Betting against Warren Buffett's Berkshire Hathaway could pay off this year, analyst says

• A Berkshire Hathaway analyst warned the conglomerate's stock could tumble in the coming months.
• Warren Buffett's company might cut back on stock purchases and buybacks, KBW's Meyer Shields said.

Betting against Warren Buffett's Berkshire Hathaway could pay off this year, as reduced buybacks and stock purchases, weaker consumer spending, and pressure on Geico threaten to weigh on the conglomerate's stock price.

Meyer Shields, an equity analyst who covers Berkshire for Keefe, Bruyette & Woods, made that case in a research note this week. He added Berkshire stock to KBW's list of top short ideas for the remainder of 2022. It has dropped only 7% this year, compared with the S&P 500's 17% decline.

Cutting back on buying

Buffett and his team spent only $3.2 billion on share repurchases in the first quarter of this year, and just $1 billion in the second quarter. In contrast, they plowed a total of $52 billion into buybacks over the course of 2020 and 2021.

The investor explained during Berkshire's annual shareholder meeting in April that, after struggling to find bargains during the pandemic, they finally found better things to buy than their own stock this year.

Indeed, Berkshire piled a net $41 billion into stocks in the first quarter. However, it spent only $4 billion on a net basis in the second quarter, suggesting it spotted fewer deals in the period.

Shields asserted the decline in Berkshire's buybacks and stock purchases last quarter might continue, based on the company's conservative investment style and a recent rebound in equity values. He argued that investors haven't fully factored that into their expectations, and Berkshire stock could fall as a result.

Weaker consumer demand

Berkshire owns scores of subsidiaries including insurers, railroads, utilities, manufacturers, and retailers — making it a microcosm of the US economy. It generates about 80% of its operating earnings from consumer-sensitive businesses, Shields estimated in his note.

As a result, the analyst warned Berkshire could be hit hard by a decline in consumer spending due to inflation, higher interest rates, and a potential recession. Indeed, Berkshire highlighted inflation and patches of weak demand, as well as supply disruptions and shortages of raw materials and workers, as headwinds in its second-quarter earnings.

Trouble at Geico

Geico swung from a $626 million profit in the second quarter of 2021, to a $487 million loss last quarter. The car insurer blamed higher used-car prices and shortages of auto parts, which raised the cost of paying out claims in the period.

Shields asserted that Geico's increased costs of labor and auto parts, coupled with loftier interest rates, would likely result in limited sales growth and margin pressure this year. He added that increased marketing spend, centered around the brand's gecko mascot, would worsen the issue.

Short-term pain, long-term gain

The prospect of Berkshire cutting back on stock purchases and buybacks, its businesses suffering from waning consumer demand, and Geico's challenges bode poorly for its stock this year, Shields concluded.

However, the analyst emphasized he remained bullish on Berkshire in the long term. He has a "market perform" rating on the stock, and a price target of $535,000 for its "A" shares, implying 27% upside from the current stock price.

Read more: Morgan Stanley breaks down why stocks will fall at least another 13% before the end of the year — and shares the 3 sectors they think will offer the best returns in the market