Warren Buffet’s reputation as an exceptional value investor is unmatched, but that doesn’t mean the oracle of Omaha isn’t wrong from time to time. Today’s development with Kraft Heinz (NASDAQ: KHC) saw the stock drop 28 percent after reporting poor performance and cutting its dividend by 36 percent.
Whether or not the billions that Berkshire Hathaway (NYSE: BRK.A) lost from the investment will be seen by the value investor as a good buying opportunity, the fact remains that investors have been expecting Buffet to found solid investment opportunities, something that he hasn’t done too much over the past while.
While he did reshuffle his portfolio a little, making decisions such as selling all of Oracle’s (NYSE: ORCL) stock as well as investing in Canada’s Suncor Energy (TSE: SU), these are relatively minor moves. With Berkshire Hathaway sitting on record levels of idle cash, shareholders have been waiting for Buffet to find his major investment opportunities, or “elephants” as he’d call them.
The last major investment from Berkshire Hathaway was a $32 billion purchase of aerospace manufacturer Precision Castparts Corp, which was done back in January 2016. Since then, the Omaha investor has done few major plays over the years as his reserves of cash continued to pile up. According to one article from The Wall Street Journal, the billionaire now faces far more competition in the form of private equity and hedge funds that are jumping to make fast acquisitions. Often times, this is done by paying premiums and higher prices that Mr. Buffett is not willing to pay.
Global fund managers have grown collectively to a record $2.1 trillion in private capital, which is roughly double the amount that was available a decade ago. In contrast, Berkshire Hathaway has had $103.6 billion in cash sitting on their balance sheet, the fifth straight quarter in which their holdings increased by $100 billion.
“With rates low and private equity folks drunk with cash and money all over the place, it’s just naturally going to be harder” for Berkshire to find acquisitions, said Bill Smead, chief executive of Smead Capital Management Inc and an owner of Berkshire shares.
As such, investors will be keenly looking forward to Mr. Buffett’s annual letter to Berkshire shareholders that will be released on Saturday. Even outside of shareholders, his letters are wide read on Wall Street for his insights. This is especially true as in last year’s letter, where Buffet bemoaned the difficulty in finding well-priced deals, opting instead to wait for better opportunities. “Prices for decent, but far from spectacular, businesses hit an all-time high,” he wrote in 2017. “Indeed, price seemed almost irrelevant to an army of optimistic purchasers.”
Many would be surprised to know that there’s been a previous time when Warren Buffet has backed from making deals due to high valuations. Back in 1969, the Omaha investor closed his private investment partnership simply because he couldn’t find value-based opportunities. Other periods of little activity include the late 1990s with the dot-com bubble as well as sitting out of the mid-2000s bull run.
In the meanwhile, it seems as if Buffet is waiting for when the market turns around, where Berkshire Hathaway will be perfectly placed to gobble up plenty of companies with their cash reserves. Until then, however, some investors in the company are getting impatient.