In many ways, Warren Buffett-led conglomerate Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) has had a rather uneventful 2017. The company hasn't announced any major acquisitions, and other than a few major moves in the stock portfolio, it hasn't really been in the headlines much.
Yet the few major moves Berkshire has made should be good for the company's future. Here's a quick recap of three moves the company has made, why they should be positive long-term catalysts, and the lessons you can learn from each.
Recognizing when a business has fundamentally changed
Buffett has famously said "our favorite holding period is forever," in regard to Berkshire's stock investments. In other words, Buffett's ideal stock is one that produces steady growth and income for decades.
However, many people misinterpret this statement as meaning that Berkshire will hold on to all of its stocks forever. That's 100% false. In fact, Buffett and his team sell stocks quite often, and for a variety of reasons.
A good example this year is IBM (NYSE:IBM), which has been one of Berkshire's largest stock positions for several years. In a May CNBC interview, Buffett revealed that Berkshire had unloaded about a third of its stake. He said the company hadn't lived up to his expectations and that the competitive landscape has gotten much more intense.
"I don't value IBM the same was that I did six years ago when I started buying ... I've revalued it somewhat downward," Buffett said. With shares above $180 earlier in the year, Buffett took advantage and sold some of his position. Now, with shares under $160, he has stopped selling.
While shareholders may be rightfully disappointed in the performance of Berkshire's IBM investment, it's important to remember that even the greatest stock pickers don't pick winners all the time. Besides, I believe it's important to have a CEO who is capable of recognizing that an investment isn't quite what he thought it was. After all, if Buffett simply held on to all of his stocks forever, he'd still own Freddie Mac. The lesson to learn here is that it's important to periodically re-evaluate whether the reasons you initially bought a stock still apply. If they don't, selling and redeploying your capital elsewhere can be the smartest move.
Doubling down, and then some, on Apple
In December, I wrote that one move that Buffett should make in 2017 was to double down on Berkshire's Apple (NASDAQ:AAPL) investment. At that time, Berkshire owned 15.2 million shares of Apple that were each worth approximately $118 each.
My reasoning for saying so was that Apple traded for less than 13 times forward earnings at the time, and some of its recent results had been rather impressive -- such as 24% year-over-year service revenue growth. The cash stockpile and potential for significant dividend growth were also reasons I though Berkshire should add to its position.
Well, Berkshire doubled down and more. (Not that my article had anything at all to do with their decision!) Berkshire now owns 129.4 million shares of Apple, more than 8 times its previous stake. And with Apple shares up by about 25% since last December, it's fair to say that buying Apple stock was a smart move.
I still consider Apple to be a good value at its current share price of around $146, although obviously not as good as it was when Berkshire decided to stock up. Even so, I wouldn't be surprised to see Berkshire's Apple investment get even bigger as the company searches for ways to put its $86 billion stockpile of cash to work.
Sometimes, there's just nothing worth buying
At the end of the first quarter of 2017, Berkshire had about $96.5 billion in cash and equivalents on its balance sheet. Some of this stockpile isn't going anywhere. Buffett likes to keep a minimum of $20 billion in cash at all times. Still, it leaves more than $75 million in excess cash just sitting around. And unlike many other cash-rich companies, virtually all of Berkshire's stockpile is held in the U.S. and is readily usable.
There are several ways Buffett would be willing to spend this money. If an attractive acquisition opportunity came along, or is a stock was trading for significantly less than its intrinsic value, Buffett would love to put some of this capital to work. He is also willing to repurchase Berkshire shares, but only when the valuation is at a "meaningful discount to conservatively calculated intrinsic value," which Berkshire's management currently defines as 120% of book value.
So far in 2017, Berkshire hasn't announced any major acquisitions, and while Buffett has been buying stocks this year, like Apple, the pace hasn't been nearly fast enough to stop the company's cash hoard from growing. And as I write this, Berkshire trades for about 1.44 times book value, well above Buffett's buyback comfort zone.
The lesson here: If nothing looks attractive, sometimes the smartest move you can make is to do nothing at all and wait for opportunities.