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Why Warren Buffett Is Not a Goldman Sachs Stock Bull

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This week, Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) quietly collected on a massive stake in Goldman Sachs (NYSE: GS  ) .

His total haul comes to $2 billion, received from gains on warrants he obtained through a big bet during the 2008 financial crisis.

Interestingly, Buffett's taking the cheap way out, preferring to take a smaller stake in the giant investment bank.

Why Buffett isn't so bullish on Goldman
In March, Buffett had a choice: He could simply execute his warrants and purchase shares at a price below their current market value, or he could choose to take his profits on the warrants in the form of stock.

Buffett chose to take the profit in the form of stock, showcasing that he doesn't plan to add any new capital to the position. He just wants his profits.

What does this say?

Well, for starters, Buffett may not believe Goldman Sachs to be a bargain at today's price. If he had thought so, he would have preferred to buy more shares at a below-market cost and get an immediate stake in the leading investment bank with no transaction costs.

You have to remember that it isn't easy for Buffett to scale into new positions. It took him months to acquire a large stake in one of the most liquid companies on the market, International Business Machines. Obviously he would like to take a fee-free, easy transaction when he can get it in a business he likes at the right price.

For Goldman Sachs, a price less than 1.2 times tangible book value must not be the right price. 

And it also indicates that Buffett may be out for better, and cheaper, bargains. He recently called the stock market "fairly priced," as he sits on a treasure trove of cash worth more than $35 billion as of June 30. Berkshire's cash position peaked in the first quarter at $49 billion in the first quarter of 2013, but it has since been whittled down as the company took part in a deal to take Heinz private.

What's Buffett up to now?
Buffett likes to keep $20 billion in cash as a buffer, so he still has at least $15 billion in play. Add in the Goldman Sachs gains -- which are worth roughly $2 billion -- and Berkshire Hathaway still has room for one more elephant-sized acquisition.

There are ample opportunities, too. A quick and Foolish stock screen reveals 590 companies have market caps larger than $1 billion but smaller than $10 billion -- companies big enough to move the needle at Berkshire that are still small enough to easily digest.

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  • Report this Comment On October 02, 2013, at 9:56 AM, DrP79 wrote:

    this way he minimized his tax consideration and did not have to put any additional capital into the venture. In return there is less dilution

    sounds like win win to me

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Related Tickers

9/29/2016 4:02 PM
BRK-A $215300.00 Down -2395.00 -1.10%
Berkshire Hathaway… CAPS Rating: *****
BRK-B $143.59 Down -1.69 -1.16%
Berkshire Hathaway… CAPS Rating: *****
GS $158.95 Down -4.50 -2.75%
Goldman Sachs CAPS Rating: ***