Buffett Fails to Walk His Talk

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Warren Buffett is losing his appetite -- for shares of packaged-foods producer Kraft (NYSE: KFT  ) , at least.

More importantly, by selling down Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) holdings of the aforementioned mac n' cheese maker by more than 31 million shares, Buffett's served himself up as the Oracle of Do As I Say, Not As I Do. That should leave Berkshire shareholders feeling decidedly uneasy.

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 (NYSE: PG  ) and Johnson & Johnson (NYSE: JNJ  ) further muddle his motives. True, J&J has recently had product recall issues, and P&G has taken down prices to lure back recession-smacked consumers. But if Buffett's long-term belief in the U.S. economy was strong enough to justify the top-dollar takeout of railroad behemoth Burlington Northern, how do these two fairly steady companies not represent compelling investments at present valuations?

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.

Berkshire Hathaway is a Motley Fool Inside Value recommendation. Berkshire Hathaway is a Motley Fool Stock Advisor choice. Johnson & Johnson and Procter & Gamble are Motley Fool Income Investor picks. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. The Fool owns shares of Berkshire Hathaway and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Mike Pienciak holds no financial interest in any company mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (16) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2010, at 6:12 PM, nola622 wrote:

    This article makes the incorrect assumption that the per share value of Kraft after the 2 deals is the same as the per share value of Kraft with Pizza, cash and fewer shares outstanding. When Warren said on TV that he "felt poorer" - he was referring to just that.

    Buffett needed to raise money for BNSF. He sells what he likes the least where he won't lose a large tax deferral. Selling at a loss actually generates more cash than the sale proceeds itself.

  • Report this Comment On May 18, 2010, at 7:05 PM, futuretrust2 wrote:

    Mr. Buffett stated the shares were undervalued based on competent management in place. However, after it became apparent that the proposed deal was the work of a monkey and then said monkey still went ahead with the deal. One can conclude that Mr. Buffett no longer felt the shares were so undervalued. This may explain his desire to sell a piece of it. Judging management ability is always a part of calculating intrinsic value and is a key part of WB success.

    He did not sell the entire position though, so this is all speculation on my part but it seems more probable than your conclusion. It was a nice try though. Got me to read it.

  • Report this Comment On May 18, 2010, at 7:35 PM, PeyDaFool wrote:

    "Buffett may be selling shares to raise cash for something big up his sleeve."

    This should have been your article's title, since it makes much more sense than "Buffett losing his touch" or "Buffett muddling his motives."

    Mike, taking jabs at Buffett just to make your article seem more interesting and exciting is not responsible reporting.

  • Report this Comment On May 18, 2010, at 9:36 PM, Tastylunch wrote:

    nola622 and futuretrust2 are correct

    Buffett's valuation was based on his view of Kraft pre-merger and with a different view of management.

    You may not agree with his decision to sell some but given the very changed nature of the business and his own likely changed perception of management I do not think his decision to sell is hypocritical at all. His decision is very easily defensible on those grounds.

    I fail to see what he hs done in this instance to warrant such harsh criticism such as "...Buffett's served himself up as the Oracle of Do As I Say, Not As I Do. "

  • Report this Comment On May 18, 2010, at 10:15 PM, esmn89 wrote:

    I have to side with futuretrust2 on this one. I believe he may not regret selling the 'undervalued' shares because Krafts latest moves have made the shares not so undervalued after all. In Mr. Buffett's opinion of this and other companies whose shares he has been offloading, the intrinsic value may have shifted.

    I am well aware of his strategy to buy undervalued stocks and sell high but I am quite ignorant to what he believes in doing when the undervalued stock devaluates. If someone can enlighten me I'll be grateful.

  • Report this Comment On May 18, 2010, at 11:28 PM, noblepaladin wrote:

    Buffett said that the KFT deal destroyed shareholder value, so he sold the shares that he believes are worth less than it used to be. When stuff is worth less, you want to hold less. It would be surprising if he didn't sell any KFT and sold his other stuff.

  • Report this Comment On May 18, 2010, at 11:35 PM, starbucks4ever wrote:

    Under the current CEO, Kraft is not worth much.

  • Report this Comment On May 19, 2010, at 12:29 AM, goalie37 wrote:

    I think you are missing one thing. Buffett is far too good an investor to base his decisions solely on valuation. If he no longer feels Kraft is the best place to put Berkshire's money, then he should sell...period.

  • Report this Comment On May 19, 2010, at 12:38 AM, Superdrol wrote:

    Buffett's behavior has not been consistant all the time. His hopping in to a battery powered car was not consistant with his no investing unles you understand it policy. The selling of Kraft was most likely to boost liquidity for the burlington sante fe acquisition.

    What gets me is he used stock of Berkshire to fund the acquisition which are undervalued by my analysis. Depending on how you look at Kraft discounting the cash flows I calculated the stock to be worth mid $32 or so. Possibly $33 depending on what parameters you use. Either way Kraft isn't what I'd consider "heavy discounted".

  • Report this Comment On May 19, 2010, at 1:10 AM, UPTschack wrote:

    I know Buffett has lost his touch...or his touch is no good in the competitive age of information. It is sad, but the man who I once thought was the greatest investor ever has put a sour taste in my mouth. The more I learn about him, the less I like him. He obviously is no average investor judging from his past. I'm not trying to "write him off." But seriously, how did he pick USG over EXP back in '06! Or PTR over CEO? It sure wasn't valuation. What's disappointing but true is the privileges he gets. I don't recall Goldman Sachs calling my phone to sell preferred stock with a 10% yield and options attached. He earned these privileges, but don't compare his returns with people who don't have the same privileges. More importantly, his returns aren't that good anymore. He is a snake in the grass. I've heard to many excuses about how his advice applies only to the "average" investor, or he has too much money to invest in the smaller, profitable companies. I hope he's happy because if I was his age with his money, I would be on cruise getting to know my grandkids... not making excuses about why I could be the richest man in the world, but I have it too hard. The more I see of him, the less I trust him. And as far as investing goes, he lost his touch years ago.

  • Report this Comment On May 19, 2010, at 11:16 AM, grfg8r wrote:

    KFT CEOs behavior is the type he doesn't prefer. Read his book. BIG turnoff for Buffett!

  • Report this Comment On May 19, 2010, at 12:27 PM, whtcllrchaingang wrote:

    Glad I didn't fly out to hear Buffett in Omaha this year. The CEO of Kraft is horrible and the CEO of Goldman is fine? B.S. Warren. BNSF is a huge bet the future hauling of coal. If coal hauling declines over the next 20 years, and have you heard of a new coal plant being opened in the US lately, this RR does not grow. Then, the dilution of the B shares and the use by BRK of financial weapons of mass destruction, the LT puts he sold on SP500, tell me that he does not remember what he said just a few yrs ago. WB from 2003-04 would take the car keys away from today's WB. Sorry to say it. I think he is an outstanding human being. Gates will have the big talk with Warren. Sokol, warm up in the bullpen, you're going in.

  • Report this Comment On May 19, 2010, at 1:53 PM, nola622 wrote:

    @whtcllrchaingang -

    What specifically has the CEO of Goldman done wrong?

    The railroad is regulated and will earn utility like rates of return on large sums of capital virtually forever. Barriers to entry... kinda big. Buy it with insurance float and you've got fine returns.

    Long Term Puts on SP500 are exactly the same as going long blue chip stocks - something most people agree Warren deserves the benefit of the doubt with... And these puts add the element of Long Term Float, in the billions - something I believe Warren knows a bit more than most about.

    You may not like Mr. Buffett, but he has done nothing inconsistent with the way he's run the place for the last 40 years. He's happy to have his zero cost float and a bumpy 15% and others prefer a smooth 7%... If you are no longer impressed by the bumpy 15%, buy a smaller company...

  • Report this Comment On May 19, 2010, at 1:57 PM, plange01 wrote:

    its obvoius that even buffett no longer believes in his buy and hold strategy anymore.the only stocks he holds are a few he has owned for over 20 years and got them very cheap.anything he buys since then he trades like everyone else.also he has become more desperate to produce high returns he has been investing in derivitives and credit default swaps that only a few years ago he swore he would never buy. it no longer pays to listen to buffett but look at what he does instead...

  • Report this Comment On May 19, 2010, at 3:22 PM, miteycasey wrote:

    Could your title be anymore misleading???

  • Report this Comment On May 19, 2010, at 3:53 PM, LWILLS wrote:

    I think Buffett sold his shares after Kraft sold its frozen pizza business to fund the Cadbury purchase. If you read Buffett's comments, you will see that he viewed the frozen pizza business as a big part of Kraf't's future growth. So I totally understand why he went ahead and sold. Actually, I sold my shares at that point for the same reason, even before I knew that Buffett did. I had better better prospects for that money. He sold JNJ due to its European exposure, so it wasn't a bet against the American economy so much as it was a calculation of lower sales overseas. I still own mine because I just can't stand to part with it, but I wouldn't be surprised if it lags the market for a while. I think Buffett is just raising cash for future deployment.

    Buffett isn't perfect, I agree with you on that point. But I don't think you looked at all the facts before drawing your conclusions.

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