Warren Buffett is losing his appetite -- for shares of packaged-foods producer Kraft
More importantly, by selling down Berkshire Hathaway's
Buffet first showed signs of souring on Kraft in fall 2009, when he characterized the company's initial bid for U.K. confectioner Cadbury as a "full price" offer. But if Buffett was merely skeptical at the start, his take on Kraft's wheeling-and-dealing ways eventually devolved into outright disapproval. This past January, he voted against Kraft's proposal to issue shares in support of the Cadbury purchase. Among his protests, Buffett noted that Kraft shares were undervalued, making an issuance unusually dilutive.
Of course, Kraft eventually bypassed pesky questions of shareholder approval, defying Buffett's open protest to acquire Cadbury for a cash-and-stock value of $19.6 billion. Specifically, the deal valued the newly issued Kraft shares at $29.58 apiece.
Here's the kicker: If, according to Buffett, Kraft shares at $29 and change undervalue the company, then certainly $27 to $29 a share represents an even larger disconnect. Yet that's exactly where shares traded for most of the quarter, when Berkshire was busy reducing its Kraft position by nearly 23%.
In other words, when Kraft "sells" undervalued shares, it's perpetrating a great misdeed upon its shareholders. But when Buffett sells those same shares at nearly identical prices, he's doing, well, what exactly for Berkshire investors?
Even more puzzlingly, Kraft shares in the past few months arguably were (and remain) even more undervalued than when Buffett first voiced his dissent, given that Kraft now owns the growth engine that is Cadbury. Throw in Kraft's encouraging first quarter, and Buffett's timing looks downright awful.
Look, I believe in selling what's cheap to buy what's even cheaper. I've done it myself, and I recommend it to any investor of conviction. But if you accept hedge-fund whiz kid Bill Ackman's analysis, it's hard to argue that Kraft isn't one of the cheapest secular names out there. Furthermore, it's hard to see what stellar opportunities Buffett was jumping on, given the list of Berkshire's first-quarter sales and purchases.
Finally, Buffett's similarly reduced positions in fellow consumer-staples names Procter & Gamble
Ultimately, Buffett may be selling shares to raise cash for something big up his sleeve. Or perhaps the proceeds from selling Kraft helped pay for the Burlington Northern purchase. Perhaps Buffett foresees another financial crisis.
Or maybe, just maybe, he might be losing his touch.
I know you have an opinion. Sound off in the comments section below.
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