Berkshire Hathaway Chairman and CEO Warren Buffett.
Andrew Harnik | AP
Warren Buffett’s loyal following of worth buyers is about to listen to from the legend himself, at a vital time when rates of interest have soared and recession fears are raging.
The 92-year-old chairman and CEO of Berkshire Hathaway is slated to launch his annual shareholder letter Saturday morning, together with the conglomerate’s newest quarterly earnings. The letter from the “Oracle of Omaha” has been required studying for buyers for many years, and this yr’s message is especially anticipated given the altering investing panorama.
Notably, there’s been a sea change in Treasury yields, which have surged to the very best stage for the reason that World Monetary Disaster amid the Federal Reserve’s aggressive charge hikes. Six-month and one-year yields have each surpassed 5% for the primary time since 2007, whereas the benchmark 10-year Treasury yield sits slightly below 4%. After greater than a decade of close to zero rates of interest, the sharp rise in yields may dent the attraction for equities and harm asset costs, Buffett stated beforehand.
“Rates of interest are to asset costs, you understand, form of like gravity is to the apple,” Buffett famously stated at Berkshire’s annual assembly in 2013. He believed that when rates of interest are excessive, it might be a significant “gravitational pull” on values.
“We’ve a roughly 15-year interval of abnormally and traditionally low rates of interest. The quick time period charges we’ve got now are extra regular,” stated David Kass, a finance professor on the College of Maryland’s Robert H. Smith Faculty of Enterprise. “Rates of interest are the primary determinant of fairness costs, to cite Buffett, so I feel I am on the lookout for and anticipating a dialogue on rates of interest.”
Maybe that defined why Berkshire was doubtless a internet vendor of shares within the fourth quarter. The conglomerate dumped a good portion of Taiwan Semiconductor, a chip inventory it had simply purchased within the third quarter. Berkshire additionally slashed its shares in Financial institution of New York Mellon and US Bancorp final quarter.
In the meantime, due to rising charges, Berkshire’s mountain of money — practically $109 billion on the finish of September — has contributed significant earnings to the conglomerate, which held $77.9 billion in U.S. Treasury payments.
“One remark Buffett might make in his letter is that it is not so painful to be sitting in money. There may be an alternate now and it is referred to as Treasury payments, or quick time period Treasuries,” Kass stated.
Extra offers?
The rising-rate setting may additionally profit Buffett’s well-known deal-making. Not solely as a result of falling asset costs, however as a result of he additionally has ample liquidity to faucet into, whereas his rivals reminiscent of personal fairness corporations need to borrow to make offers.
“Non-public fairness and others who’re pondering of constructing acquisitions must go into the market to borrow [at] greater rates of interest. This is able to confer a aggressive benefit again to Berkshire,” Kass stated.
Berkshire purchased insurance coverage firm Alleghany for $11.6 billion in money final yr, its greatest deal since 2016.
Huge power bets
Buffett continued to spice up its place in Occidental Petroleum over the previous yr, with Berkshire’s stake within the oil large topping 21%. In August, Berkshire acquired regulatory approval to buy as much as 50%, spurring hypothesis that it could ultimately purchase all of Houston-based Occidental.
Many are keen to seek out out if Buffett has an urge for food for nonetheless extra Occidental shares, given the oil and fuel producer’s underperformance in 2023. The inventory is down about 6% this yr, buying and selling under $60 after greater than doubling in 2022.
“He is been demonstrating plenty of self-discipline right here because it pertains to shopping for OXY shares within the open market,” stated James Shanahan, a Berkshire analyst at Edward Jones. “There’s solely a few events that he spends greater than $60 a share to amass Occidental inventory.”
In the meantime, Chevron remained Berkshire’s third largest fairness holding on the finish of 2022, behind solely Apple and Financial institution of America.
Geico’s weak point
Traders are additionally excited about any updates on Berkshire’s working companies in mild of a looming recession.
“As a shareholder, what I am most enthusiastic about is an replace on the underlying working enterprise,” stated Invoice Stone, CIO at Glenview Belief and a Berkshire shareholder. “We have already seen the publicly traded portfolio. I am frankly extra excited about how nicely the underlying companies are working and his view of the strengths and weaknesses.”
Berkshire’s auto insurance coverage firm Geico has been beneath strain currently with consecutive quarters of underwriting losses.
“What (if any) corrective actions is Berkshire taking to treatment this case? A lot of GEICO’s friends are grappling with the identical points and have raised premium charges to counter the antagonistic declare tendencies,” Catherine Seifert, CFRA’s Berkshire analyst, stated in a be aware.
Buybacks
Buffett watchers are additionally on the lookout for his commentary on buybacks.
Berkshire’s tempo of share repurchases slowed final yr, having purchased a complete of $5.25 billion by way of the tip of the third quarter. That was markedly slower than the tempo in 2021, when Berkshire purchased again a document $27 billion of its personal shares as Buffett discovered fewer exterior alternatives within the midst of a sky excessive bull market.
Buffett himself advised shareholders at its annual assembly final yr that he prefers shopping for stakes in different corporations quite than repurchasing his personal shares.
“If we’ve got the selection of shopping for companies that we like, or shopping for again inventory — the controlling issue’s how a lot cash we’ve got — we might quite purchase companies,” Buffett stated in April in Omaha.