Is Buffett's Berkshire Buy a Bearish Sign?

Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) is doing something it's never done before: It's buying back its own shares.

I think the move is great news for Berkshire shareholders. As my fellow Fool Morgan Housel noted, prior to the buyout-announcement pop, Berkshire shares were trading at a mere 1.02 times book value, the cheapest level they've seen in decades. According to Bloomberg, the stock has traded at an average book value multiple of 1.55 since 2000.

But an interesting question is whether this is a bearish sign for the rest of the market. If Buffett is opting to buy back Berkshire stock -- something he's never done before -- rather than sink the same cash into shares of other publicly traded companies, does this mean that he doesn't see bargains elsewhere?

Probably not
I would wager that this is much more of a reflection on the cheapness of Berkshire's stock than a view that there aren't bargains in the rest of the market. Though Berkshire's stock has recovered 48% since the market's low in March 2009, it's fallen well short of the gains on both the S&P 500 and larger-cap-focused Dow Jones.

Source: Yahoo! Finance.

Berkshire's business has hardly flat-lined since that point, but the stock's valuation has gone almost nowhere. At its lowest point in 2009, Berkshire's stock traded at a price-to-book multiple of 0.97, so prior to the buyback announcement, we could say that the stock was still trading at crisis levels.

The devil's advocate may say, "Yes, but when Berkshire was trading at these levels during the crisis, Buffett chose to put his money into companies like Goldman Sachs and GE (NYSE: GE  ) rather than Berkshire, so why the change now?"

That's actually pretty easy to address. Though Berkshire's stock got battered during the crisis, other stocks took an even harder hit. At their respective low points, Goldman and GE saw price-to-book value multiples of 0.48 and 0.67, respectively. Not only that, but because of the paucity of funding sources at the time, Buffett was able to get sweetheart deals on both of those investments that gave Berkshire preferred stock, fat dividends, and warrants to boot.

It's not like Buffett isn't buying elsewhere
Surmising that Buffett doesn't see bargains outside of Berkshire would be easier if he wasn't also making other non-Berkshire buys. Bloomberg cited Buffett as saying that he spent more on stocks on Aug. 8 than at any other point during the year. When talking to Fortune a few days after that, Buffett quipped: "The lower things go, the more I buy. We are in the business of buying."

We won't know for another month or so what exactly Buffett was buying in August, but we do know that he added to Berkshire's portfolio through the first half of the year, including boosting his huge Wells Fargo stake and adding to his position in British grocer Tesco. And of course we can't forget the preferred investment he made in Bank of America (NYSE: BAC  ) .

Value, value everywhere...
Bloomberg ran the headline "Buffett Buyback Shows S&P 500 Passes Berkshire Value Test," which was rather confusing since the article noted that the index would have to fall around 40% for its book value multiple to match Buffett's Berkshire target.

But even if the overall index doesn't have a Berkshire-esque valuation, there are plenty of individual stocks that are as cheap, if not cheaper. Wells Fargo currently trades right around its book value, while JPMorgan Chase and Bank of America have multiples of 0.71 and 0.33, respectively. Insurers MetLife (NYSE: MET  ) and WellPoint change hands at book value multiples of 0.57 and 0.99, respectively, while asset manager BlackRock is at 1.1.

And while book value multiples are great for valuing financial businesses, they can be less useful when looking at other types of businesses. From a price-to-earnings perspective, there are plenty of other bargains to be found including Microsoft, Chevron (NYSE: CVX  ) , and AT&T (NYSE: T  ) , which sport P/E multiples of 9.5, 8, and 8.6, respectively.

No called strikes
Looking back over Warren Buffett's history, it's clear that he doesn't take action for action's sake. If there are no bargains available, he's perfectly comfortable sitting on his hands and letting Berkshire's cash wait around. So if you're concerned that Buffett is buying back Berkshire stock simply because he doesn't see anything else worthwhile out there, don't be. This simply means that Berkshire's stock is a screaming bargain.

Want to keep a closer eye on Berkshire Hathaway and what Warren Buffett is doing? Add the stock to your Foolish watchlist. And if you don't have a watchlist yet, you're in luck -- you can start one up right now for free.

The Motley Fool owns shares of Berkshire Hathaway, Bank of America, Microsoft, and JPMorgan Chase. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Chevron, AT&T, BlackRock, WellPoint, and Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. 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.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, Bank of America, Microsoft, AT&T, and Chevron, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (11) | Recommend This Article (36)

Comments from our Foolish Readers

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  • Report this Comment On September 29, 2011, at 3:57 PM, mhonarvar wrote:

    If Buffet thinks his company is worth more (say $100 per B share instead of $70) then each share he buys adds $30 in value.

    He's not saying anything about the economy or other companies by doing this - he's simply saying he can get $30 in value easily.

  • Report this Comment On September 29, 2011, at 4:08 PM, ilovesumm wrote:

    It shows that his stock is cheaper and also more trustworthy than other stocks such as BAC. Berkshire insurance component has been hit this year so it has pulled BRK stock down. Buffett knows BRK as a whole is very cheap itself and compared to other companies.

    If Buffett thought strongly the market was going lower he would sit on his cash. Buying something today that you think will go on sale in the near future is illogical.

  • Report this Comment On September 29, 2011, at 4:09 PM, ilovesumm wrote:

    He would not pay more for something today that will go on sale tommorrow makes no sense.

  • Report this Comment On September 29, 2011, at 5:31 PM, DavesHere wrote:

    The Berkshire bias is toward buying whole companies, rather than stocks. Historically, stock which amounts to only partial ownership has had to be pretty compelling to get B's attention. The only signal here is that B's own stock is what B finds most compelling at the moment.

  • Report this Comment On September 29, 2011, at 5:59 PM, cameron1994 wrote:

    he's buying back stock because he is seeing it at a current bargain price, its a bullish bet. The art of share buy backs is to purchase stock at undervalued prices or its like overpaying for any other stock, buffett sees the markets in better places in the future and the same for berkshires share prices. just increasing share holders value

  • Report this Comment On September 29, 2011, at 6:41 PM, artmuseum wrote:

    This contrary fool believes Buffett's move to buy its own stock back is a desperation ploy.

    He did it under tremendous pressure from his own shareholders who grumbled for months the stock is 'undervalued.'

    I beg to differ.

    HIS RECORD IS NOT AS STELLAR as the relentless pr machine leads us to believe. Almost by accident I found out going through Yahoo charts that for example John Fredriksen via SDRL has outperformed BRK stock in the last decade or so! Moreover JF gives his shareholders a cash dividend return BRKS owners can only dream about.

    Buffett's recent big bet on Bk of America is a good example of a foolish investment - to put not too a fine point to it, the top echelon of that bank was one of the main cause of our financial meltdown - with no serious consequences SO FAR. No one jailed - no billion $ fines. But what goes around comes around - and the day of reckoning for that bank + some others, is fast approaching.

    It seems to be a reprise of his investment in Solomon Bros - another then big player on Wall Street - a generation ago -- good old Buffett, if memory serves, had to take over the active management of Solomon to rescue it from total collapse.

    And consider Buffett's age - I haven't seen anyone talking much about that?!

    PS - JF is almost 20 years younger than WB.

  • Report this Comment On September 29, 2011, at 9:15 PM, dsciola wrote:

    Interesting article on Buffett's buyback and what he may think about the whole macro. This is the 2nd article I've come across arguing that his buy-back is a bullish signal for the market.

    To me, what stands out the most is the fact that Buffett is very risk averse and would not buy anything unless he truly felt it was cheap. Perhaps when we find out what he was buying in August, then we'll get a clearer glimpse into his view on the market.


  • Report this Comment On September 30, 2011, at 8:46 AM, Cashmenow wrote:

    Ok so Buffet is bullish on Buffet. I would only venture to guess why. Perhaps some of the chickens have folwn the coup. Leaving the farmer only a few eggs and hens to lay so more for him. To put the analogy in a more correct way prices are low on a lot of stocks with good value so Warren Buffet sees an excellent opportunity to put back in place some of the cash gone by the wayside. And bring his companies back into line with a more correct valuation.

  • Report this Comment On September 30, 2011, at 9:30 AM, Gorm wrote:

    Might the valuations you state just reflect REALITY?

    Greece will eventually default and Spain and Italy are in sad shape. Every effort to defer default contracts growth, recovery.

    China would appear to be contracting.

    The US is hurting. The old drags have NOT changed, ie housing, unemployment, growth, debt, inept leadership, uncertainty.

    Maybe you are just hopelessly thinking there is ALWAYS a positive ending to horror stories!!


  • Report this Comment On September 30, 2011, at 8:08 PM, scvalley wrote:

    I've only fast-read this article and comments. This is a great subject.

    After a few mistakes since 2008, Warren Buffett seems to be thinking differently than in prior years. Or maybe he is thinking the same but is fading somewhat on the understanding and/or appreciation/changes with the technical capacity of the real new world.

    He has made a few mistakes. Buying in 2008, buying a railroad (as if there are no options in the near future, buying B of A, etc.

    We don't trade Berkshire, but it may be a thought to short it.

  • Report this Comment On October 02, 2011, at 11:14 PM, azmfool wrote:

    Matt - I not sure I agree that this is the first time Berkshire has offered to purchase shares. Maybe the first time on the open market (?) but I believe in one of the newsletters some years back, WB did offer to buy A shares direct from owners.

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