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August 30, 2007
While on the surface Berkshire’s cash hoard suggests that Buffett can not find many opportunities in stocks, in recent quarters the opposite has been true: with cash holding steady new funds available to Berkshire have been landing in equities at an accelerating rate. Should these trends continue it suggests that Buffett is growing bearish on cash/fixed instruments and bullish on stocks.
Buffett’s main equities theme in 2007 has been railroad stocks, with his largest position being built in Burlington Northern Santa Fe Corp. The basic logic of purchasing railway companies is obvious: railroad companies have an extremely long and profitable history, railroads are a more fuel-efficient/environmentally friendly option compared to trucks, and it is nearly impossible for new competitors to enter the fray. Some more complex notes relating to railroads are as follows: the global economy/weakening dollar theme plays into BNI’s geographical focus, the future is all about ethanol and the Canadian sands, and one word: COAL. Before lauding Buffett for making another brilliant long-term buy, it should be remembered that railroad stocks are highly cyclical, and that a slow down/recession could negatively impact BNI’s operations and the company’s stock price.
In recent history when Buffett has entered cyclical stocks it didn’t deserve much attention (he is usually, to play on a previous theme, just ‘pecking’). However, with more buying in recent days Buffett is now holding more than 52 million shares of BNI for a position 2.4 times the size of his Anheuser-Busch stake. In other words, it is becoming clear that Buffett wants to accumulate BNI below $80, and this is one of the first companies he has liked this much in a long time. Speculations and Conclusions Looking back say 20-years there is little doubt that Buffett’s position in BNI will be very profitable when based in USD. Nevertheless, that Buffett held a large amount of cash as railroad stocks boomed in recent years and he is aggressively buying in before a potential near-term peak in earnings, margins, and maybe even stock prices is difficult to ignore. Buffett usually buys aggressively when others are fearful and reduces his exposure when others are greedy. There is no evidence of any fear in railway stocks this year… Even if you can not figure out exactly what Buffett is thinking buying BNI, you can assume he has a plan. Here goes: If you have a lot of money it may be worth putting a little into BNI instead of Treasuries given that your plan if things turn sour is to buy the entire company out and still have more than $17 billion in the bank leftover. In other words, if Buffett’s original entry into BNI does prove early, he will be the one pleased by this the most (it would be like making a down payment on new car one day and showing up the next to find out your salesman is reducing your purchase price). The ‘fear’ rests in those investors that followed Buffett if they do not have a long-term horizon and very deep pockets. The Flipside: Although Buffett usually holds companies ‘forever’, he does tweak his holdings based upon stock price swings from time to time (i.e. he has reduced his BUD stake by more than 10,000,000 shares from their peak). It is entirely possible that BNI will not go down in history as one of Buffett’s final large acquisitions. |
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