MorningWord 8/17/15: Have You Tried the Buffett? – $IBM, $BRKB

by Dan August 17, 2015 9:40 am • Commentary

The financial media highlights quarterly changes in large institutional investor holdings from their from 13F filings, which are submitted four times a year.  It’s important to note that these filings are due 45 days after the close of each quarter and the accuracy of the holdings reported that much later should be looked at with a slightly skeptically.  While changes in large mutual funds, or from the likes of Warren Buffet are not likely to have changed much since the filing, the same can not be said for large hedge funds who could dramatically alter their previously stated position, either by significantly adding, reducing, or using options to to hedge, add yield or leverage.

You get the point, just like it is nearly impossible to glean much from unusual options activity without having intimate knowledge of the trade and the trader’s intent, the same can be true for attempting to ride the coat-tails of the best and the brightest through data that is at least 45 days old.

We tend to be very hesitant to place too much emphasis on these reports, as not all filings are created equal. For instance, Buffet’s holdings usually capture the most attention, despite the fact that they don’t change much. He usually discloses new additions to the portfolio prior to 13f’s being released.  But the lack of change, which sometimes flies in the face of conventional market wisdom is interesting to track. For instance in IBM, of which Berkshire Hathaway is the largest shareholder, with 8% of the shares outstanding. He’s has actually added to of late despite the stock’s massive under-performance vs large cap tech peers and the broad market.

And here is IBM vs the S&P500 (SPX) since the start of 2012, down 16% vs the SPX up 65%!!!:

IBM vs SPX since Jan 1, 2012 from Bloomberg
IBM vs SPX since Jan 1, 2012 from Bloomberg

Buffett could have thrown a dart at a Bloomberg terminal to find a ticker to invest his $12.5 billion currently in IBM and had better performance.  If he was going for yield, heck, the XLU is up 30% in that same time period. Yeah I get it he was fairly well convinced that IBM’s 3% plus dividend yield and monster share buyback would continue to shrink the float, which it has by nearly 200 million shares since 2012, but this story is about missed opportunity, not about defensive positioning.  I don’t mean to pick on Mr. Buffet, he is obviously an investing legend, but I am hard-pressed to see too many positive outcomes from this investment from a fundamental standpoint. And while those appear to deteriorate, Barron’s highlighted Buffett’s own words from 2011 this weekend (Buffett Loves IBM. That’s Bad for Innovation, and Investors) suggesting then that they may need to do an about face:

“In the end, the success of our IBM investment will be determined primarily by its future earnings,” Buffett wrote in 2011. “But an important secondary factor will be how many shares the company purchases with the substantial sums it is likely to devote to this activity.”


LOST IN THIS ANALYSIS is what ultimately becomes of IBM, and whether it can retain its position as a tech innovator.

The company’s dividends and buybacks have consumed upward of 80% of its operating cash flow in each of the past three years, which means IBM has become a sort of machine for borrowing to pay out. And there’s reason to be concerned about the quality of the operations backing up that borrowing.

If history is any guide (see his Exxon XOM exit from last year, here), Buffett could pull the plug on his IBM holding at some point. Those who have been along for the ride should follow suit.