A follow-up on a post from March based on news today for Berkshire Hathaway (BRK.A).
Whitney Tilson and Andy Kilpatrick (who worte the best book on Berkshire, “Of Permanent Value”) were on CNBC today discussing the subject. Before we go on, watch what they said.
Now, earlier Tilson had this to say about housing and lenders.
Okay, so, if housing is going to drag for another 18 months, then Berkshire’s results will also. So, one would then expect lower comp. earnings and hence a lower share price.
Financials institutions like American Express (AXP), Wells Fargo (WFC), Bank of America (BAC), USB (USB), M&T Bank (MTB) make up about 30%-40% of Berkshire equity portfolio (it varies based on valuations). The argument can be made that these are the class of the financials and that may be true, but all have seen share prices cut almost in half in the last year and a half no mater their quality. The other parts are tied to housing (shares have suffered) and the consumer like Home Depot (HD), Lowes (LOW), USG (USG), Coke (KO) and others. A prolonged housing downturn could see further deterioration.
Wholly-owned subs such as Shaw Industries, Clayton Homes, Jordan’s Furniture (the are 4 furniture companies), Benjamin Moore, Home Services and Acme Brick and directly tied to housing and will suffer in the downturn Tilson predicts.
For all its holdings, Berkshire is essentially an insurance company. It has operated under “perfect” conditions for the last two years according to Buffett and eventually to run must end. Premiums are already falling and as houses are re-poed and fewer new cars are purchase, insurance premiums derived from those products will fall accordingly. I know people who are looking at homeowners and auto policies for way to decrease coverage and save money. Whether or not this is a good idea is irrelevant (I do not think it is), it is happening. Throw in a hurricane or two (we are due) and insurance could suffer quite a poor year.
For more on Berkshire’s insurance read this former post:
Back in March when shares sat at $133,000 I argued they were not a “value”. Today they sit at $111,000. Are they a value now? Perhaps but one also has to expect that the near term, if Tilson is correct is fraught with potholes for Berkshire and earnings ought to take a hit.
Based on that, share price ought to suffer also meaning you will probably be able to pick them up cheaper down the road. If I owned shares would I sell? If I needed the money in the next year, yes. If I had a multi-year time frame would I sell? No. If that was the case I would be watching down the road for a cheaper entry price, I think you’ll get it.
Disclosure (“none” means no position):Long WFC, None
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