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.
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?