For decades, few if any investors have been able to hold a candle to Warren Buffett's performance. As CEO of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), Buffett has led his company's share price to a compound annual return of 20.3% over the past 55 years. For you math-phobes, we're talking about an aggregate gain of more than 2,700,000%!
Buffett's strategy of investing in or acquiring businesses with clear-cut competitive advantages has worked wonders. And it's also created quite the following for the Oracle of Omaha.
Thus, with Berkshire Hathaway lifting the hood on its second-quarter operating results this past weekend, there were a lot of curious shareholders and prospective investors wondering how Buffett and his company navigated through the most challenging quarter in decades. What we saw were five truly jaw-dropping figures.
1. $15.7 billion in proceeds from equity sales
The first number that jumps out of Berkshire Hathaway's cash flow statement is that Buffett and his team received $15.7 billion in proceeds from equity sales during the second quarter.
For those who may recall, Buffett announced during his company's annual shareholder meeting in May that he and his team had sold more than $6 billion in equities in April. It would appear that Berkshire Hathaway's selling didn't stop with the jettisoning of the company's four airline stocks. In less than a week, Berkshire is set to file its 13F with the Securities and Exchange Commission (SEC), which'll give investors a closer look at what Buffett actually sold.
However, one stock I'm fairly confident has been given the boot is Goldman Sachs (NYSE:GS). Berkshire Hathaway had pared down close to 90% of its stake in investment bank Goldman Sachs over the past two quarters, signaling that Buffett has lost faith in the company. It's an interesting move considering how well Goldman's equity and commodities segments have performed of late. But Buffett isn't a fan of paring own his company's stakes slowly, so look for Goldman Sachs to have been sold in its entirety from Berkshire's portfolio during the second quarter.
2. $146.6 billion in cash and equivalents on hand
Even though Warren Buffett spent $9.7 billion in early July to buy Dominion Energy's natural gas transmission and storage assets, and he's dropped more than $2 billion to purchase additional shares of Bank of America in recent weeks, these acquisitions didn't occur in the second quarter. With Buffett a big-time net-seller of equities, Berkshire Hathaway's cash on hand grew from $137.2 billion, at the end of March, to an all-timer record $146.6 billion, as of June 30, 2020.
Despite Buffett spending a significant amount of time offering support for the U.S. economy during his virtually held annual shareholder meeting in May, the Oracle of Omaha's growing cash pile suggests that he doesn't view equities as attractively priced. Even as a firm believer in the buy-and-hold ethos, Buffett's unwillingness to deploy his cash hoard is a potential red flag.
3. $5.1 billion in share repurchases
Then again, there has been one asset that Warren Buffett can't stop buying over the past two years: His own stock.
According to the SEC filings, Buffett and his team repurchased approximately $5.1 billion worth of Berkshire Hathaway stock during the second quarter. This comes after $1.7 billion in purchases in the sequential first quarter, $5 billion in aggregate purchases in 2019, and close to $1 billion in repurchasing activity in the second-half of 2018. Altogether, Buffett has rebought almost $13 billion worth of his company's stock in two years.
Though investors would much prefer Buffett put his company's cash hoard to work via an acquisition of equity investments, rebuying stock isn't a bad idea. After all, repurchasing Berkshire Hathaway's stock will reduce the number of shares outstanding, which can have a positive impact on earnings per share. It also doesn't hurt that Berkshire's stock was trading at its lowest price-to-book valuation in eight years throughout the second quarter.
4. $26.3 billion in net earnings
Another jaw-dropping number is Berkshire Hathaway's bottom line, which logged net earnings of $26.3 billion for the second quarter. For those of you keeping score at home, that's $10.88 per Class B share (BRK.B) in earnings.
How the heck did Berkshire Hathaway make so much when the U.S. economy turned in such a putrid quarter of growth due to the coronavirus disease 2019 (COVID-19) pandemic? The answer lies with the company's investment portfolio "gains."
You see, back in 2018, the SEC required companies that were holding equity securities to include the unrealized change in market value of these securities in their quarterly earnings statements. This is to say that the vast majority of Berkshire Hathaway's $26.3 billion in net earnings is attributable to the company's investment portfolio gaining value during the second quarter. The thing is, these are almost entirely unrealized gains (i.e., Berkshire is still holding these equities). As such, Buffett and his right-hand man Charlie Munger strongly suggest ignoring Berkshire's headline profit/loss figure and dig down into the meat and potatoes of how its owned businesses and sold equities actually performed.
5. $9.8 billion writedown tied to Precision Castparts
Finally, take note that Berkshire Hathaway wrote down approximately $9.8 billion in goodwill tied to its 2016 acquisition of Precision Castparts for $32.1 billion.
Berkshire's SEC filing notes that COVID-19 has wreaked havoc on the aerospace and airline industries (without using those exact words), and it's unclear how long these adverse effects will last. After incurring a pre-tax loss of $78 million in Q2, Precision Castparts announced an aggressive restructuring that led to the layoff of roughly 10,000 workers (30% of the company's workforce). Even after these layoffs, earnings are expected to be negatively impacted throughout 2020 as operational inefficiencies are dealt with.
Buffett has always been a stickler for value, but appeared to break his cardinal rule when purchasing Precision Castparts. This massive writedown could provide some context as to why the Oracle of Omaha is unwilling to pay a premium for an acquisition, or put the company's record cash pile to work.