For Berkshire, is Bigger more powerful?

March 12, 2013, 09:23 am ET, BY Jolene W.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

By Jolene Wee, Stock Traders Daily

Berkshire Hathaway Inc.’s (NYSE:BRK.B) Chairman and Chief Executive and America’s Favorite Investor, Warren Buffet, wrote in his annual letter to shareholders that the $24 billion increase in the company’s net worth in 2012 was subpar.  In a year when many companies struggled to exist, Buffet’s $24 billion gain underperformed against the Standard and Poor’s 500-stock index.  Total return for the companies in the index for 2012 was 16% while Berkshire reported 14% for the year.  Standing tall at $14.8 billion in net income and $47 billion in cash at the end of 2012, Berkshire Hathaway appears to have become too big for even Warren Buffet to manage. 

Buffet’s 2012 letter to his shareholders would have looked very different if Berkshire was smaller.  Despite Buffet’s not so positive report to its investors, Berkshire’s B share stock price posted a 30.1% increase in response to his letter.  It appears that investors did not share Buffet’s disappointed sentiments.  Berkshire’s underperformance in 2012 is only the ninth out of the 48 years of Buffet’s leadership.  At the age of 82 and surviving cancer, Buffet has not lost a beat. 

Prospects for Buffet to continue his streak of beating the S&P on a rolling five year basis look bleak as the economy gains strength and large profitable acquisitions are few and far between.  Historically, Berkshire performs better when the stock market is flat or down.  Buffet and his Vice Chairman, Charlie Munger, have been hunting for acquisition targets since two years ago but came up short in 2012. 

Sitting on the shelves of Berkshire’s investments are the likes of The Coca-Cola Company (NYSE:KO), International Business Machines Corp. (NYSE:IBM), Wells Fargo & Co (NYSE:WFC), General Electric Company (NYSE:GE), General Motors Company (NYSE:GM) and Johnson & Johnson (NYSE:JNJ).  Learn more about Berkshire’s other investments by visiting our real time trading reports. 

In February, Berkshire made an acquisition of H.J. Heinz Co. (NYSE:HNZ), the maker of Heinz ketchup, with 3G Capital’s Jorge Paulo Lemann from Brazil.  Heinz fit Berkshire’s acquisition requirements beautifully with its strong balance sheet and a long standing reputation as an American icon.  For the year ended October 28, Heinz reported $11.6 billion in revenue and $1 billion in profit.  Berkshire and 3G paid $28 billion or $72.50 per share for Heinz, with 3G maintaining operations of Heinz after the deal closes and the company is taken private.    

However, there are not too many companies such as Heinz to be acquired these days.  And due to the size of Berkshire, smaller acquisitions have little impact on Berkshire’s performance and as such do not catch the fancies of Buffet and Munger.  One exception is newspaper companies.  Buffet and Munger have acquired 28 newspapers for $344 million in the past 15 months even though these acquisitions did not fit Berkshire’s size requirements.  Both Buffet and Munger claim to love newspapers and plan to acquire more if the business looks sound.

Rumor has it that Buffet and Munger still have more shots left in their deal gun.  Since Heinz will be left under the care of 3G, Berkshire is capable of making one or two more large deals in 2013.  After all, it is such a waste to see billions of Berkshire dollars in cash accumulate dust in an economy where interest rates are low and deals can be found. 

And we know how Buffet feels about hoarding too much cash.  Even though Buffet does not own any of Apple Inc.’s (NASDAQ:AAPL) stocks, he once advised former Apple CEO Steve Jobs to buy back stock with Apple’s cash hoard but Jobs did not do so.  Apple was recently criticized by its investors including hedge fund manager, David Einhorn, for not paying out some of its $137 billion cash pile to its shareholders and filed a lawsuit against the company.  Einhorn dropped the lawsuit last Friday but continued to pressure the company for better returns.     

2013 is looking bright for Buffet so far as he hunts for another Heinz.  As Berkshire amasses more wealth, it will become more and more difficult for Buffet to continue his winning streak.  For more information on possible acquisition worthy targets for Buffet, consult our real time trading reports.  If a stock is on Buffet’s radar, it is certainly worth looking into.

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