Insights for Investors by Investors

Tracking Buffett’s latest moves

•1-Warren-Buffett

Berkshire Hathaway (NYSE:BRK) continued its busy year, with management clearly “cleaning-up” its expanding portfolio of investments. As readers will know, the Warren Buffett-led group doesn’t always ‘do what it says,’ with Berkshire focused on active management and in many cases taking full ownership of businesses ranging from railroads to insurance companies.

The September quarter saw Berkshire facing some difficult comparables, with overall earnings (which reflect Berkshire’s fluctuating equity investments) falling by 60 per cent in the the September quarter, year-on-year, to $10.3 billion.

On an operating basis, the result was significantly better, with operating income coming in at US$6.47 billion, up 18 per cent from US$5.48 billion a year ago.

The cash cow of the business has long been the insurance underwriting business, which Buffett himself confirms is central to the ability to hold such a diverse array of listed and unlisted investments. Insurance premiums must be invested to deliver returns, but offer a constant flow of cash, not unlike an Australian pension fund.

The cash-cow status has been somewhat muted in 2021, with the group seeing a tripling of its losses to US$784 million as a number of natural disasters saw a spike in insurance claims.

As of the end of 30 September, the company held some US$311 billion in equity investments and a ballooning cash balance of US$149 billion which is still looking for a home. Buffett’s ‘value’ focus combined with a booming merger and acquisition market has made it difficult to find appropriate investments to deploy this cash; or perhaps Buffett is waiting for another crash?

According to regulatory findings, this quarter has been all about trimming and cleaning-up Berkshire’s direct equity portfolio, with allocations to the financials and healthcare sectors reduced. Management confirmed that its holdings in Visa (NYSE:V) and Mastercard (NYSE:MC) had been reduced following a strong 12-month period for both companies and well in advance of Amazon’s decision this week to ban payments from the latter in the UK.

In the healthcare space, holdings in pharmaceutical businesses AbbVie (NYSE: ABBV) and Bristol Myers Squibb (NYSE: BMY) were reduced significantly after a sharp sell-off in October amid concerns about increasing drug prices. The most interesting new addition to the portfolio was Royalty Pharma (NYSE:RPRX) which seeks partnerships with late-stage drug-trial hopefuls and supports them in moving to commercialisation.

Naturally, as a traditional value investor the holding in oil and gas company Chevron (NYSE: CVX) was increased while tiling retailer and manufacturer Floor and Décor (NYSE:CVX) was a new addition. So what can Australian investors take from this insight, and are there any companies they should be considering in Australia?

On a high level, Wesfarmers (ASX:WES) stands out, with the company in the process of taking over Australian Pharmaceutical Industries (ASX: API) while also owning the largest DIY and home renovation chain in the form of Bunnings. Metcash (ASX:MTS) has maintained operations, albeit smaller, in the tool and hardware business. Clearly Berkshire has some confidence in the ability for the surge in residential and commercial construction to continue.

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