Buffett -- Sold!

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. -- Warren Buffett

You can't miss the bear, or he's gonna turn around and rip you open like a present from your momma on Christmas morning.
 -- Silas Botwin, Weeds (Pilot episode)

For as long as we've tracked it, Wall Street banker Stifel Nicolaus has practiced what Buffett preached. When investors were unnecessarily fearful, they bought -- and won. When the market got too frothy, Stifel counseled selling -- and won again.

Over the course of nearly four Foolish years of monitoring their progress, we've watched Stifel ascend to the very tippety top of the rankings on Motley Fool CAPS. At last report, the banker scored nearly 57% for the accuracy of its recommendations (a rare feat in CAPS-land), earning it our coveted "Wall Street's Best" icon. And so I make the following, modest suggestion: If you turn to anyone on Wall Street for advice on your investing, it might as well be Stifel. And here's what Stifel's saying today …

Sell Warren Buffett
Or more precisely, sell his holding company, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) . And you've got to give Stifel credit. The analytical woods are full of analysts hunting small fry, but it takes real brass ... bullets ... to go bear hunting with Warren Buffett in your sights. One thing I'll say for 'em: Stifel's not scared of big game.

But why is Stifel stalking Berkshire by downgrading it last week? Basically, because as one of the biggest, most diverse companies out there, and a holder of some of the biggest brand names in American industry -- everything from Coca-Cola (NYSE: KO  ) to Home Depot (NYSE: HD  ) , and Bank of America (NYSE: BAC  ) to Johnson & Johnson (NYSE: JNJ  ) -- Berkshire stock acts as a proxy for the American economy. And according to Stifel, our economy is in for some hard times.

According to Stifel, we're about to see a "2H10 economic retreat" as "declining consumer confidence will slow consumer spending, as employment very slowly recovers," and as "a shrinking appetite for increased public spending should limit the size of any future economic stimulus packages." All of which point to slower economic growth than a lot of investors are banking on.

Hush! Be very, very quiet. We're hunting bears
Refraining from the common Wall Street practice of slapping a "price target" on Berkshire, Stifel nonetheless does offer us its best guess at a fair price for Berkshire. Beginning with the observation that Berk-shares have outperformed the S&P 500 so far this year, Stifel warns they're fast approaching an "apex" and "poised for a correction."

How big a correction, you ask? Performing a sum-of-the-parts valuation on Berkshire's admittedly far-flung subsidiaries, Stifel posits a "fair value for the shares at about $104,000, about 13% downside from current levels." But is Stifel right?

Wanna hit the bear? Lay down a crossfire
As you've probably surmised by now, yes. I think Stifel is right about Berkshire's overvaluation. (The more so because ... I've said the same thing myself, and on more than one occasion.)

Berkshire loyalists will point out that Buffett derides the use of P/Es to value his company, advising investors to focus instead on the company's book value. Fair enough. According to the analyst, Berk-shares risk getting hit with a "double whammy" as, first, earnings take a hit as widespread economic weakness crimps sales, and second, the value of Berkshire's "equity portfolio and derivative positions expose it to additional book value pressure."

In other words, an economic slowdown won't just crimp profits at Berkshire per se. It will drop the share prices at all of the Berkshire holdings named above. And as the value of Coke and Home Depot, B of A and J&J plunge, so too will the value of Berkshire's book. I very much doubt investors, valuing the company on the basis of its book value, will relish this outcome.

You cannot miss the bear
For the better part of five decades, betting against Buffett has been a losing proposition for investors. Clearly, if you're going to take a shot at the Oracle of Omaha, you must aim carefully, and not pull the trigger till the time is absolutely right.

With the broader market having rebounded on no real economic news to back it up and Berkshire shares in particular now trading back within 5% of their 52-week high, I'd say the chances of scoring a hit today have never been higher. But make sure to keep your eyes peeled, and affixed to our scorecard on Motley Fool CAPS. Let's see if Stifel really can beat the odds and bag its bear.

Fool contributor Rich Smith  does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 482 out of more than 165,000 members. The Fool has a disclosure policy.

Berkshire Hathaway, Home Depot, and Coca-Cola are Motley Fool Inside Value picks. Berkshire Hathaway is a Motley Fool Stock Advisor selection. Johnson & Johnson and Coca-Cola are Motley Fool Income Investor choices. Motley Fool Options has recommended buying calls on Johnson & Johnson. The Fool owns shares of Berkshire Hathaway and Coca-Cola.


Read/Post Comments (6) | Recommend This Article (28)

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 July 12, 2010, at 12:24 PM, wantonhubris wrote:

    While I can't disagree that Berkshire's share price may suffer in the short term along with the overall market, what you seem to be ignoring is the fact that this may be good news for the share price in the long term. Mr. Buffett and friends have a lot of cash to deploy if/when the market tanks. And they're pretty good at deployment of capital. I think I'll hold on to my shares, thank you.

  • Report this Comment On July 12, 2010, at 12:30 PM, TMFHousel wrote:
  • Report this Comment On July 13, 2010, at 8:22 AM, Fool wrote:

    Very interesting set of conflicting viewpoints..

    Both Stifel and GS (thanks for the post, Morgan) acknowledge that Berkshire is transforming from a holdings company to one of operations and subsidiary earnings.

    Stifel views this as a negative, as declining confidence curbs consumer spending. GS is more optimistic, saying that our economy is turning the corner and looking to improve.

    I find myself somewhere in the middle: acknowledging that there are some macro headwinds, but that we're about to witness some phenomenal 2Q earnings reports. And I think, as always, that Buffett is less concerned about the short-term volatility and has placed his bets with the big picture in mind.

  • Report this Comment On July 13, 2010, at 12:46 PM, TMFDitty wrote:

    And here's a link to Goldman's record on CAPS:

    http://caps.fool.com/player/trackgoldmansach.aspx?source=ier...

    (47% for accuracy, and a negative score overall.)

    TMFDitty

  • Report this Comment On July 16, 2010, at 5:50 PM, reichar8691 wrote:

    So we should sell BKE and keep cash. Because if there is a bear market on the way, experience shows that BKE stands up through it better than the rest of the market. If BKE is going to be negative, the market in general will be more so.

  • Report this Comment On July 17, 2010, at 10:55 PM, anelson00 wrote:

    What he is saying might be true, but history tells us one thing--never underestimate Mr. Buffet.

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