In a recent filing to the Securities and Exchange Commission, Warren Buffett's Berkshire Hathaway (NYSE:BRK.B) took a firm stance by defending tis valuation methods for several of its equity investments. In the end, Berkshire Hathaway followed the SEC's demand and wrote down the value of the particular stocks, but not before the company responded in a public filing.
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Buying Cheaper than Buffett
While Berkshire's financial statements typically reflect write downs in value when stocks decline in price, Berkshire initially did not take write downs for five companies. According to the filing, Berkshire CEO Marc Hamburg stated that management is confident that each security's market price will grow to the intrinsic value that existed at the dates of acquisition. Naturally, such a confident statement from warranted a lot of attention.
Investors will want to take note: all five companies are currently trading at prices below what Berkshire paid for them. If Berkshire management is confident that prices will get back to at least "the intrinsic value at the time of acquisition", there could be some quality upside here. After all, Buffett only buys when prices are below intrinsic value. (For related reading, see Buffett Picks To Coattail.)
Strong Earnings Power
The five companies in question are Kraft Foods (NYSE:KFT), Wells Fargo (NYSE:WFC), U.S. Bancorp (NYSE:USB), Sanofi-Aventis (NYSE:SNY) and insurer Swiss Re. In all five cases today, these stocks trade for less than what Berkshire paid. For example, Berkshire paid between $32 and $35 for its Kraft shares. Today Kraft shares trade hands for $31.50 and yield almost 4%. Pharmaceutical company Sanofi-Aventis was purchased at prices ranging from $83 to $90 a share, which is well below the current $70 share price today (accounting for the two to one relationship between SNY ADRs and ordinary shares). The biggest unrealized loss at the moment comes from U.S. Bancorp. Berkshire paid between $29 and $34 a share, while shares are trading for less than $27.
In the SEC filing, Berkshire defended its positions by commenting on the strong earnings power and quality business operation of these five investments.
The Bottom Line
Ultimately, its likely Berkshire will make money on most, if not all, these investments. As such, investors have an opportunity to invest in some excellent companies at prices at a wider discount to intrinsic value than what Berkshire paid. But buyers beware: Buffett has a long holding period time horizon. Unless you are prepared to behave like Buffett, you may want to watch this unfold from the sidelines. (For more, see 4 Lesser-Known Companies Buffett Owns.)
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