Here's Your Best Chance to Buy It Like Buffett

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In October 2008, the news went forth: Warren Buffett had broken with his decades-long pledge to avoid investing in tech stocks. The chairman of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) had famously denied having any special skill in tech, you see, and so declined to waste his time on investments he feared would end badly.

We should all be so "unlucky." The $232 million Buffett laid out to acquire a 9.89% stake in China's BYD Co. (OTC: BYDFF.PK) has since swelled to $1.2 billion in value -- more than a five-times return in barely two years. But before you go kicking yourself for not having bought the stock the minute you learned Buffett owned it, consider this: BYD actually hit its peak market cap more than a year ago, on Oct. 26, 2009, hitting an intraday high of $11.25 a share -- and giving Buffett a brief-but-gratifying 11-bagger. Since then, the shares have retraced their path halfway back to Buffett's entry price -- and handed you a second bite at the apple. BYD specializes in hybrid and electric cars that rely on its batteries.

Buy it like Buffett
Recognizing the opportunity that Buffett spied first, our hypergrowth investing team at Motley Fool Rule Breakers followed the Oracle's lead and added BYD to their portfolio back in September. As a result, we're actually sitting on a small loss. But the good news here is that if BYD returns to its peak of years past, not only can you ride along with Buffett for the second half of his erstwhile gains -- you can beat our performance soundly.

Judging from recent pronouncements at BYD, there's every chance you will be given a chance to beat our performance. Here's why: The problem at BYD has been one of execution. The company worked hard to grow fast, but as sales mounted, management failed to keep its eye on quality control. It overbuilt its sales network, gave ground to competitors in China, and let slip its timetable for introducing the e6 electric car to the U.S. market.

Promises unfulfilled
After selling nearly 450,000 cars in China in 2009, BYD boldly declared that it would nearly double that number in 2010 -- then promptly ran into a tree. 520,000 cars sold was all it could muster last year, and the resulting 16% growth rate badly lagged the 30% average growth rate in Chinese car sales. Rival carmakers like Geely and Great Wall ate BYD's Chinese lunch (and its market share).

Meanwhile, the company decided the styling on its electric e6 wasn't up to par for American standards, and required a redesign. The promised 2011 introduction date got pushed back. BYD remained notably absent from the U.S. market last year even as Tesla (Nasdaq: TSLA  ) continued winning fans with its Roadster all-electric car, Nissan grew a Leaf, and General Motors (NYSE: GM  ) delivered on its promise to put the Volt on sale (and General Electric (NYSE: GE  ) gave it a big vote of confidence). It is only getting more crowded with additional electric and hybrid vehicles being introduced in 2011.

Burned by the admission that its 2010 sales goal was "unrealistic," BYD now aims to just pace the average rate of Chinese auto sales growth in 2011 -- growing perhaps 10%, and selling 550,000 automobiles this year. In the U.S., a ticker-tape parade introduction of the e6 in 2011 has been canceled in favor of a few test drives in southern California later this year, followed by actual sales of perhaps as many as 50 (and no, I didn't forget any zeros) of the electro-buggies in 2012.

In short, not only has BYD ceded the electrical first-mover advantage to GM, Tesla, and Nissan already. It's almost certain to trail Ford's (NYSE: F  ) entree into the electric market stateside, and perhaps lag Toyota Motor (NYSE: TM  ) as well.

Aside from that, Mrs. Lincoln, how was the play?
So are you enthused yet? Hopping with excitement, and looking frantically around for the "buy" button to get in on this hot stock? If not -- that's totally understandable. But before you give up on BYD entirely, consider:

Our Rule Breakers team may be down slightly on our investment in BYD, but we haven't cashed out. We've got confidence in Buffett's stock picking and in BYD's ability to turn itself around. What's more, Buffett just lost half the value of his investment in BYD, and he's not selling. True, Buffett's still up six times on his initial cash outlay, but if you think going from a 12-bagger to a "mere" six-bagger doesn't hurt, well, you've probably got a whole lot more money than I have -- more money than Buffett, too, I suspect. (Which means your name is either Bill Gates or Carlos Slim.)

Not to beat a dead horse or anything, but let me restate: Probably the best investor in all of human history still believes BYD is a good investment, and one that will make him more money if he keeps it, than he could earn elsewhere by selling. So, too, believes the investing team at Motley Fool Rule Breakers -- the folks who've racked up the second-best overall performance on their picks of any Fool newsletter. And to top it all off, the stock is selling for 50% off its year-ago price.

So I've got just one question for you. That sound you hear at the door -- it's opportunity, knocking. Are you going to let it in or what?

BYD is a Motley Fool Rule Breakers pick. Berkshire Hathaway and General Motors are Motley Fool Inside Value selections. Berkshire Hathaway and Ford Motor are Motley Fool Stock Advisor recommendations. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Smith does not own shares of any company named above. Check out his latest stock recommendations on Motley Fool CAPS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (12) | Recommend This Article (7)

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 January 12, 2011, at 11:40 PM, yellowca wrote:

    Rich, great arguments against BVD in the "Promises Unfulfilled" section - 1) slower growth than expected, 2) delay of the e6, 3) losing the first mover advantage. You sold me on the bear points.

    Care to elaborate on the point that you've got confidence in BVD's ability to turn itself around? The bulk of your pro-BVD writing gave me the impression that you're not giving up on BVD mostly because Buffett himself isn't selling.

  • Report this Comment On January 13, 2011, at 2:26 AM, ayaghsizian wrote:

    Yellowca brings up a good point and I'd like to read the reply.

  • Report this Comment On January 13, 2011, at 6:49 AM, midnightmoney wrote:

    add me to the eager

  • Report this Comment On January 13, 2011, at 9:53 AM, TMFDitty wrote:

    Fair question, and echoes thereof. So ... my belief that BYD's a good bet goes something like this:

    1. Are Buffett/Munger good businessmen? Do they know what they are doing, and have they proven their ability to buy great businesses run by superb owner-operators?


    2. What do Buffett/Munger have to say about BYD and its founder, Wang Chuan-Fu? Is he the kind of guy we want to take a gamble on?

    "This guy is a combination of Thomas Edison and Jack Welch -- something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it."

    I'd say that's a check, too.

    3. Bonus reason: According to Tom G, the longer he's invested, the more he's become convinced that you succeed in investing less by focusing on numbers (my own personal bias) and more by focusing on the leadership at a company. He's cited Costco, Netflix, Coach, and Amazon as all being great companies that he believes succeed largely part because of the people who run them, and their long-term focus on their businesses ("long-term" being another way of saying "not just what they did in 2010.")

    So... while I'm personally a numbers guy, a lot of folks who are smarter than I am are telling me -- in unison -- that the way to *really* succeed in investing is to look past the numbers to the folks who make them happen. And that, in a nutshell, is why I believe BYD is a good bet.

    Foolish best, and thanks for the invitation to expand on the thought (way) past my official word-limit for the article :)


  • Report this Comment On January 13, 2011, at 10:05 AM, Tomohawk52 wrote:

    Not to question your points, but don't you think it's possible that all of the above are victims of confirmation bias?

    What I mean is that Buffett, Munger, Tom G say "Hey we think the following guys are great: X, Y, Z.. And see how their companies did gangbusters over the years." but what about the guys who oversaw companies that were also great guys but the companies tanked? I bet those guys are quickly forgotten.

    I might be biased as well, as I have never spent one cent at any of Costco, Netflix, Coach, or Amazon. ;-)

  • Report this Comment On January 13, 2011, at 10:37 AM, TMFDitty wrote:

    Heh. Perhaps, Tomohawk52. In support of your thesis, I spend about $100 per trip at Costco, have a subscription to Netflix streaming, make almost all my online purchases at Amazon, and am contemplating presenting a Coach bag to Wifey on her next birthday.


  • Report this Comment On January 13, 2011, at 11:10 AM, blmadoff wrote:

    For all we know Buffett could have bailed by now.

  • Report this Comment On January 14, 2011, at 5:01 PM, feather70 wrote:

    I just wanted to point out that the actual ticker is most probably BYDDF, as BYDFF doesn't exist.

  • Report this Comment On January 16, 2011, at 2:36 PM, baldheadeddork wrote:

    I'm a big fan of Mr. Buffett, but he's not perfect. I made a decent return last year on KFT from buying when the stock dipped after he spoke out against the Cadbury acquisition.

    I think there's also a big mistake in presuming that Buffett would make the same investment in BYD today. The outlook for the company has changed dramatically in the last two years, and not for the better. They haven't expanded into the US or Europe, they're now lagging GM, Ford and Nissan in advanced hybrids/EV's, they failed to hit their domestic growth targets by a huge margin, and they've come up on the bad side of a fight with the Chinese government - which is going to force consolidation in their auto industry.

    With all you know about Warren Buffett, do you really think he would make that investment today given these circumstances?

  • Report this Comment On January 16, 2011, at 2:53 PM, baldheadeddork wrote:

    And for a trip down memory lane, here's what a Fool front pager wrote last September 30 when he called BYD a better investment than Ford:

    Since then, Ford is up 49% and BYD is down 34%.

  • Report this Comment On January 25, 2011, at 7:40 AM, summertimeVA wrote:

    Me think Buffet made a great call- company messed up lost market share in an over crowded market (today) and the stock is down big time since I invested (33%). It has a value of 7~8 USD / share and is trading at a discount of ~ 38%. It's growth rate is currently -6%, the industry it belongs to has a 8% growth rate! It's PE is 2.56 and the industry it belongs to is 19. The sales per share is 3.18 USD whereas the industry average is 6.89 USD. If you have access cash and dont know when you expect a return then buy otherwise there are tons of stock-chinese, HK stock if that is your pref (see below) that give better returns, at least in the next 12 months.

    I own it and am losing equity + interest that I could have invested elsewhere. Is it going up? What is it's growth story? Sorry but you have not provided one financial argument or market argument to buy this stock. Or for that matter do you own a BYD electric car or plan to buy one like you say you do for all of the other stock. I digress but money can be better invested elsewhere with better sounder returns than hanging on to Buffets coat tails.

    You want to win- think CIMC, HAIER, SHENZEN HIGHWAY, MTR, GUANGSHEN....

  • Report this Comment On May 17, 2011, at 9:49 PM, Investorlion wrote:

    1. buffet good businessman. Check

    2. What does buffet say about founder. "great, blah blah words". check.

    3. Bonus reason. check.

    4. When do we find out of Buffett's 13F filing when he dumps companies. uh oh - not after many many days.. only at the end of the quarter.. what do we do now????

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