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Warren Buffett’s Berkshire Hathaway surged to a record high this week, helping increase its valuation this year by more than $100bn — the equivalent of Ford and Halliburton combined.
The “Oracle of Omaha”, whose sprawling railroad-to-confectioner conglomerate is now worth $780bn, has enticed investors despite a quarter that revealed the negative effects of the cooling US economy on some of its biggest portfolio companies, and few new investments.
Longtime investors said there were good reasons Berkshire’s shares have risen 16 per cent this year.
“The fact the economy has stayed resilient even if overall growth has been subdued, that is a very positive thing,” said Christopher Rossbach, chief investment officer of J Stern & Co, a longtime shareholder. “[Buffett] has a very nice balance of exposure to good businesses.”
Among investors helping push the stock to new highs are retail traders. Trading data analysed by Goldman Sachs this week underlined the point: retail investors have placed many more buy than sell orders for Berkshire shares.
JPMorgan Chase strategists noted there was persistent demand for the company’s vastly cheaper B shares, which currently trade at $357, and for its $543,680 class A stock, traditionally a quieter market.
The bank’s analysis showed bidding for the B shares had picked up particularly with retail investors in recent days, with a growing imbalance between buy and sell orders. It is a fact that is often observed in Berkshire stock; Buffett himself has said that the company’s large cohort of long-term shareholders limits trading in the stock.
Many shareholders have been invested in Berkshire for years or decades. Jay Winthrop, a principal at Douglass Winthrop Advisors, noted that it had an “unusual collection of shareholders and it tilts heavily to individuals and families”.
Berkshire’s second-quarter results this month indicate what is driving the enthusiasm.
Profits for the quarter were nearly $36bn, including $10bn of operating earnings — a 6.6 per cent year-on-year rise and a measure of the profitability of its vast business portfolio.
Investors were buoyed by the fact that Geico, the company’s auto insurance unit, posted a second consecutive quarterly profit after more than a year of losses.
They also seemed unfazed by Buffett’s report that he had found few appealing companies to invest in and was pumping cash into short-term government debt instead.
Berkshire was a net seller of $8bn of stocks in the second quarter, and $10.4bn in the first quarter. Meanwhile, interest income on Berkshire’s $147bn cash and Treasury bill portfolio is on track to top $5bn this year.
“Right now someone with cash is in a very nice situation,” said Rhys Williams, chief strategist at Spouting Rock Asset Management. “With all the things that could go bump in the middle of the night, that probably plays to his strengths.”
The performance of Berkshire’s stock portfolio also cheered investors: the value of its stake in Apple grew by nearly $60bn in the first half of the year after a sharp rise in the iPhone maker’s shares.
“It’s just a math problem,” Winthrop said. “If you have more than 20 per cent of your market cap tied up in Apple in a year like this, you’ll have that move the dial on Berkshire’s share price.”
Investors said these factors offset the negatives. The 6.6 per cent rise in operating profit was partly driven by Berkshire’s recent acquisitions, including its takeover of insurance-to-toys conglomerate Alleghany. Its 25 per cent stake in Occidental Petroleum means part of the oil company’s profits are reported on Berkshire’s income statement.
The results also contained evidence that the US economy is no longer running at the speed it was when stimulus measures fuelled a post-pandemic rebound.
Berkshire’s BNSF Railway, which runs from California to Illinois, reported a decline in shipping revenues and said consumer and industry demand had fallen. The slide in the housing market hit Berkshire’s building products business, as well as its real estate broker and manufactured homes businesses.
It also reported “lower revenues at . . . nearly all of our other consumer products operations”, which includes battery brand Duracell, clothing company Fruit of the Loom and motorhome company Forest River.
There was also a disclosure that, at other companies, would have been the main headline news. Berkshire-owned electric utility PacifiCorp warned that it was facing claims of more than $7bn related to 2020 wildfires in the states of Oregon and California, had “probable losses” of $1bn and could incur “significant additional losses” as cases move through the courts.
It was a fact that few shareholders raised as a concern. As is usually the case, they were more focused on Buffett’s investment decisions.
Darren Pollock, a portfolio manager at Cheviot, said that while an “optimistic stock market is at least in part behind Berkshire’s rise”, the gains in Apple, its successful investments in energy and Japanese trading houses were also a factor.
“Buffett and his acumen are in vogue again,” he said. “The market’s perception — certainly not the reality — regarding his ability waxes and wanes over time. On a few occasions in the past quarter-century it was fashionable for some in the market to believe, wrongly, that Buffett had ‘lost it’.”
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