The bear market for stocks hasn’t even spared Warren Buffett’s Berkshire Hathaway, as the stock has dropped almost 20 percent since December.
That’s almost a third more than the 15 percent decline in the S&P 500 stock index during the same period. It also constitutes the worst first-half of a year for the company since 1990, Bloomberg News points out.
Buffett warned shareholders in February that profits in the company’s key insurance business would slide, after Berkshire reported record net income last year of $13.2 billion.
“That party is over,” Buffett wrote in his annual letter to shareholders. “It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008.”
Three of Berkshire Hathaway’s 10 biggest stock holdings as of March 31 have tumbled recently. Wells Fargo, Berkshire’s second-biggest position, plummeted 18 percent in the second quarter, while American Express and U.S. Bancorp dropped 14 percent.
Berkshire has suffered from the decline in commercial property insurance rates from their lofty levels after Hurricane Katrina in 2005.
Property and casualty rates in the U.S. fell 14 percent in the first quarter of this year from the same period in 2007, according to a survey by the Council of Insurance Agents and Brokers.
Berkshire, which owns National Indemnity, General Re Corp. and Geico Corp., endured a 70 percent plunge in earnings from insurance underwriting in the first quarter, to $181 million. Pretax underwriting profit at Berkshire’s catastrophe insurance unit tanked 95 percent.
The housing slump also is hurting Berkshire’s construction-related units, including Acme Brick, wallboard maker Johns Manville, and Shaw Industries, the world’s largest carpet maker.
Berkshire shares closed at $120,100 yesterday, down more than 19 percent from its record close of $149,200 Dec. 10.
Experts are divided as to whether Berkshire shares represent good value now. Berkshire is “close to getting more fairly priced,” Charles Hamilton, an analyst for FTN Midwest Securities, tells Bloomberg. “I wouldn’t say it presents a buying opportunity right now.”
But Frank Betz, a partner at Carret Zane Capital Management in Warren, NJ, is more bullish. “I’d put a new client in Berkshire right now,” he tells Bloomberg.
“It’s probably the highest-quality collection of individual companies that’s ever been assembled. Long slides are not in the Berkshire Hathaway lexicon.”
The numbers bear Betz out. Berkshire shares have risen in 17 of the last 20 years. The last decline for a full year was 3.8 percent in 2002.
The bear market could provide Buffett with an opportunity to buy shares on the cheap, Whitney Tilson, a principal at T2 Partners hedge fund in New York, tells Bloomberg.
“Where Buffett makes his money is taking advantage of weak, chaotic markets,” Tilson says. “The odds that Buffett could do a large transformative deal have gone up substantially.”
Berkshire has $35 billion of cash in its coffers. So the company can pounce, while private equity firms struggle to raise cash amid the credit crunch.
Tilson estimates Berkshire’s intrinsic value at $157,000, 24 percent above present levels. The stock has reached its intrinsic value in 11 of the last 12 years, Tilson says.
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