Despite moderately lagging the stock market in recent years, Warren Buffett's Berkshire Hathaway Inc. (BRK.A) has still been regarded as one of the premier U.S. companies, a model for other companies to follow and for investors to own. But in 2019, Berkshire has been crushed by the S&P 500, which has risen nearly 20% while Berkshire has risen just over 1%. This comes as one-time major holders are selling one of the nation's biggest investment funds, Oregon’s Public Employees’ Retirement Fund, which has slashed two-fifths of its Berkshire stock investment, as outlined by Barron’s.
Shares of Berkshire Hathaway, run by one of the most legendary investors and philanthropists of our time, are now sharply lagging the broader market as the S&P 500 reaches new highs in 2019.
Who Will Be the Next Buffett?
The leadership of Buffett, and his long-time business partner Charlie Munger, is a difficult, if not impossible, act to follow. Berkshire's stock is suffering in part due to investor concerns regarding Buffett's age, which brings about questions about who the next CEO will be, how they will spend Berkshire’s mounting cash pile, and how they will manage a poor investment decision.
As Buffett nears his 89th birthday in August, many expect him to appoint one of two top Berkshire executives – either Greg Abel, the CEO of Berkshire Hathaway Energy Co., or Ajit Jain, Berkshire Hathaway’s chair of Insurance Operations. In 2015, Buffett said he had the “right person” to succeed him as CEO, “ready to assume the job the day after I die or step down.” He never elaborated on these comments.
Whoever assumes the role will need to decide how to spend over $110 billion in cash. While Buffett has hinted that he’d like to make another big acquisition, the market’s rally makes for slim pickings amid expensive targets. This individual will also have a major part in a joint healthcare venture with Amazon.com Inc. (AMZN) and JPMorgan Chase & Co. (JPM) called Haven, intended to lower healthcare costs for employees.
Kraft Heinz Mistake
Buffett suffered “a reputational and financial black eye” earlier in 2019 thanks to a $1 billion paper loss that the Omaha, Nebraska-based company wrote down when Kraft Heinz Co. (KHC), the struggling consumer staples giant and one of Berkshire’s larger investments, sank. The company posted a $15.4 billion write-down for its Kraft and Oscar Mayer brands, and other assets, cut its dividend and said the SEC was investigating its account.
Back in 2015, Buffett backed the merger of H.J. Heinz and Kraft Foods Group that created the company. He now says Berkshire overpaid for Kraft, but offered no plan on exiting the investment. Shares of the packaged food behemoth are down over 46% over the recent 12 months, lower near 26% in 2019.
Kraft isn’t the only one of Berkshire’s holdings that is lagging the broader market’s rally this year. Wells Fargo Corp. (WFC) one of Buffett’s favorite stocks, has also underperformed. Wells Fargo faces a significant challenge finding the right leader to help it clean up its image after a series of scandals. That said, Apple Inc. (AAPL), Berkshire’s largest holding, is up 32.4% YTD.
Pension Fund Cuts Berkshire Stake
In the second quarter, Oregon’s Public Employees’ Retirement Fund cut its holding in Berkshire by selling over 140,000 Class B shares. The pension fund, which ranks No. 42 in the list of largest public pensions in the world by assets, now owns about 223,000 Class B Berkshire shares. Since the Q2 sale, Berkshire shares have sank even further.
While bears fear the Berkshire investors have become too reliant on Buffett’s individual leadership and past successes, overlooking the issues facing Berkshire today, others remain optimistic about the future of the conglomerate.
“The stock is very cheaply valued, given the long-term growth opportunities in insurance, Burlington Northern, and its manufacturing, service, and retail businesses. There’s also the ability to create value through significant acquisitions and share repurchases,” according to Barclays analyst Jay Gelb. An earlier Investopedia story outlined five reasons Buffett’s fans see Berkshire’s depressed value as an attractive time to buy.