Summary
- A review of Berkshire Hathaway’s latest filing shows that the company was a big seller of equities as they rose last quarter.
- However, the company stepped up to buy its own stock in May and June.
- The company’s stock offers good defensive value in a frothy market.
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Introduction
The market's rise off its lows this year has been stunning. Low interest rates coupled with fiscal and monetary stimulus are pushing people into buying anything that is not latched down. Investors justify this by admitting that while the overall market may be overvalued, the stocks they own are not. It looks like Berkshire Hathaway (NYSE:BRK.A) (BRK.B) is no exception - while it was a big seller of stocks in the second quarter, it was a notable buyer of its own.
With scores of operating businesses and investments, the company's financials are complicated. I will provide the rapid antigen test version of its results and valuation, to simplify for those who may not be interested in wading through the polymerase chain reaction test version of the company's financials. In other words, a simplified and quick version at the expense of some of the details.
2Q2020 results
First, a note on the second quarter results. The headline number was a profit of $26.2 billion, mainly due to a mark-to-market pre-tax gain of $40 billion on investment and derivative contracts (offset by a $10.6 billion impairment charge, most of it from writing down the value of the company's acquisition of Precision Castparts). Operational results were in line with expectations, with operating earnings of $5.5 billion versus $6.1 billion in the prior year. This amounted to $2.28 per B share.
Equity activity
I looked at the six month cash flow statement in the company's 10-Q filing and compared it to the prior quarter to see the extent to which the company was buying equities last quarter. The answer for stock bulls may be seen as disappointing. The company bought a mere $0.8 billion and sold $13.5 billion. This includes the sale of its airline positions that was mentioned in the annual meeting in May. It ended the quarter with $207.5 billion invested in equity securities, so the sales amounted to about 6% of its portfolio.
However, the company's spending on acquiring its own stock of $5 billion was about triple what it spent in the first quarter of the year. The details (on page 47 of the 10-Q) show that the company did not repurchase any shares after March 10 until May. Its repurchases were at an average price of less than $180, so it's an open question whether they will continue now with the stock at a higher level.
