The case for selling Berkshire Hathaway
One investment firm writes about why it decided to dump half its holdings in the company.
The firm, Reed Conner & Birdwell, says it manages about $1.7 billion for wealthy clients. Berkshire was one of its larger holdings going back to 2000, but last month it sold half its position.
Why? The investors there think Berkshire is at best worth around $83 per share (it was trading just under $82 Thursday). Here are some of RCB's concerns about the stock, and the company:
Age: Berkshire's holy trinity is getting old. Warren Buffett is 79, Charlie Munger is 86 and Ajit Jain is 60. And so the question of succession is important.
"Morbid thoughts aside, who the next person to run Berkshire and in what form is a matter of legitimate concern to an investor," writes Jeffrey Bronchick, the chief investment officer at RCB. "There is a long history of legacy problems following the retirement/replacement of a larger than life CEO."
It's too big: Berkshire is buying the Burlington Northern (BNI) railroad company in a huge deal. So huge, in fact, that it reeks of an attempt to make Berkshire so large and diversified that Buffett doesn't matter anymore, Bronchick writes.
That leads to questions about Berkshire's size and ability to move the needle with future deals. Unlike Wal-Mart (WMT) or Costco (COST), Berkshire is so decentralized that it cannot benefit from scale, Bronchick writes.
Splitting wasn't helpful: Berkshire split its B shares to finance the Burlington Northern deal, and that enabled it to enter the S&P 500 index. But that's not necessarily a good thing, Bronchick writes.
"Berkshire now enters the world of indexed money, which means its stock will often trade without regard to an analysis of its fair value, but merely as one of 500 pieces of paper to be tossed about by advanced degrees from the finest business schools."It's hard to see any benefit from this, according to Bronchick. It removes that perception of exclusivity among the Berkshire faithful, that feeling that the shareholders understood investing and could outperform in a down market.
So, with these concerns in mind, RCB decided to hedge its bets and sell half its position. Bronchick said there are still many reasons to hold the stock: Berkshire should outperform in a choppy market (although it didn't in 2008), and it should have a big tailwind in an improving economy. The stock is usually strong heading into the annual meeting.
But for one last reason against holding the stock, Bronchick points to something that Berkshire itself said in its last annual report: "The past growth rate in Berkshire's book value per share is not an indication of future results ... our book value per share will likely not increase in the future at a rate even close to its past rate."
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