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Berkshire "Never Cheaper" Tilson


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Tilson says that BRK has never been cheaper (bit of a hyperbole there)  He is quoted as saying it is 1x pre-tax.  I don't know how he gets that but here is the short article from WSJ:

 

From Bloomberg, via WSJ:

 

Berkshire Hathaway ‘Never Cheaper,’ Says Tilson

 

    Bloomberg

 

 

Is the best value stock out there also the home of the world’s most famous value investor?

 

That’s the verdict of T2 Partners’ Whitney Tilson, who says the firm’s biggest position is Warren Buffett investment vehicle Berkshire Hathaway — a stock that’s “safe, cheap and growing at 8%-10% a year.”

 

He says Berkshire shares are trading at one time pre-tax earnings, a 40% discount to intrinsic value. “It’s never been cheaper than today,” he says, adding investors in Berkshire get “Warren Buffet to invest for you.”

 

Mr. Tilson, speaking at the Bloomberg Markets 50 summit, admits it is very hard for stock pickers to maneuver in today’s environment, but says there are still good stocks.

 

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Cheaper than in 2009 and 2000 (just barely considering the economic situation) is my conclusion as well.

 

 

Seems like BRK is more subject to market swings since it's inception in the S&P500 in jan 2010 and lately it follows financials rather closely.

 

Also, a couple of weeks ago I checked the performance of BRK's top 5 stock holdings (represents "only" $45b of BRK tho, but surely earnings aren't getting lower..?) and it shows a nice picture. On average the top holdings did +15% but BRK declined 15%. This doesn't show how undervalued BRK is or isn't, but it sure shows how things can change in 1 year. Who knows where the price will be in one year.

 

If the macro situation gets better, I wouldn't be suprised to see another buyback comment in February if the stock is below $75-80. Not that he would buy back stock, but the past shows he likes the stock to at least somewhat represent intrinsic value. Especially after his very clear explanation in this year's letter about their (Buffett & Munger's) calculation of IV. Just my guess!

 

I added even more 3 days ago. No 3/5-bagger but it is free money nonetheless.

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My guess about the 1x earnings thing is that he's talking about the implied valuation of the operating subs in a two-column valuation.  I haven't looked at the numbers, but that's about the only thing that makes sense of what was written.  Perhaps 1x projected normalized earnings for this year or next. 

 

"Is BRK cheap?" isn't really a question to me at this point.  Yes, it's very cheap.  It's hard to come to any other conclusion when looking at the numbers.  I'm mostly curious about why, and what will trigger a correction of that situation.

 

My guesses about the "why" include some combination of:

  • Buffett retirement penalty -- triggered and/or exasperated by the Lubrizol/Sokol issue (the opposite of the Buffett Premium)
  • Treated like a generic financial, thus getting taken down with the sector.  Similarly, the addition to the S&P 500 probably has the effect of making BRK trade more like a generic stock with flows into and out of index funds and ETFs
  • People simply don't understand BRK
  • Gates Foundation selling - a marginal impact at most I think

 

 

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Correct Zarley, he is talking about the two-column valuation which Buffett himself likes to use.

 

http://www.tilsonfunds.com/BRK.pdf

 

 

 

Another reason for the undervaluation of companies like BRK, LUK and BAM is that they are excluded from a lot of funds because of the way they are set up. A simple example : the PE ratio in combination with some other metrics just don't cut it, they are left out of the 'value screens' and are overlooked. I read an excellent article/paper on this and other facts some time ago but can't find it in my bookmarks! :(

 

 

 

I am not a big fan of Tilson but he was right in 2000 as well. Just a bit early. :D

 

http://www.fool.com/boringport/2000/boringport000214.htm

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Thanks tom, his points in 2000 are, of course, correct and are applicable today.  I'm lukewarm on Tilson generally, but I agree with his overall perspective on BRK.  I think he's a bit optimistic in his valuation approach, but not wildly so. 

 

Your post reminded me that a conglomerate discount and size penalty probably also apply to BRK.  Unfortunately, that means my list of reasons for a price discount to IV is populated mostly with items that aren't likely to change significantly going forward.  But, eventually, the value and earning power will be so compelling that a move toward IV is inevitable.  Buyback talk from Buffett would be an obvious catalyst for that; but I'm not really counting on it.

 

 

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Exactly, a move toward IV will occur someday. I don't really care when as long as BRK is able to increase BV at a decent pace while waiting.

 

I don't think Tilson is to optimistic tho. I have read other analysis where people claim BRK is worth $180k/share and more as well. Especially when you look at the potential a hardening insurance market and the improvement of US housing for example. If things turn out to be not as bad as a lot of people think, all of a sudden a lot of hidden value will be unleashed in the form or new earnings (insurance, housing and general improvement over time), stock holdings that gain significantely (WFC etc), value from warrants on BAC, GE, GS; etc.

 

I have no accurate estimate on IV and I don't believe it can be done anyway. I believe BRK is anywhere between 55-67.5c on the dollar at current prices unless the economy evolves into shit the coming months/years. I will probably be selling well below $160-180k/share so it doesn't really matter.

 

Btw, if I am not mistaken Berkowitz has almost 7.5% of FAIRX' assets in BRK. That is even more than his BAC investment which he believes is trading at 2 times pre-tax earnings before provisions. Do I really believe he has 7,5% of the fund's money in something that is only 75c on the dollar (just an example for the sake of my argument) while he can pick up stuff at 20-40c on the dollar? Of course he is diversified and he can always sell things like BRK for cheaper stuff if we go down even further, that is probably part of the reason for holding such a big position in BRK, BAM, LUK etc. But I bet he would prefer more cash instead if it was only at 70-75c on the dollar atm. To me it simply proves the level of undervaluation of some securities like BRK.  :-X

 

 

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Exactly, a move toward IV will occur someday. I don't really care when as long as BRK is able to increase BV at a decent pace while waiting.

 

I don't think Tilson is to optimistic tho. I have read other analysis where people claim BRK is worth $180k/share and more as well. Especially when you look at the potential a hardening insurance market and the improvement of US housing for example. If things turn out to be not as bad as a lot of people think, all of a sudden a lot of hidden value will be unleashed in the form or new earnings (insurance, housing and general improvement over time), stock holdings that gain significantely (WFC etc), value from warrants on BAC, GE, GS; etc.

 

I have no accurate estimate on IV and I don't believe it can be done anyway. I believe BRK is anywhere between 55-67.5c on the dollar at current prices unless the economy evolves into shit the coming months/years. I will probably be selling well below $160-180k/share so it doesn't really matter.

 

Btw, if I am not mistaken Berkowitz has almost 7.5% of FAIRX' assets in BRK. That is even more than his BAC investment which he believes is trading at 2 times pre-tax earnings before provisions. Do I really believe he has 7,5% of the fund's money in something that is only 75c on the dollar (just an example for the sake of my argument) while he can pick up stuff at 20-40c on the dollar? Of course he is diversified and he can always sell things like BRK for cheaper stuff if we go down even further, that is probably part of the reason for holding such a big position in BRK, BAM, LUK etc. But I bet he would prefer more cash instead if it was only at 70-75c on the dollar atm. To me it simply proves the level of undervaluation of some securities like BRK.  :-X

 

There are limitations on how much he can have in banks, that is why he has 5% in BAC, C, and RF ... and probably those apply to GS and MS too. BRK is very cheap just not crazy cheap.

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Exactly, a move toward IV will occur someday. I don't really care when as long as BRK is able to increase BV at a decent pace while waiting.

 

I don't think Tilson is to optimistic tho. I have read other analysis where people claim BRK is worth $180k/share and more as well. Especially when you look at the potential a hardening insurance market and the improvement of US housing for example. If things turn out to be not as bad as a lot of people think, all of a sudden a lot of hidden value will be unleashed in the form or new earnings (insurance, housing and general improvement over time), stock holdings that gain significantely (WFC etc), value from warrants on BAC, GE, GS; etc.

 

I have no accurate estimate on IV and I don't believe it can be done anyway. I believe BRK is anywhere between 55-67.5c on the dollar at current prices unless the economy evolves into shit the coming months/years. I will probably be selling well below $160-180k/share so it doesn't really matter.

 

Btw, if I am not mistaken Berkowitz has almost 7.5% of FAIRX' assets in BRK. That is even more than his BAC investment which he believes is trading at 2 times pre-tax earnings before provisions. Do I really believe he has 7,5% of the fund's money in something that is only 75c on the dollar (just an example for the sake of my argument) while he can pick up stuff at 20-40c on the dollar? Of course he is diversified and he can always sell things like BRK for cheaper stuff if we go down even further, that is probably part of the reason for holding such a big position in BRK, BAM, LUK etc. But I bet he would prefer more cash instead if it was only at 70-75c on the dollar atm. To me it simply proves the level of undervaluation of some securities like BRK.  :-X

 

There are limitations on how much he can have in banks, that is why he has 5% in BAC, C, and RF ... and probably those apply to GS and MS too. BRK is very cheap just not crazy cheap.

 

I think that no matter the macro situation BRK will be undervalued by the market until WB passes on and his successors have proven themselves.

 

That could take at least a decade or more...

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i have cash to buy bkb, and agree it has never been cheaper. One hesitation for me is the cost of foreign exchange and the currency risk. It is not appealing to convert  cdn dollars and pay foreign exchange on a buy and a sell, (2% each way?) and then possibly eat some currency also if the US$ drops. It makes the return hurdle more difficult. I guess the US$ to Cdn could work in my favour,  but it seems more likely it is going the other way.

 

 

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i have cash to buy bkb, and agree it has never been cheaper. One hesitation for me is the cost of foreign exchange and the currency risk. It is not appealing to convert  cdn dollars and pay foreign exchange on a buy and a sell, (2% each way?) and then possibly eat some currency also if the US$ drops. It makes the return hurdle more difficult. I guess the US$ to Cdn could work in my favour,  but it seems more likely it is going the other way.

 

I agree, but I don't see it like that. If I buy USD I will not convert back to CAD until I'm forced to convert of the CAD dollar trades at 0.60USD again. For me having a broker capable of holding USD and CAD in all my accounts was important. At least you don't pay spread everytime you do a conversion.

 

BeerBaron

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I think it is never cheaper becasue it is ever harder to compound BV.  I think the 8 to 10% is very aggresive given that they have only grown BV at little more than 50% over the past 5 years.  Just compare this to Berkley which has been able to double its BV.  Look a the BoA deal.  It represents maybe 3% of assets so if it is a home run 2x or 3x it will have a small impact on value.  I see this as a nice collection of assets that may someday be broken up for its parts.

 

Packer

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There are limitations on how much he can have in banks, that is why he has 5% in BAC, C, and RF ... and probably those apply to GS and MS too. BRK is very cheap just not crazy cheap.

 

Good point which I totally missed!

 

Define crazy cheap. I doubt BRK is something that will ever get "crazy cheap". It's like waiting for something like KO to trade at 3x earnings without hitting a severe depression. It just won't happen.

 

 

I think that no matter the macro situation BRK will be undervalued by the market until WB passes on and his successors have proven themselves.

 

That could take at least a decade or more...

 

Mr Market's short-sightedness works in both ways. I'll try not to be suprised by whatever happens and take advantage of it.

 

I think it is never cheaper becasue it is ever harder to compound BV.  I think the 8 to 10% is very aggresive given that they have only grown BV at little more than 50% over the past 5 years.  Just compare this to Berkley which has been able to double its BV.  Look a the BoA deal.  It represents maybe 3% of assets so if it is a home run 2x or 3x it will have a small impact on value.  I see this as a nice collection of assets that may someday be broken up for its parts.

 

Packer

 

 

BRK BV growth from 2006-2010 = 10% annually

S&P 2006-2010 dividends inc. = 2,3% annually

 

That was in an overal bad period. BV growth of more than 10% will occur again in better times. People are overfocusing on size and growth. They claim BRK isn't interesting anymore because of the diminishing returns while the company is still outperforming as we speak.

 

You will always find companies that grow faster and performe better. It's all relative compared to the ultimate price you pay for the value you get in return. Because I'm still in my early days of investing, I can't find anything that has a better combination: very high probability of a correct assessment of calculated IV (this one just applies to me... ;x), 55-67.5 cents on the dollar, still growing at slightly market outperforming pace, extremely safe with topmanagement. Anyone who can is smarter than me atm and that is fine! ;)

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BRK BV growth from 2006-2010 = 10% annually

S&P 2006-2010 dividends inc. = 2,3% annually

 

 

Aren't those two completely dissimilar measurements of performance?

 

Why not instead measure Berkshire share price performance vs the book value growth (+ dividends) of the S&P500 companies over that period?

 

Berkshire's price gained 5.5% annually.  Did the S&P500 book value growth (including dividends paid out) do better than this?

 

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I think part of  the reason for BV growth was the financial crisis and BRK's ability to buy cheap.  Without this event, the BV growth would have been less.  If we have another crisis and BRK can deploy its capital, then we may be able to repeat but if none occurs then continued growth will be a challenge given BRK's size as it will be dependent upon its businesses to grwo that much which is the aggregate is probably not in the cards. 

 

Packer

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BRK BV growth from 2006-2010 = 10% annually

S&P 2006-2010 dividends inc. = 2,3% annually

 

 

Aren't those two completely dissimilar measurements of performance?

 

Why not instead measure Berkshire share price performance vs the book value growth (+ dividends) of the S&P500 companies over that period?

 

Berkshire's price gained 5.5% annually.  Did the S&P500 book value growth (including dividends paid out) do better than this?

 

You raise a valid argument Eric. Just pointing out to the system Buffett uses to measure Berkshire's performance against the market. I believe that over time it gives a correct image of reality.

 

Here you see a longer list from this year's letter:

 

2000-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 (2.3) 10.3

2001-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 0.6 7.4

2002-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1 6.2 6.9

2003-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 12.8 0.5

2004-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 (2.2) 9.1

2005-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 0.4 8.2

2006-2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0 2.3 7.7

 

I am sure that in very strong bull markets Berkshire might start to underperform in some years based on this comparison. But in general it will still grow at least at market pace for some time to come.

 

@Packer: Correct but I think the effect was limited on Berkshire's ability to grow BV even more. No excessive amount of cash was deployed compared to investments in place before the crisis in my opinion. In aggregate both businesses and stocks just turned out to be quite recessionproof. It is true that the only reason for the great outperformance the last 5 years (06-10 period) was the crisis.

That is just what happens, in good times (03-07 period for example) outperformance will look lean or nonexistent and in bad times outperformance will be boosted. In reality the truth of true out/underperformance is somewhere in between as markets hover between over/undervaluedness.

 

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I agree with your statements however history has shown when the firm size approaches BRK it is very hard to grow because the above market return opportunities have a tendency to be relatively small.  BRK may be able to do it with Buffett at the helm but after he is gone, the situation may be different.  I think you have a key man issue.  In valuations, this can reduce the value up to 35% to 40% from FMV.  He will be able to outperform the S&P 500 but I do not see any of us buying the S&P 500 today so the comparison may be not applicable. 

 

The way I see it is BRK is a unique conglomerate because Buffett is at the helm.  He can source good deals and provide the last person standng capital for many businesses.  Normally, these conglomerates are not run the way BRK is run.  I just don't see after Buffett and Munger are gone that the firm will be run in the same way.  Buffett has had many years to put a succession into place but I do not see how it will work without a strong man/men, Buffett and Munger, running the ship and performing the capital allocation.  So far they have succession plans for the operations and to some extent for investments but not the secret sauce of the top position of capital allocation.  How will this work when you have the operations and investment guys calmoring for more capital when there is no guy to broker the conflict like there is today?  Who is going to take responsiblity for the captial allocation decision?  No one will have the vested interest Buffet has as his foundation will be selling his stock after he passes.  I just don't see this working without Buffett providing the direction.  In addition, given BRK's size, large share count and inclusion in the major indicies, I don's see it as under researched as in the past.  Just some contrary thoughts.

 

Packer

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>If we have another crisis and BRK can deploy its capital, then we may be able to repeat but if none occurs then continued growth will be a challenge given BRK's size as it will be dependent upon its businesses

 

BRK has more than one engine to grow - 

  1. Operating businesses recover or EPS grows or widen the moat in their fields

  2. Stock portfolio grows because the large caps recover

  3. Buy businesses - tuck in acquisitions and/or new businesses altogether

 

In addition to this, BRK stock to book has dropped from the historic average of 1.6 to 1.05 - 1.1 range. It is very cheap given the quality of the businesses.

Is it entirely possible that the drop in BRK valuation is a result of Buffett selling stock? It is comparable to the relative drop in valuation for MSFT, Mr Gates foundation is selling shares every day
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Beerbaron,

 

Who do you have your US$ RSP with? I am with Waterhouse, they do a partial solution with wash trades. They even setup your cdn account to automatically wash trade but for all the effort they put in to this program, they could have setup the US$ RSP. I don't think they want to do it. But even with wash trades, your US dividends are forced back to loonies. BMO appears to be coming with a new account. We should insist on this as investors.

http://www.canadiancapitalist.com/bmo-investorline-to-allow-u-s-dollar-registered-accounts/

 

 

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Beerbaron,

 

Who do you have your US$ RSP with? I am with Waterhouse, they do a partial solution with wash trades. They even setup your cdn account to automatically wash trade but for all the effort they put in to this program, they could have setup the US$ RSP. I don't think they want to do it. But even with wash trades, your US dividends are forced back to loonies. BMO appears to be coming with a new account. We should insist on this as investors.

http://www.canadiancapitalist.com/bmo-investorline-to-allow-u-s-dollar-registered-accounts/

 

I'm with Questrade. Their interface was crappy and it's slowly getting better. Their prices are really low for someone that does not do much trades.

 

There is more details in another thread.

 

BeerBaron

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