by millionairemind » Fri Nov 21, 2008 10:06 am
November 20, 2008, 1:16 pm
Would Buffett Find Berkshire a Value?
Posted by David Gaffen
In markets like this, nobody is immune to the selling, not even Berkshire Hathaway Inc., the multi-faceted conglomerate run by Warren Buffett that has developed such a reputation for value investing that it has become regarded as somewhat of a value play itself.
But the class B shares of the stock have declined by nearly 45% since hitting a 52-week high of $5059 a share on Dec. 11, 2007. Some of this can be attributed to investors applying selling pressure across the board, even for a less-liquid stock like Berkshire, but that’s not to say a yellow flag or two has not cropped up with this seemingly safe investment.
Berkshire’s credit-default swaps, a measure of insurance against default on debt, have risen dramatically in the last few weeks, and reflect a higher cost of insurance than the remaining brokerage firms like Morgan Stanley. As of Thursday it cost $490,000 to insure $10 million in bonds against default, compared with $270,000 on November 7, according to brokerage Phoenix Partners Group.
The rise in the cost of this insurance stems from worries about put contracts (the option to sell a stock at a given date at a given price) sold to buyers at about $4.85 billion, and that Berkshire might be on the hook for as much as $37 billion — but not until 2019. Still, these positions have been marked down, and those buying insurance are doing so to protect themselves against losses.
In addition, in recent weeks, the credit-default swaps has seen a marked decline in liquidity and trading, so a smaller amount of insurance contracts purchased can still cause large shifts in prices of a particular credit-default swap. “It only needs a little bit to move the market a long way,†says Tim Backshall, chief credit derivatives strategist at Credit Derivatives Research. “It doesn’t make any sense, except the rest of the markets don’t make sense either.â€
A similar dynamic exists in the equity market, which has become cautious on Berkshire shares as the price of its credit insurance has risen. But this is not the only reason for the stock’s decline. The company has posted four consecutive declines in profit due to investment losses and insurance costs, and it may take time before it recovers, as insurance rates continue to decline. Its reputation is not enough of an enticement for some, as the stock often carries a premium because of its well-regarded management.
“The insurance business which is a significant portion of their earnings, is a very cyclical business,†says Harry Rady, CEO of Rady Asset Management in San Diego. “With everything else at an extremely significant discount, I see a lot more downside. There is so much opportunity to buy assets for 50 cents on the dollar, why buy a dollar for a dollar because Warren Buffett runs it?â€
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch
Disclaimer - The author may at times own some of the stocks mentioned in this forum. All discussions are NOT to be construed as buy/sell recommendations. Readers are advised to do their own research and analysis.
