Will Ackman’s Faith in Buffett and Berkshire Pay Off?



Bill Ackman’s Pershing Square Holdings showed faith in Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B) (BRK-B) by initiating a new position in Berkshire in June. Ackman, who appreciates Buffett’s stock-picking abilities, feels that Berkshire is misunderstood. Ackman believes that Berkshire has a robust business model that will keep making profits in the years to come. However, critics think otherwise.

Article continues below advertisement

Ackman’s stand on Buffett and Berkshire

Ackman thinks that Berkshire stock is trading way below its intrinsic value. In a letter in June, Pershing Square Holdings stated, “In light of the company’s currently depressed valuation, understated near-term earnings, and the potential for significant future earnings per share growth, we believe that Berkshire’s share price is likely to increase substantially over the coming years.”

Furthermore, Pershing feels Berkshire stock’s downside is limited due to its robust balance sheet and diversified business model, which includes recession-proof businesses such as insurance. Berkshire’s insurance business brings in a load of cash in terms of upfront premiums, which the company invests in other profit-making businesses. Berkshire invest in giants such as Apple, Bank of America, American Express, and Wells Fargo.

Additionally, Pershing believes Berkshire’s massive cash pile can be used to invest in large, healthy, high-return companies. In the third quarter, the company had a record cash balance of $128 billion.

Pershing’s latest views on Berkshire

In the third quarter, Berkshire’s results were better than expected. Additionally, the company’s operating income grew year-over-year. Ackman’s Pershing was impressed by Berkshire’s adjusted earnings growth and praised its margin improvement in its large businesses.

In Pershing’s third-quarter conference call, partner Ryan Israel said, “we think that based upon history, ultimately, that cash over time will be put to a very productive use that will enhance the per share value of the business.” Israel also reiterated Pershing’s view that Berkshire stock looks cheaper. He said, “In terms of earnings, the company overall is only about 13 to 14x our estimate of next year’s earnings, which is very cheap relative to sort of the peers that it participates in, in the broader market overall.”

Article continues below advertisement

Pershing’s large investment

Pershing took a position in Berkshire in June. However, the company’s most significant investment is in Chipotle Mexican Grill (CMG). Chipotle reported better-than-expected earnings in the third quarter. Its stock has returned 73% this year. Last month, Pershing sold some Chipotle stock.

Critics of Buffett and Berkshire

Not everyone is positive on Buffett and Berkshire Hathaway. Wedgewood Partners CIO David Rolfe seems quite frustrated with Berkshire.

He believes Berkshire and Buffett missed many excellent investment opportunities. Furthermore, Rolfe thinks Berkshire blew the chance to sell stock during a bull market—specifically Kraft Heinz (KHC) stock. Buffett has acknowledged he made a mistake with KHC.

Berkshire stock has risen 8.8% this year and 4.4% this month. However, it has underperformed the equity market. The SPDR S&P 500 Index ETF (SPY) has risen 24.5% this year.

Furthermore, Buffett seems to have missed out on Apple (AAPL) stock’s rally this year. He hasn’t bought any Apple stock this year, and he sold some in last year’s fourth quarter. AAPL stock has risen 65% year-to-date. It seems Buffett’s search for an “elephant-sized” investment has led to a plethora of missed opportunities. Or perhaps Buffett and Berkshire are just waiting for the right one.


More From Market Realist