Why Kass Is Wrong About Berkshire Hathaway

While Berkshire Hathaway [BRKA] (BRK.A) may need to swim upstream in order to outperform by any significant margin, given its huge relative out-performance in the last eighteen months or so, the bear case seems more of a marketing strategy for a hedge fund manager than a well-reasoned investment strategy.

Since one of the highlights underpinning Mr. Kass's case seems to be the the supposed under-performance of four major holdings [Coca-Cola Co. (KO), Wells Fargo & Co. (WFC), Kraft Foods Inc. (KFT), and American Express Co. (AXP)], it would seem appropriate to dig a bit deeper into his claims about short and long-term performance, and their relative importance to the equity portfolio and look through earnings.

• Coca-Cola: It has certainly peaked and is 30% off its 1998 highs, but it is also 50% above the 2003 lows, and has substantially more than half of its earnings overseas (which are partly responsible for the strong relative showing since the lows). KO was somewhere between 25% and 35% of the equity portfolio in 1998 and 2003, and now constitutes less than 15% of the total portfolio, which is far less relative weighting to the total earnings (look through) and asset base as well.
• Wells Fargo & Co.: It was less than 10% of the equity portfolio in 2003 (unknown in 1998) and today, it is more than 15% due to growth in the portfolio and stock purchases. Certainly, one can't fault him for owning one of the top performing major banks in the country. I'll trust WEB's judgment on the long-term prospects of WFC before anybody else's.
• American Express: Once again it is up six-fold off cost basis, and still seems to be sitting pretty (relative to banks, credit car companies and broker dealers domestic and international) on both operational basis and source of non-dollar (look through earnings). It's not my favorite stock, but what could possibly be his time horizon for thinking this global powerhouse will falter. If not now, when?
• Kraft Foods Inc.: He bought here cheap; PG massive cap gains. Two global power house franchises with substantial non-dollar cash flow.

While betting that BRKA will see declines (perhaps 10% to 20% from highs) at any given time is reasonable, however, making strong claims about why the stock will fall based on the performance of four stocks that are less relevant now than they have been at any time in the last ten years seems disingenuous.

More so, given the fact that the string of multi-billion dollar acquisitions has accelerated in the last eight months. One can be fairly certain that the short seller is not considering putting a price target any lower than the recently reached 120,000 level, which would be plain silly. He also claims that the performance over the last ten years has diminished relative to the prior years. That is not surprising and may be factually correct. However it is misleading, since the performance over the last two, and five year periods has been stupendous on a relative basis, especially relative to financials.

Therefore, if he is trying to time a two-month trade fine, but that is something different than throwing up smoke about fundamentals giving selective performance and time horizons, and no time frame for his short call. The real question one should ask is, who (among institutions and hedge funds) owned BRKA stock over the last couple of years during this credit debacle, and who didn't.

It would be interesting to see how many (if any) big value (or any for that matter) funds performed better since last August. In addition, why are the big fund managers, who did not, still, holding their jobs? Most BRKA shareholders have slept comfortably, and will probably continue to do so. In fact, investors have one last chance to get on board for the next five years. Beyond that time, with a $300 or $400 billion market cap, it will certainly be a much bigger struggle to outperform.

Comments

[ValueInvestor]

Anyone that would bet against Berkshire and Warren must be crazy.

[BrianPursley]

It's the derivatives portfolio Kass has a problem with, not the equity portfolio.

[gokou3]

If Kass thinks there's a problem with the derivative portfolio, then Kass should long some European long-term index puts, so he would be the counter-party of BRK.

[FIG trader]

He is specifically is quoted as saying it is the performance of the four stocks as well as other things. Is he referring to the credit default swap which are under water by 1.5 Billion? Big F'n deal. WEB hasn't taken a multi-billion loss ever, except for catastrophe losses. I wouldn't lose sleep over a markdown on a credit he has studied. Or the index put sold at par. A 15/20 year bet. Fuggedaboutit. Kass will be 6 feet under as will WEB, but the cash will be compounding

[montag]

Kass is just like everyone else, positive or negative using the internet to coattail someones real world notoriety. Write a blog post an bash Warren, same as if it were a Britney post on a celeb blog. Kass is alot smarter then his articles makes him out to be, especially were the derivatives are concerned he will most likely not receive the fame he is seeking in a more broader audience as the man who sold Warren. Its all a bit sad.

[User 164258]

I never considered the idea that this could be a marketing play rather than a financial one. Good insight.

As far as shorting BRK, it does not make a lot of sense to me. The company has little leverage, other than its derivative portfolio, it has an extremely solid balance sheet. Everyone including WEB knows that company will not grow as fast in the future due to its size. And, the company does not sell for a huge valuation. Therefore, I see no catalyst that could occur that would suddenly drive the stock price down. Aren't there more interesting shorts out there? There has to be some highly leveraged companies selling for high valuations with yet to be determined true values of assets on their balance sheet.