Warren Buffett's Berkshire Hathaway faces a brutal mix of economic headwinds. It will capitalize on the chaos, 8 experts say.
- Berkshire Hathaway faces high inflation, rising rates, and a potential recession and credit crunch.
- Warren Buffett's company will weather the storm and scoop up the bargains that emerge, experts say.
Like many US companies, Warren Buffett's Berkshire Hathaway faces a painful mix of stubborn inflation, rising interest rates, a looming recession, and a potential credit crunch as banking fears linger.
The famed investor's company owns a vast array of businesses including Geico, Duracell, and the BNSF Railway. It also holds multibillion-dollar stakes in Apple, Coca-Cola, and other public companies. As a result, its fortunes are closely tied to the wider US economy and the stock market.
Experts say Berkshire's ample cash reserves, strong brands, and prudent management will enable it to comfortably navigate a harsh economic environment. They also expect Buffett, who took cover during the pandemic crash in early 2020, to once again "be greedy when others are fearful" and scoop up bargains if asset prices tumble.
Here's what eight Buffett experts told Insider about Berkshire's current outlook. Their comments have been lightly edited for length and clarity:
1. David Kass, a Buffett blogger and finance professor at the University of Maryland:
"Elevated inflation and rising interest rates are likely to depress operating earnings. But they may present investment opportunities for Berkshire if the equity markets decline substantially in the weeks ahead."
"Berkshire's cash position equaled $129 billion at the end of last year. I would like to see Buffett put more cash to work such as continuing to increase his stake in Occidental Petroleum at attractive prices and accelerating his buying back of Berkshire shares at current or lower prices."
2. Adam Schwartz, the CIO of Black Bear Value Partners:
"Berkshire prepares for the worst and hopes for the best. While various macro and even micro issues can have short-term impacts, ultimately the business is on sound financial footing and can take advantage when competitors may not be in the same position."
"The pandemic was an unusual event and prudence was the smarter decision. There were other outcomes that could have been more globally devastating. In the event of a 'normal' economic slowdown I'd anticipate the usual behavior of taking advantage of panic and fear."
3. John Longo, a finance professor at Rutgers University and the author of "Buffett's Tips: A Guide to Financial Literacy and Life":
"Berkshire is a well-diversified business so there is no doubt that they are dealing with the supply chain disruptions and increase in wholesale prices that have impacted many firms. However, several Berkshire firms tend to have pricing power, so it may be able to deal with inflation better than many other firms."
"Buffett has often expounded on the virtues of See's Candies and their ability to raise prices over time. Nebraska Furniture Mart, GEICO, and Berkshire Hathaway Energy are among the lowest cost producers in their industries, so they should be able to raise prices without losing their customer base."
"Buffett understands the banking sector very well. It will be telling if he adds more assets to banking stocks, since they have been at the center of the recent market turmoil. If he adds materially, it would be a bullish sign that the regional banking crisis may be contained. If he does not add to his existing holdings in financial stocks, perhaps it suggests there is more downside to come."
4. Paul Lountzis, founder and president of Lountzis Asset Management:
"I'm not worried. Berkshire is greatly diversified by industry and has lots of cash to put to work."
"The pandemic was a very rare event. If a recession comes on and the market capitulates (it has not really since 2008 and a bit in 2022) it may provide an environment that Buffett is more comfortable with."
5. James Shanahan, senior equity analyst at Edward Jones:
"Berkshire Hathaway's operating earnings growth has tracked pretty closely with earnings per share for the S&P 500 (generally rising and falling with the broader economy)."
"Berkshire's railroad is pro-cyclical, at least with regards to consumer, industrial and energy products. In a weaker economic environment, I would expect results for manufacturing, service and retailing businesses to soften considerably. Should that happen in 2023-2024, strength in investment income and improved insurance underwriting results should lessen the income on overall operating earnings."
"Rising interest rates were called out in each of the last two quarters as negatively impacting results for Clayton Homes, Berkshire Hathaway Home Services, and various building products companies. Higher financing costs are likely to be driving slower sales volumes at Van Tyul Group."
"It is difficult to say if Buffett took advantage of the decline in prices for bank stocks, but it seems unlikely, given that he has been steadily liquidating those positions."
6. Adam Mead, founder and CEO of Mead Capital Management, and author of "The Complete Financial History of Berkshire Hathaway":
"Berkshire has successfully navigated similar economic environments in the past, and to the extent there is turmoil, that can be good for Berkshire. It has some great businesses that have proven to be inflation-resistant. Think See's Candies, or its investment in Coke."
"It's important to remember that the pandemic could have gone in another direction. I saw and heard genuine fear in Buffett's voice during the 2020 annual meeting. Buffett's first job is to ensure Berkshire survives. Only then does he look to thrive. I'd expect more opportunities to come Berkshire's way in the future, absent a check-wielding Fed stepping in and lending directly to more companies."
"It's interesting to reflect on the past few years instead of just the recent one year or several quarters. Berkshire repurchased $65 billion of its own shares over the past five years. It's also purchased over $60 billion, net of common stocks, made acquisitions of $20 billion, and invested over $25 billion in growth capex. That's a lot of capital being put to work! "
7. Darren Pollock, portfolio manager at Cheviot Value Management:
"Buffett was cautious in the first half of 2020 because, having large insurance subsidiaries within Berkshire, it was important that liquidity be available for whatever liabilities arose due to Covid. Market turmoil now will be much more plain vanilla, resembling prior periods of market unrest during which Berkshire was able to capitalize on low-priced opportunities."
"Shareholders who plan on holding Berkshire for years into the future should hope for a near-term bear market in stocks. This would allow for Berkshire to choose between buying back its own stock at an advantageous price, buying shares of other business at intelligent prices, or possibly buying entire companies. These three options will eventually speed up the growth in intrinsic value per share at Berkshire."
"Should bargain opportunities not arise, the company still has plenty of places in which it can invest its capital internally so that it will continue to grow for a very long time. This is the base case for Berkshire but we're hoping for a turbulent market to produce investment opportunities that will allow the company to plant the seeds for a better-than-base-case future."
8. Brian Gongol, longtime Buffett follower and Berkshire shareholder:
"It's better to be in Berkshire's shoes during challenging times than during a boom. Tough times are when companies become susceptible to their most short-sighted stakeholders: With Silicon Valley Bank, they turned out to be panicky depositors. For other firms, they will turn out to be major lenders who suddenly get tight with credit, or shareholders who can't stomach a couple of disappointing quarters. Berkshire remains intrinsically resilient against short-sightedness; they don't need anybody else's money, and voting power remains concentrated among the ultra-long-term holders of the 'A' shares."
"The onset of the pandemic really held Berkshire back from decisive action because the circumstances were just so far outside the boundaries of normal. But in the case of a normal market correction or even a recession, the elephant gun remains fully loaded."
"Popular opinion will undoubtedly count them out because they haven't launched an AI startup or because it looks underwhelming to keep so much 'dry powder' on the balance sheet. But when things turn sour is exactly when Berkshire will shine. I don't want that time to come, but I sleep well knowing who's ready for it."
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