Hedge fund manager and famed short seller Doug Kass says he's betting against Warren Buffett.
By shorting Buffett's holding company, Berkshire Hathaway, Kass will profit if the price of one of America's most revered stocks — managed by America's most revered investor — falls.
Kass acknowledges that Buffett has achieved an amazing record over a 50 year career, but he writes on TheStreet.com that Buffett has begun to morph from the "Shakespeare of investing" into the "Mozart of marketing."
Kass manages Seabreeze Partners, a short-only hedge fund which has delivered some impressive returns. Since it began trading in January 2005, the fund is up 40.7 percent through the end of April 2008. This compares with a gain of 15 percent in the S&P 500 over that same time frame.
In calling Berkshire overvalued, Kass echoes a December 2007 Barron’s cover story.
In it, Barron's argued then that fundamental ratios suggested Berkshire’s price was too high, and that the stock should see a 10 percent decline, to $132,000.
Within weeks of that story, Berkshire fell (in line with the overall market) and reached Barron's target. Over the next few months, it traded even below what Barron’s considered at publication to be fair value, by more than 15 percent at its lowest.
By the time Kass wrote his more recent opinion, the fundamental valuations of Berkshire had returned to their historical averages. In fact, the price was where Barron’s predicted it should be, trading recently around $132,990.
Now Kass sees even lower prices for Berkshire ahead.
Ignoring fundamentals, Kass looks inside Berkshire’s portfolio and is troubled by what he finds.
Buffett's largest investments have underperformed recently, and Kass thinks they will continue to suffer, leading investors like Kass to seek profits from what he considers to be Buffett’s mistakes.
Coca-Cola, Wells Fargo, Kraft, and American Express make up almost half of Berkshire’s total stock portfolio. Over the last decade, these four stocks have underperformed Berkshire itself.
Holding these four stocks “forever,” as Buffett is wont to do, has caused Buffet to miss out on other, more profitable opportunities, Kass maintains.
More worrying, Kass suggests, the holdings do not necessarily have big competitive advantages, what Buffett calls the "moat" around the "castle" of a big stock.
“To paraphrase the Master, ‘Where are the future moats at Coca-Cola, Wells Fargo, Kraft and American Express?’” Kass wonders.
The math seems to support Kass’ argument. Berkshire is down about 5.5 percent so far this year. Only Kraft has preformed better, yet it has lost 2.3 percent.
Coca-Cola is down about 7 percent, Wells Fargo nearly 12 percent, and American Express more than 12 percent.
Another factor that will adversely impact Berkshire going forward is one Buffett himself mentions every year in his letter to shareholders. The company's asset and earnings bases are simply too large for the business to continue performing as it has in the past.
In short, future gains are likely to be lower.
Follow Kass if you dare.
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