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1 Question Berkshire Hathaway Has to Answer

By Matthew Frankel, CFP® – Sep 15, 2020 at 6:52AM

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Here's the No. 1 question that could change the investment thesis.

Berkshire Hathaway (BRK.A 0.35%) (BRK.B 0.40%) has a cash problem. For years, Berkshire's operating businesses have been generating billions of dollars, but CEO Warren Buffett and his team haven't been able to find many attractive opportunities to put that money to work. The cash has built up, reaching nearly $147 billion on the balance sheet at the end of the second quarter.

The past couple of months have provided a glimmer of hope. So far, the third quarter has been Berkshire's most active period of investment in years. This begs the question: In the minds of Warren Buffett and Berkshire's other investment managers, is it finally time to invest again?

Warren Buffett smiling at an event.

Image source: The Motley Fool.

Berkshire's recent moves

After being a net seller of stocks in both the first and second quarters of 2020 -- much to the disappointment of many investors -- Warren Buffett and the rest of Berkshire's team have made some big moves in the past few months.

Just a few days after the second quarter ended, Berkshire announced it was acquiring Dominion Energy's (D 0.82%) natural gas assets in a deal worth approximately $10 billion, including the assumption of debt. Berkshire's actual cash outlay was $4 billion, but it was still Berkshire's first notable investment (stock or acquisition) in some time.

Shortly after the Dominion deal was announced, Berkshire added to its Bank of America (BAC 0.24%) stock investment. And then it added some more. And some more. In all, Berkshire spent more than $2 billion increasing its already large stake in the megabank to nearly 12% of outstanding shares, worth more than $26 billion at current market values.

In late August, Berkshire announced that it had acquired stakes of more than 5% in five large Japanese companies, a total investment of roughly $6.5 billion built over a 12-month period.

Most recently, it was revealed through a regulatory filing that Berkshire has agreed to invest over $500 million in cloud data company Snowflake's upcoming IPO. This investment was most likely initiated by one or both of Buffett's two stock-picking lieutenants, Ted Weschler and Todd Combs. Both are much more comfortable with the technology sector than Buffett.

In all, these investments represent total capital of about $13 billion. This is still a small fraction of the $147 billion in cash Berkshire had on its balance sheet at the end of the second quarter, but it's the most aggressive Berkshire has been with its cash in a long time.

Is Berkshire finally comfortable with investing again?

There may be more investment activity going on right now than we know. We're only aware of the Bank of America investment because Berkshire owns more than 10% of the bank and is thus subject to disclosure rules. We won't know what else is going on in Berkshire's stock portfolio until the company releases its 13F filing for the period, which won't happen until mid-November. Not to mention that there are still three weeks left in September; given the recent volume of Berkshire headlines, I don't think anyone would be surprised to see another investment announced.

Here's the takeaway. The recent moves by Berkshire suggest that Warren Buffett and his team are finally ready to put money to work, which could signal that the worst of the pandemic's effects on the market are over. Buffett loves investing when stocks are cheap, but not necessarily when they're volatile like they were in the second quarter. The activity might signal that Buffett believes things have calmed down and are likely to stay that way.

The big unanswered question is whether Buffett feels comfortable enough to keep deploying capital, and hopefully "fire his elephant gun" (that is, make a big acquisition). After all, even after the relatively aggressive investment activity lately, Berkshire still has more than $130 billion left to play with.

Matthew Frankel, CFP owns shares of Bank of America and Berkshire Hathaway (B shares) and has the following options: short January 2021 $23 puts on Bank of America. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Dominion Energy, Inc and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Bank of America Stock Quote
Bank of America
$37.70 (0.24%) $0.09
Berkshire Hathaway (A shares) Stock Quote
Berkshire Hathaway (A shares)
$478,675.55 (0.35%) $1,655.56
Berkshire Hathaway (B shares) Stock Quote
Berkshire Hathaway (B shares)
$317.43 (0.40%) $1.25
Dominion Energy, Inc Stock Quote
Dominion Energy, Inc
$61.53 (0.82%) $0.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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