But, there are plenty of other fish in the sea of stocks. The key to portfolio management is reallocating assets and instead of doing that Berkshire seems to have done nothing. That is not a way to maximize returns.
So, Berkshire is the worst of all three worlds. The company is not adding to its core portfolio of mainly domestic industrial businesses, only added slightly to its portfolio of publicly-traded securities, and, according to its 10-Q, only repurchased $1.7 billion of BRK shares in the first quarter in the midst of the most rapid stock reversal in 90 years.
So, there’s just no return of capital from Berkshire to shareholders, and without aggressive actions to bolster its returns on capital, I expect BRK shares to continue to lag the S&P 500.