MorningWord 8/10/15: Warren Buffett Gets High on $PCP

by Dan August 10, 2015 9:19 am • Commentary

Warren Buffett’s Berkshire Hathaway (BRK/B) is in the news this morning, as he is “Buying American” (as he likes to say) with his $37 billion acquisition of industrial nuts and bolts maker Precision Castparts (PCP), at a 20% premium to Friday’s close.  Prior to this morning’s announcement, PCP was down nearly 20% on the year, and down 30% from its all time highs made last June.  Despite the fact that the Oregon based company gets over 80% of its sales from the U.S., the chart looks more like a U.S. multinational in the industrial space. (Those have shown very poor relative performance over the last year as the the surge in the U.S. dollar has taken its toll on profits.)  From a purely technical standpoint, the bid could not have come at a better time as the uptrend since the 2009 lows had been broken and the stock look poised to break key technical support at $190:

PCP chart since Jan 2009 from Bloomberg
PCP chart since Jan 2009 from Bloomberg

All cash take-over deals from one of the safest credit on the planet have a soothing effect on investors.

I would have upchucked my breakfast if Buffett was paying a 20% premium on his largest all cash deal ever with a stock it all time highs. That would have been a sign of a top.  But Buffett will not be ringing any such bell. He was patient.

That patience doesn’t mean that BRK/B’s stock isn’t in a precarious position itself. It’s made a series of lower highs and lower lows since its all time highs late last year. But it’s still (very importantly) holding its uptrend from its 2011 lows like a boss. But a break below would be troubling and likely yield a move back to the low $120s:

BRK/B since Jan 2009 from Bloomberg
BRK/B since Jan 2009 from Bloomberg

The fact that BRK/B is only down 7% from its all time highs, and about 5% on the year is quite surprising when you consider many of Buffet’s largest holdings have been dogs in 2015. AXP is down 14% from its 52 week highs. CBI, GM, IBM & PG all down 20% from their 52 week highs. KO is down 7% from its 52 week highs. GE & JNJ are down 10%.

There are plenty that act fine with BK, COST, DE, DTV, GS, MA all outperforming in 2015 (up between 5 ad 10%), so nothing catching a ride on a bubble or anything. The point here is simple. Like all of us, Mr. Buffet has his share of dogs in his portfolio. And let’s not forget where he really adds alpha. It ain’t scooping every old U.S. household name on pullbacks. It’s his ability to do sweetheart deals in distressed times like the ones during the recent financial crisis where he exacted billions in warrants from the likes of Bank of America (BAC), GE and Goldman Sachs.

His lending to those distressed institutions in the throes of the crisis were basically guaranteed by the U.S. Treasury so he would make billions on the way out. And he has. Just Saying. It’s good to be the Oracle.

And remember, like AAPL, there’s nothing special about BRK/B stock. If they can sell Apple (AAPL) down 15%, they most definitely can and will do the same for (you’ll have to take it out of my cold dead hands) holding in BRK/B.