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Berkshire Hathaway
Barron's Kass on Berkshire

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By DanQuisenberry
May 20, 2008

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Greetings All,

Just finished reading the positive and negative in Barron's this weak and I must say that I am surprised at the evaluation (however brief) presented by Kass. He is a wonderful short seller and a pretty good market timer so I make these comments with the utmost respect for his abilities. The major points made by Kass are that...

"More than anything, I'm short Berkshire because of Buffett's recent investment-style drift. In the past five years, Buffett frequently called derivatives "financial weapons of mass destruction." Yet, very much out of character, he immersed himself in several large and thus far unprofitable derivative transactions, leading to an unrealized $1.6 billion pretax loss in the first quarter."

He mentions the 1.6 billion in paper losses the Berkshire Hathaway experienced in the first quarter. The problem is that a good part of the losses are from options that Berkshire can only lose if certain world market indexes are lower in 15-20 years than they were when the bets were placed. In the meantime, Berkshire Hathaway gets to use the float to invest. I don't know who is on the other side of these bets, but I wish I had the opportunity to make them. I'm almost certain the Kass would too if he had the size and opportunity. This paper loss will vanish in the next quarter unless there is a precipitous market drop from here. I am surprised that Kass hasn't researched this point further being that he doesn't own many positions. I know he is just talking his book, but this is a glaring omission.

Another point Kass makes relates to Berkshire's substantial exposure to financials like American Express, Bank of America and Wells Fargo. While I agree that financials may have a tough time going forward, some of the pain has already been taken and if you look at the Berkshire Portfolio, there are plenty of non-financial holdings, including, Coke, P&G, BNI (Still kicking myself for missing this one), and many others. Between the portfolio and operating companies there is plenty of non-financial (excluding insurance for a moment) exposure.

Lastly, Kass states that the salad days for insurance are over. This may be true in the short run, but it is a cyclical business that will grow nicely globally over time. Whether Berkshire is a participant in that growth is another matter. I imagine they will be.

I just think that Kass is a little late to the party here. At 5000, I thought the stock had gotten ahead of itself, but at 4000 it starts to look a lot more attractive and not something I would short in a million years. I don't know if Kass is going to make money here, but I thought that his case for shorting was extremely weak.

Abelson had a column on TPartners evaluation of Berkshire and as you can guess, they are bullish. Here is a snippet....

"Moreover, at current prices, they reckon, there's little "Buffett premium" in the stock. Even absent a particular catalyst, T2 argues, Berkshire's intrinsic value will continue to grow nicely. And, as to a possible dearth of inviting investments, that hardly strikes them as a permanent or terribly serious impediment. "There are worse things," as the report wryly observes, "than sitting on a lot of cash," ....The bottom line, to invent a cliché, is that Berkshire Hathaway, by T2's reckoning, is roughly 20% undervalued. Assuming 10% growth in the intrinsic value of the business and a cash buildup of $6,000 per share over the next 12 months, they're looking for total intrinsic value of $178,700 per share, or a 46% premium to today's price of the stock. And peering further out, within two years, based on the same reasonable assumptions of growth and cash additions, the magic number could rise to over $200,000.


I hope that everyone enjoys the weekend.

Best,
DQ