We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. -- Warren Buffett
You can't miss the bear, or he's gonna turn around and rip you open like a present from your momma on Christmas morning.
-- Silas Botwin, Weeds (Pilot episode)
For as long as we've tracked it, Wall Street banker Stifel Nicolaus has practiced what Buffett preached. When investors were unnecessarily fearful, they bought -- and won. When the market got too frothy, Stifel counseled selling -- and won again.
Over the course of nearly four Foolish years of monitoring their progress, we've watched Stifel ascend to the very tippety top of the rankings on Motley Fool CAPS. At last report, the banker scored nearly 57% for the accuracy of its recommendations (a rare feat in CAPS-land), earning it our coveted "Wall Street's Best" icon. And so I make the following, modest suggestion: If you turn to anyone on Wall Street for advice on your investing, it might as well be Stifel. And here's what Stifel's saying today …
Sell Warren Buffett
Or more precisely, sell his holding company, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). And you've got to give Stifel credit. The analytical woods are full of analysts hunting small fry, but it takes real brass ... bullets ... to go bear hunting with Warren Buffett in your sights. One thing I'll say for 'em: Stifel's not scared of big game.
But why is Stifel stalking Berkshire by downgrading it last week? Basically, because as one of the biggest, most diverse companies out there, and a holder of some of the biggest brand names in American industry -- everything from Coca-Cola (NYSE: KO) to Home Depot (NYSE: HD), and Bank of America (NYSE: BAC) to Johnson & Johnson (NYSE: JNJ) -- Berkshire stock acts as a proxy for the American economy. And according to Stifel, our economy is in for some hard times.
According to Stifel, we're about to see a "2H10 economic retreat" as "declining consumer confidence will slow consumer spending, as employment very slowly recovers," and as "a shrinking appetite for increased public spending should limit the size of any future economic stimulus packages." All of which point to slower economic growth than a lot of investors are banking on.
Hush! Be very, very quiet. We're hunting bears
Refraining from the common Wall Street practice of slapping a "price target" on Berkshire, Stifel nonetheless does offer us its best guess at a fair price for Berkshire. Beginning with the observation that Berk-shares have outperformed the S&P 500 so far this year, Stifel warns they're fast approaching an "apex" and "poised for a correction."
How big a correction, you ask? Performing a sum-of-the-parts valuation on Berkshire's admittedly far-flung subsidiaries, Stifel posits a "fair value for the shares at about $104,000, about 13% downside from current levels." But is Stifel right?
Wanna hit the bear? Lay down a crossfire
As you've probably surmised by now, yes. I think Stifel is right about Berkshire's overvaluation. (The more so because ... I've said the same thing myself, and on more than one occasion.)
Berkshire loyalists will point out that Buffett derides the use of P/Es to value his company, advising investors to focus instead on the company's book value. Fair enough. According to the analyst, Berk-shares risk getting hit with a "double whammy" as, first, earnings take a hit as widespread economic weakness crimps sales, and second, the value of Berkshire's "equity portfolio and derivative positions expose it to additional book value pressure."
In other words, an economic slowdown won't just crimp profits at Berkshire per se. It will drop the share prices at all of the Berkshire holdings named above. And as the value of Coke and Home Depot, B of A and J&J plunge, so too will the value of Berkshire's book. I very much doubt investors, valuing the company on the basis of its book value, will relish this outcome.
You cannot miss the bear
For the better part of five decades, betting against Buffett has been a losing proposition for investors. Clearly, if you're going to take a shot at the Oracle of Omaha, you must aim carefully, and not pull the trigger till the time is absolutely right.
With the broader market having rebounded on no real economic news to back it up and Berkshire shares in particular now trading back within 5% of their 52-week high, I'd say the chances of scoring a hit today have never been higher. But make sure to keep your eyes peeled, and affixed to our scorecard on Motley Fool CAPS. Let's see if Stifel really can beat the odds and bag its bear.
