Berkshire Q2 2020 report

[Valuehalla]

Buybacks:

 

I can not see a change in WEBs mind. On the day before the AM (2th May) BRK.B was at 182,67$, the days before even higher.  He said on 2th May the price is not more interesting than in January (when the price was in mid 220$ and he bought back). Also he reffered with his statement to the current moment.

 

1) Buyback prices of 175$ in May are app 5 % cheaper than the 183$ before his statement.

2) It is not our aim as shareholders that WEB creates the impression of "strong buybacks are coming next week." They shall do buybacks as cheap as possible. It is very smart to give a statement like he has done, to get ready for buybacks and start them massivly.

 

Meanwhile the Coronadust on the battlefield has settled down, there is no panic anymore and right now i estimate a BV of 175$ the B share (like yearend 2019). So we are trading right now just 20 % above BV with 210$.

 

175 $ + 30 % is app 228 $ (after the older buyback rule BV+30%).

if you add 45 % to reach app IV it is 254 $ (after the new buyback rule).

 

3) So I expect no further comments from him (would even be negativ to inform the public about further buybacks) and I expect he will go on with heavy buybacks till minimum 228 $ (like January). All information according buybacks is given in the written reports/decissions, now he is just silently exercising them. It is contraproductive to ring the bell before or while doing it.

 

Concerning the cashpile and additionally the incoming cash, he can easily buyback half of the outstanding shares within 10 years. Think about that....

[John Hjorth]

Very nice to see you back, Valuehalla! [ : - ) ]

[kab60]

I'm also in the camp of no surprises re buybacks, but glad he didn't let us down. There was a long period post the AGM where it traded around the lows - or between 170-180 - despite the broad rally and way less uncertainty. The old man is pretty smart. He didn't bottom tick but he probably got the best possible risk/reward.

[Guest longinvestor]

Yes Omaha can buy back half or at least a third of the shares back but the stock has to be at “salivating “ levels for the 90 year old in charge. Perhaps the next guy drools easier. In essence the market has to cooperate by keeping the discount intact. In other words, bring on more hate

[Spekulatius]

I must be the only one here genuinely astonished to see the $10 billion write off on the PCP.

That was a $32 billion purchase and seeing a third of its value impaired was shocking. It was one thing with the airlines (which are genuinely the weakest link in the aerospace value chain) but a write off on PCP, which you cannot reverse, was surprising.

 

Am wondering if I will see RTX write off a portion of its Rockwell Collins purchase, which had a cash component to it. Unfortunately asset bought whole or mostly by cash have the most to lose in an impairment. Unlike a stock purchase where the burden (Dilution) is shifted on shareholders.

 

If the airline bet went sour the way Oxy bet went sour, I hope there is no parallel in the bulked up oil and gas with Diamond going sour some years from now just like PCP did today.

 

The PCP purchase was a dud before COVID-19 so I am not surprised by the write down. I would like to see a post mortem  from Warren or Munger would be interesting.

[sleepydragon]

I might be wrong but I think for corporations your long term capital loss can’t be used against income and can only be carried forward for 3-5 years.

So if WEB did sold WFC he would need to sell some other stocks with enough profits to harvest the tax loss?

 

[gfp]

I might be wrong but I think for corporations your long term capital loss can’t be used against income and can only be carried forward for 3-5 years.

So if WEB did sold WFC he would need to sell some other stocks with enough profits to harvest the tax loss?

 

Berkshire's cost basis on the WFC shares it still held in 2020 was/is $20.365 / share.  There won't be a loss if they have in fact been sold.

[Spekulatius]

It seems to me that Berkshire just recycled capital in low risk bets. They sold airlines and WFC and bought higher quality BAC and their own shares.

[Xerxes]

^^^ bulls-eye

 

Folks,

On page 2 of the report, it is comparing the B/S snapshot from Dec 2019 to close of Q2 (i.e. June 2020).

What do you think is the pacer behind the $48 billion reduction in equity securities. This is not end of Q1 that had huge downdraft, some of it came back with the bounce back. Also about $50 billion seems to have flown into U.S. T-Bills during the same six months period.

 

 

ASSETS

Insurance and Other:

Cash and cash equivalents                    32,318      $ 61,151

Short-term investments in U.S. T-Bills  110,518        63,822

Investments in fixed maturity securities 19,210          18,685

Investments in equity securities            207,454        248,027

 

 

EDIT:

Q1 had $68 billion loss in the investment portfolio

Q2 had $39 billion gain in the investment portfolio

 

Net for the six months comes to $29 billion loss; so that means the bounce back, notwithstanding Apple, didn't undo most of the carnage of Q1.

 

 

 

[Gregmal]

Thats certainly plausible, but is also a significant deviation from his attitude in early May. In May, he wasn't even certain the cash hoard would be sufficient. The stock was cheaper, by his own admission, at 225 in February. I'd suggest rewatching the AGM. There were folks here and other places, who were debating selling their stock because of how downbeat he sounded. Going from that to then potentially repurchasing the same amount of stock they did in all of 2019, inside of what was a 4-6 week window....definitely something changed.

 

Put another way, if the stock was cheaper in February(when they bought 1.75B for the ENTIRE quarter), and the cash on hand wasn't enough under some scenarios, no way this guy is pouring money into buybacks at a record pace.

[Xerxes]

On Kraft Heinz:

Note 5. Equity method investments (Continued)

As of June 30, 2020, the carrying value of our investment in Kraft Heinz exceeded the fair value based on the quoted market

price by $2.7 billion (20.6%). In light of that fact, we evaluated our investment in Kraft Heinz for impairment. We utilize no brightline tests in such evaluations. Based on the available facts and information regarding the operating results of Kraft Heinz, our ability

and intent to hold the investment until recovery, the relative amount of the decline, and the length of time that fair value was less than

carrying value, we concluded that recognition of an impairment loss in earnings was not required. However, we will continue to

monitor this investment and it is possible that an impairment loss will be recorded in earnings in future periods based on changes in

facts and circumstances or intentions.

 

They performed no impairment as they judged the market value 20% discount to carrying value to be temporary. For reference in Q1, the gap stood at 40%, which had narrowed considerably by close of Q2.

 

Yet, on PCP, which has no publicly traded quote [so no pressure to write-off], based on their DCF model and carrying value, they took the axe right away.

 

This says either PCP was deeply overpaid, as indicated earlier by Spekulatius [i think Semper Augustus fellas also alluded to that as well], or BRK really sees aerospace value chain severely impaired. Or both.

 

It is almost as if they took it as an opportunity to take the axe.

 

I believe although under heavy pressure, the value chain is not severely impaired, given that the OEMs need to maintain a steady but lower production rate, even if airlines cannot intake them. The alternative is loose entirely their supply chain. i.e. Airbus cut its rate on A.320 from 60 per month to 40 and will not get below that.

 

 

 

[Gregmal]

As for the Gates theories, I dont buy it either. Bill is one of MANY, MANY resources available to Berkshire. Gates pitched Buffett hard on buying MSFT a long time ago; Warren didnt get it, and didnt do anything. Look at the stocks that make up the majority of the Gates portfolio. Definitely more WEB influenced than Gates(with a couple exceptions). Oh yea, and the fact that Gates was buying stocks in Q1. Which is not to say Gates was bullish, but he clearly was OK buying the same stocks WEB often laments missing, while WEB himself, did not. If it was Gates, well than I think that needs to channel an entirely different bunch of queries. Such as, when the going gets tough, how do I feel about Bill Gates being the shot caller at BRK?

 

I think the much more plausible scenario is that as things progressed, specifically mid to late May, it became obvious that while some of the already shut down states like NY/NJ etc would probably be shutdown for a long time, most of the rest of the country would open back up and people clearly weren't going to change their long term behaviors. Memorial Day I think was kind of a wake up call for many. Warren probably realized this, and while valuations arent by any means cheap, the other side is that now we have an economic reset, and subsequently, a low base(data wise) similar to what we had in 2010-2012, a point in time when many also felt the market was in a bubble and propped up by the Fed. The next piece of the puzzle may be revealed in a week or so, when Q2 positions get disclosed.

[Cigarbutt]

Here is an updated list of %s of cash, equivalents and ST bills in Insurance and Other over SE. (from a thread with a different line of thought, November 3rd 2019, pre-virus)

1995    16%        2000      9%          2005      44%            2010      21%            2015      26%          Added:          Q4 2019    29%

  96      6%            01        9%            06        35%              11      20%              16        25%                              Q1 2020    36%

  97      3%            02        16%          07        31%              12        22%            17        32%                              Q2 2020    37%

  98      24%          03        40%          08        22%              13        19%            18        31%

  99      7%            04        47%          09        21%              14        24%          Q319      31%

 

And using a simplified liquidity to cash coverage as defined by Brooklyn Investor:

http://brooklyninvestor.blogspot.com/2017/11/is-buffett-bearish.html

Updated numbers about 'coverage':

2017:      112%            Added:          Q4 2019    106%

2018:      101%                                Q1 2020    110%

Q3 2019: 107%                                Q2 2020    117%

From a coherence point of view, it was suggested in early November that Mr. Buffett had lost it because shares were not aggressively bought back when the B shares were at 215-220. Since then, using a long term lens and a sustainability bias, Mr. Buffett has been able, even while opportunistically increasing buybacks, to increase liquidity and financial flexibility. The above numbers have evolved since the 2010-2 period and the World keeps changing and it seems the thinking is anchored on the long term.

[Xerxes]

Bloomberg pegs at $12.8 billion of stock sale in Q2 alone (which I believe is net of new buys in Q2) and calls it the most in a decade.

 

https://www.bloomberg.com/news/videos/2020-08-10/warren-buffett-bets-on-berkshire-hathaway-video

[LearningMachine]

I calculate below about $15B of securities sold in Q2.  Some of it was the airlines before the AGM. I wonder if he also sold some of the remaining banks or maybe the overpriced AAPL (even though Q2 statement says AAPL is part of top four holdings)?  At the time he sold these stocks in Q2, he probably didn't know that BAC price was going to get attractive in Q3 for him to purchase more.  If the sales had been after BAC purchase, it would have been more likely to be banks for him to avoid conflict of interest with other banks.  However, sales were a lot before BAC purchase.  So, could it be overpriced AAPL or something else, or he disliked some banks so much that he wanted to sell them even when he didn't know he was going to buy more of BAC?  WFC holdings are about $8.6 B, JPM is $5.7B, USB is $5.6 B and BK is $3.3 B.

 

-----------Calculation of $15B stock sales ----------------

We know already that between April 23 and July 7, 2020, he bought 19,374.65 BRK class A equivalent shares.  Assuming he was able to get it for about $170 per Class B share, that is, for $255,000 per class A share, and assuming further that the purchases were entirely in Q2, he spent about $5 Billion buying back BRK in Q2.

 

Despite that, the cash position went up from $137B  to $147B in Q2.  5+10=15 Billion

 

The Dominion purchase was announced on July 5.  So, that wasn't in Q2.  BAC purchases were started on July 28.  So, not in Q2 either.

 

[John Hjorth]

With regard to the AAPL position, has anyone of my fellow board members tried to tie the value in the "Big Four" statement to the last known share count for AAPL shares held by Berkshire? [bRK plus NEAM numbers [, if any]].

[mattee2264]

 

I think back in May Buffett was worried about psychological and economic scarring and therefore a difficult and protracted economic recovery.

 

But helped by generous government handouts and a cavalier approach to reopening the economy consumers are back to their free spending ways and that is driving a much faster and stronger recovery than anticipated. Plus Berkshire's operating earnings held up pretty well and there was of course a nice non-operating unrealized gain from Apple's astounding ascent.

 

But even so I wouldn't say he is bullish. He sold out of airlines and trimmed some of his bank positions and purchased his own stock at a modest discount to intrinsic value and did a small private transaction buying some gas pipelines. Meanwhile he still has almost $150B in cash.

 

 

 

 

[John Hjorth]

With regard to the AAPL position, has anyone of my fellow board members tried to tie the value in the "Big Four" statement to the last known share count for AAPL shares held by Berkshire? [bRK plus NEAM numbers [, if any]].

 

Heck, here we go :

 

AAPL closing price EOP 2020Q2 : 364.80 [source : Yahoo! Finance]

 

AAPL shares held EOP 2020Q1 by Berkshire : 245,155,566 [source : Dataroma]

 

AAPL shares reported by NEAM EOP 2020Q1 :1,452,250 + 3,578 [= 1,455,828] [source : NEAM 13-F/HR EOP 2020Q1]

 

Total : 246,611,394

 

Calculated market value EOP 2020Q2 : 246,611,394 * 364.80 = 89,963,836,531.

 

"Big Four" comment states "$ 91.5 billion".

 

So there was added to the position during 2020Q2?? [ 0_0 ] -Did I get it right?

[Ballinvarosig Investors]

Yeah, it seems like he either dumped Wells or JPM (or a lot of both).  Sold 2% of JPM as of last 13F, so could be continuation of that.  I think JPM basis is $6 billion and some change.  The Wells would have triggered like a billion realized gain this quarter, I think if he closed out the position.

If Berkshire had sold out of WFC, surely they would have had to file a 13D to indicate that their stake is below 5%?

 

I think he probably sold quite a bit of WFC, but I wouldn't be surprised if he blew out JPM entirely. Out of all Berkshire's financials, JPM are probably the most exposed to unsecured consumer lending, which is probably not a place where you want to be in this environment.

[gfp]

I put it in the very first post in this thread.  No material change in Berkshire's Apple position.

 

You take $91.5 Billion and divide by AAPL quarter end closing price, $364.80.

 

This spits out the number of shares owned by Berkshire - approximately 250.8 million shares.  Which is unchanged.  Dataroma is not going to show an accurate share count for some Berkshire portfolio positions, but the Annual Report does, and the thread on this site on Berkshire Holdings also shows accurate holdings.

 

With regard to the AAPL position, has anyone of my fellow board members tried to tie the value in the "Big Four" statement to the last known share count for AAPL shares held by Berkshire? [bRK plus NEAM numbers [, if any]].

 

Heck, here we go :

 

AAPL closing price EOP 2020Q2 : 364.80 [source : Yahoo! Finance]

 

AAPL shares held EOP 2020Q1 by Berkshire : 245,155,566 [source : Dataroma]

 

AAPL shares reported by NEAM EOP 2020Q1 :1,452,250 + 3,578 [= 1,455,828] [source : NEAM 13-F/HR EOP 2020Q1]

 

Total : 246,611,394

 

Calculated market value EOP 2020Q2 : 246,611,394 * 364.80 = 89,963,836,531.

 

"Big Four" comment states "$ 91.5 billion".

 

So there was added to the position during 2020Q2?? [ 0_0 ] -Did I get it right?

[gfp]

You definitely could be right on the stock moves - but I don't think Berkshire would have to file a 13D.  I've been surprised before when I thought Berkshire needed to file at 5% and never did.  Apple - as a recent example - BRK never filed anything when it crossed above 5%.  I've read the 13d and 13f rules in the past and thought they indicated Berkshire had to file at 5% and yet BRK doesn't.  Maybe the quarterly disclosures of holdings are enough for BRK unless they intend to go activist or something.  Or maybe there is a carve out for Insurance companies.  I don't know the reason.

 

He would show a loss on JPM, so selling it would fit the tax loss selling narrative.  He could have also dumped BK.  We'll find out in a week I guess

 

Yeah, it seems like he either dumped Wells or JPM (or a lot of both).  Sold 2% of JPM as of last 13F, so could be continuation of that.  I think JPM basis is $6 billion and some change.  The Wells would have triggered like a billion realized gain this quarter, I think if he closed out the position.

If Berkshire had sold out of WFC, surely they would have had to file a 13D to indicate that their stake is below 5%?

 

I think he probably sold quite a bit of WFC, but I wouldn't be surprised if he blew out JPM entirely. Out of all Berkshire's financials, JPM are probably the most exposed to unsecured consumer lending, which is probably not a place where you want to be in this environment.

[A_Hamilton]

You definitely could be right on the stock moves - but I don't think Berkshire would have to file a 13D.  I've been surprised before when I thought Berkshire needed to file at 5% and never did.  Apple - as a recent example - BRK never filed anything when it crossed above 5%.  I've read the 13d and 13f rules in the past and thought they indicated Berkshire had to file at 5% and yet BRK doesn't.  Maybe the quarterly disclosures of holdings are enough for BRK unless they intend to go activist or something.  Or maybe there is a carve out for Insurance companies.  I don't know the reason.

 

He would show a loss on JPM, so selling it would fit the tax loss selling narrative.  He could have also dumped BK.  We'll find out in a week I guess

 

Yeah, it seems like he either dumped Wells or JPM (or a lot of both).  Sold 2% of JPM as of last 13F, so could be continuation of that.  I think JPM basis is $6 billion and some change.  The Wells would have triggered like a billion realized gain this quarter, I think if he closed out the position.

If Berkshire had sold out of WFC, surely they would have had to file a 13D to indicate that their stake is below 5%?

 

I think he probably sold quite a bit of WFC, but I wouldn't be surprised if he blew out JPM entirely. Out of all Berkshire's financials, JPM are probably the most exposed to unsecured consumer lending, which is probably not a place where you want to be in this environment.

 

You are missing the fact that a company can go over 5% and be a 13G filer. This is a passive investor who owns over 5%. A 13G only needs to be filed once per year within 45 days of year end. There is no incremental filing needed until you get to a position over 10% or intend to become activist (then you'd need a 13D for activist and also become a deemed insider and Form 4 filer if over 10%).

[Munger_Disciple]

One thing I found interesting is that Berkshire's equity portfolio returned approximately -12% (vs. total return of -3.1% for the S&P 500 index) during the first half of 2020 despite heavy allocation to AAPL. Result of the carnage in financials and airlines this year.

[gfp]

I've had quite a few newer investors ask me about Berkshire's "big buyback" policy and it seems like folks expect this to be ongoing.  Looking at Page 47 of the 10-Q, it is very clear that this level of buyback was extremely price sensitive.  Look at these average prices and the average prices likely achieved during the month following quarter end.  Berkshire is likely back to their dribs and drabs at $215/share.  I had folks extrapolating $30 Billion annual buybacks to me...

 

[gfp]

BNSF made another $1.3 Billion in cash distributions to Berkshire for the quarter, up from $1.1 Billion in Q1.  $2.4 Billion for the first 6 months, unchanged from 2019.

 

BNSF LLC 10-Q:

https://www.sec.gov/Archives/edgar/data/934612/000093461220000018/llc6302010q.htm