Though we now think of him as somehow unassailable, Buffett had nearly come a cropper 30-year earlier, when he purchased around $358m (£275m) in preferred stock of US Air, though he eventually managed to craft a viable exit for the conglomerate holding company a decade later.
So, what are we to make of the decision by Berkshire Hathaway to take a $565m stake in Barrick Gold Corp (NYSE: GOLD)? After all, Warren Buffett has also consistently criticised gold’s utility as an investment, though he may well have simply been referring to bullion itself, as opposed to gold mining stocks, highlighting his obvious preference for productive over non-productive assets.
Operational leverage dictates that producers can quickly expand profit margins when the gold price starts to tick-up because their cost base remains the same. So, could his foray into the market indicate that he believes that the price of the yellow metal has further to run?
As a renowned value investor, we can assume that he has a lengthy time horizon on his investments, but he would probably have noticed that the gold price has just recorded its first weekly loss since June, after hitting a record high of $2,075 an ounce on 7 August.
While the investment in Barrick is relatively modest in terms of Berkshire Hathaway’s usual deals, and the stock was probably undervalued if you were to divide its P/E ratio (prior to the deal) by its projected earnings growth rate, it is simply not the type of company that you would normally associate with Warren Buffett.
What was particularly interesting – and perhaps even slightly unnerving – about the news on Barrick, was that the same US regulatory filing also showed that Berkshire Hathaway had significantly reduced its exposure to JPMorgan Chase & Co (NYSE: JPM) and Wells Fargo & Co (NYSE: WFC) while divesting its residual holding in Goldman Sachs (NYSE: GS). Admittedly, it has continued to build its position in Bank of America Corp (NYSE: BAC), but should the switch out of investment banks set alarm bells ringing?
Warren Buffett took a couple of contrarian – and ultimately profitable – positions in investment banks at the height of the global financial crisis, most famously the acquisition of $5bn in Goldman Sachs preferred stock. This effective vote of confidence helped to shore-up Goldman’s share price and the decision to pile in when other investors were heading for the exits is consistent with his investment philosophy.
However, you are left wondering whether news on the divestments indicates that he believes the sector is in worse shape now than it was in 2008.
In May, he told shareholders in Berkshire Hathaway that US banks were adequately capitalised in the face of the pandemic, but he also pointed to the issue which could have precipitated the sell-off, namely delinquent energy loans. By the fourth week of April, the price of West Texas Intermediate (WTI) had slumped to $11.57 a barrel, by which time the big US banks had impaired energy loans to the tune of $25.1bn.
The subsequent implementation of meaningful production quotas by Saudi Arabia and Russia has enabled WTI prices to recover to over $40 a barrel, but a high proportion of Wall Street’s oilfield-services credit exposure is now rated junk. All the big banks are on the hook, though Goldman Sachs has the greatest exposure when its energy loans are taken as a proportion of the bank’s overall loan book.
A few of the banks may inadvertently end up in the oil business if they are forced to go down the road of asset seizures if prices tank again, but they are also faced with the prospect of a severe slump in consumer borrowing and a moribund interest rate environment. Berkshire Hathaway is now holding huge reserves of cash, so do not be surprised if Mr Buffett re-enters the fray once he is convinced that the non-performing energy loans no longer represent a significant risk factor for investments in the sector.
