Amid all the questions and celebrations at the weekend’s annual meeting of Warren Buffett’s Berkshire Hathaway in the US midwestern city of Omaha, there was one big question left unanswered – is Buffett changing his view on the world of investment?
Specifically, is he updating his new about technology, away from the old time IBM idea of big machines, software and services to the newer models represented by companies such as Amazon, Facebook, Alphabet/Google
Buffett’s shock news late last week that he had sold a third of his holding in Business Machines Corp (IBM), one of the four so-called pillars of Berkshire’s massive investment portfolio, has triggered questions among followers about whether the so-called Sage of Omaha is changing is mid at age 86.
Coming so soon after Buffett abandoned another pillar – the $US26 billion stake in giant US bank, Well Fargo, analysts are wondering if he will abandon another, longer held member of the quartet, Coca Cola which is struggling (similar to IBM) to handle a changing market place.
His 4th pillar, a long held stake in American Express seems safe after it has turned in a couple of sold quarters of solid performances.
As a result of Buffett’s news IBM shares fell sharply on Wall Street on Friday, cutting its market value by about $US3.8 billion as the shares fell by around 2.7%.
That took its shares down by close to 7% for the year so far, or more than $US12 billion (The shares rose 21.6% in 2016, so the change of heart by Buffett is quite stunning).
That was after Warren Buffett told CNBC in an interview on Thursday that he sold about a third of his stake in the company after he lost confidence in the investment. "I don’t value IBM the same way that I did six years ago when I started buying," Buffett told CNBC. "I’ve revalued it somewhat downward," he said.
A day later and not only was the company a bit cheaper, but it faced a credit downgrade from S&P Global on Friday. S&P Global reduced its rating to A-plus, from double-A-minus.
“The downgrade reflects IBM’s transformation with operating declines in recent years as it reinvests and repositions its business to achieve better performance and our expectation that the transition to operating stability will take longer than we had previously forecast,” according to S&P analyst John Moore.
The company is trying to move into cloud computing and artificial intelligence amid a deterioration in its legacy technology businesses. But investors have been losing patience, with sales having now fallen for 20-straight quarters.
On Wednesday,Moody’s cut IBM’s credit rating, which cited challenges the company faces as it tries to move toward becoming a cloud-computing company. Last week, IBM reported weaker-than-expected earnings, missing sales expectations for the first time in a year.
Before the sales, Berkshire held about 81 million shares. Berkshire started building its International Business Machines stake in 2011, eventually becoming the company’s largest shareholder, with an investment valued at almost $US13 billion at the peak.
The sale of IBM shares also follows hard on the heels of Berkshire’s big move into Apple were it is estimated to own 1% of the company. Berkshire topped up its Apple holding in January, before the stock jumped sharply to current levels above $US147 each, meaning Berkshire is sitting on huge capital gains.
A month ago Buffett announced that Berkshire should no longer build its stake on Wells Fargo past the 10% stake it (and he) held.
In fact Berkshire said it would sell around 9 million shares to keep its stake will under the 10% level. Berkshire Hathaway had been talking to the US Fed about lifting its Wells stake above the 10% level, but then withdrew the application when it became clear the Fed would impose restrictions on financial deals between the bank and Berkshire.
Buffett then said it would sell down its stake, keep the Well Fargo stake at the reduced level, and in effect, ignore the stock.
At the weekend meeting of Berkshire shareholders Buffett and his vice chair, Charlie Munger both rued several of the tech investments they never made, praising not only Amazon founder Jeff Bezos, but also online search group Google.
It was a noticeable shift from a company that owns insurance, manufacturing companies, real estate, trains and power companies, Buffett confessed that he had made a mistake not investing in Google and had underestimated Mr Bezos. “I was too dumb to realise what would happen…I did not think he could succeed on the scale that he has.”
The reassessment of a maturing technology sector comes at a critical time for Berkshire, which is worth more than $US410 billion and has over $US105 billion in cash on hand to invest.
Buffett made the point that over the next decade he and his successors will invest more capital on acquisitions and investment in Berkshire’s businesses than he has done in his entire 52 years at the helm.
Businesses that need little in terms of capital investments with scale will be key.
He understands that the only five publicly traded companies with higher market values than Berkshire are in technology.
The quintet is worth more than $US2.5 trillion and includes Apple, Google, Microsoft, Amazon and Facebook. Buffett told the meeting these companies require “no equity capital” (from the likes of Berkshire).
“It used to be that growing and earning large amounts of money required investment.” Not any more. These are self-sufficient giants that will only grow larger – especially Amazon and Facebook.
The question for Buffett and his company is now finding the emerging companies that need capital (the patient type that Berkshire is famed for) that can wait for years for a payoff.
With that in mind should the investment in Apple should be seen as a trial run or a new ‘pillar’ for the investment portfolio?
