Howard Hughes Corp: A Lesson in Price vs Value

I was planning on writing a bullish piece on real estate developer Howard Hughes Corp (HHC) today, as the stock has been crushed in recent months and closed yesterday at $92.59 per share, 35% below its 52-week high.

Well, that idea quickly went out the window when CNBC’s David Faber reported shortly after the opening bell that HHC’s board has hired Centerview Partners to explore strategic alternatives, including a possible sale, joint venture, or spin-off of all or parts of the business. To say that the stock is reacting positively to the news would be an understatement. As I type this HHC shares are up $29, or 31%, to $121 each.

So rather than explain why the stock appeared dramatically undervalued in the low 90’s, which I was apparently one day too late in sharing, I will instead offer up the observation that Warren Buffett’s often-quoted mantra “price is what you pay, value is what you get” is notable in this case.

Some investors give more credence to that concept than others, mainly because while value investors try to find situations where value > price, more short-term and/or technically-inclined investors use the market price as their guide and believe that the daily matching of buyers and sellers across the globe corrects most any material pricing inefficiency. Not surprisingly, I am in the former camp.

HHC is an interesting case because most fundamental analysts believe that the company’s assets are worth between $130 and $170 per share, net of debt, and that those same assets should grow in value nicely over time given their strong locations within the local trade areas they serve. Of course, if this is true, and markets are quite efficient, then the stock should not have closed yesterday at $92 and change.

Typically, bulls and bears are left arguing back and forth about who is right, but sometimes we get a better sense through actual corporate action. We won’t know whether HHC finds a buyer for some or all of its assets for at least several more months (and if so, at what price) but today’s trading action seems quite odd.

I would say that it is rare that a stock surges more than 30% on news that the company has hired bankers to approach possible buyers because we are still very far away from getting any idea as to how many interested parties there are, or what prices they might be willing to pay. Stock moves like this are usually seen late in the process, when a journalist gets word of who is bidding and what the range of bids has (roughly) been. In this case, CNBC’s Faber merely confirmed the hiring of advisors because the process has just begun.

What that tells me is that investors seem to believe a few things. First, that HHC’s net asset value per share is, in fact, materially higher than yesterday’s closing price. Two, that the market believes that there will be ample interest in HHC’s assets such that bids are likely to materialize (though of course no deal can be assured). And three, it probably helps HHC that interest rates have recently come down and lending capacity from financial institutions, hedge funds, and private equity firms appears robust, though obviously that can change quickly in today’s world.

I say all of this because I think it firmly supports the notion that markets in the short term can be quite inefficient. Up until today, HHC stock did not have many fans, but that changed in a matter of minutes as the fundamental story changed (or more precisely, a layer was added; the fact that the board is open to strategic alternatives). Conversely, if it was true that the market was efficient and the consensus view among HHC’s close followers was that the business was worth somewhere close to Wednesday’s closing price, we would not see the stock surging today.

The beauty, of course, is that now we might very well be able to settle the debate about HHC’s net asset value (or at least the opinion of that NAV among folks who want to buy the assets and have the cash to do so). The next few months should be very interesting.

Full Disclosure: Long shares of HHC at the time of writing, though I have been trimming positions into today’s strength, as Wednesday’s announcement confirmed they are open to selling, whereas the stock is acting as if a deal is nearing completion.

*Author Update* 4:30pm ET

HHC stock leveled off for a while and then surged again late in the trading day, closing at $131.25, up nearly 42% for the session. In the spirit of full disclosure, I have continued to sell more at prices as high as $131.50 and have also written some $140 covered calls against shares that remain in client accounts.

Simply put, I understand HHC is a unique company with great properties and I have no doubt that some bidders will emerge to try and pull some of them away from HHC. That said, this one-day move is pretty remarkable and I think it is overdone in the short-term. Accordingly, I think it is silly to not sell any stock at these levels, and would welcome a scenario where it cools down and I can buy back some of the sold shares at lower prices. Tomorrow (the last day of the quarter) should be the second-most intriguing trading day for HHC this year! ūüôā

Lastly, some people are speculating that this announcement was all about juicing up Bill Ackman’s portfolio right before the end of the quarter and nothing truly will come of it. While a deal might not happen, I don’t think Bill’s HHC position is big enough (just 2% of disclosed portfolio value as of 3/31/19) for him to have orchestrated this whole thing just to show a better performance figure for Q2. After all, Pershing Square was already having a great year and another 100 basis points is a small prize for such an effort. Just my two cents…

Buffett Sells IBM, Jumps On Apple Bandwagon – Blessing Or Curse?

Warren Buffett’s decision to invest a large sum in Apple (AAPL) in recent quarters was so surprising because he once regarded tech companies to be outside his so-called “circle of competence.” Then six years ago he started buying IBM (IBM) shares, which only served to confirm that the legendary investor indeed should probably steer clear of the sector and focus on the areas of the economy he knows best.

In recent days we have learned that Buffett has begun selling off his IBM position (about 1/3 thus far), but his new tech favorite is clearly Apple, which he has been accumulating so much that it now represents his second largest single stock investment in dollar terms behind Wells Fargo (WFC).

His timing with Apple appears to have been quite good, although I suspect that is more due to luck than anything. For the last year or so, Apple bulls (other than Buffett) have been touting the idea that the company is not actually a hardware company, but rather a software and services company with valuable recurring revenue. It should follow, they say, that Apple stock deserves a much higher earnings multiple than it traditionally has received (below the S&P 500 due to the perceived fickle nature of technology products, especially on the hardware side of the business).

I am not convinced that this argument makes sense, at least yet. Every quarter we hear investors tripping over themselves about Apple’s service revenue growth, and yet whenever I look at the numbers I still see a hardware company. Consider the first half of Apple’s current fiscal year (which ends September 30th). Service revenue made up 11% of Apple’s total sales, versus 67% for the iPhone, 10% for the Mac, 7% for the iPad, and 5% everything else. Clearly, Apple is not a software company.

Now I know that services have higher margins, so although they represent 11% of sales, they contribute more than that to profits, which is a good thing. But in order for software and services to really become a large contributor to Apple’s bottom line, the revenue contribution has to rise materially, in my view. And that is where I think the “Apple is a services juggernaut” thesis gets shaky.

Over the last six months, services made up 11% of total revenue. Okay, so clearly that number must be accelerating pretty quickly given how bullish certain shareholders are about Apple’s earnings multiple expansion potential, right? Well, in fiscal 2016 the figure was also 11%. In fiscal 2014 it was 10%. In fiscal 2013 it was 9%. Services thus far are not growing much faster than hardware, which actually makes sense when you think about the Apple ecosystem.

If you want more people to buy the services, they have to buy the hardware first. So maybe the two go hand in hand. Put another way, if many iPhone owners have not subscribed to Apple’s services yet, why would they suddenly begin to adopt them at higher rates in the future? At least, that is the argument for why services might not become 20 or 30% of sales over the next few years.

Interestingly, since Buffett started buying more Apple, the earnings multiple has increased. Much of that likely has to do with the prospect for corporate tax reform and the potential for the company to repatriate their large cash hoard ($30 per share net of debt) back home at a low tax rate, but some probably is linked to the idea that services are about to explode to the upside. Color me skeptical on that front.

Year-to-date Apple shares have rallied from ~$116 to ~$152 each. On a free cash flow basis, the multiple on fiscal 2016 results has risen from 12x to nearly 16x. As a holder of the stock, I am certainly happy about that, but I wonder how much more room the multiple has to rise. And will it turn back the other way if services growth disappoints or if tax reform is less aggressive than hoped? Perhaps.

If that happens, the stock price could very much depend more on Apple’s future product lineup than anything. On that front, I am nervous about the company. In recent months I have come to the conclusion that Amazon (AMZN) might be the “new Apple” in terms of tech innovation. Not too long ago it was Apple that would be first to market (the iPad, the iPhone, etc), and then everyone else would copy them (and fail). Lately it seems that Amazon has taken over that role and Google (GOOG), Microsoft (MSFT), and Apple then copy them.

I am thinking about Amazon Echo, which Google quickly copied and rumors are that Apple is not far behind in doing the same. With¬†Amazon’s announcement this week about Echo Show¬†I had the same thought. Dash buttons – same thing. Drone delivery – same thing. Apple is reportedly funding original TV shows and movies now (years behind the curve). The Apple Watch wasn’t first to market, etc. Oh, and the attempt to build an electric car in Cupertino? The perfect example of mimicry.

If that is the case, then Apple’s hardware growth, which has been halted, may be difficult to accelerate. And if services need to pick up the slack, there is a lot of work left there as they seem to be stuck as a percentage¬†of total sales.

While I am not bearish on Apple as an investment Рtheir ability to generate cash remains more than formidable Рwith the recent earnings multiple expansion I am starting to think about where future upside will come from. If the most exuberant bulls are right and the stock can garner a multiple a la Coca Cola (KO) or McDonalds (MCD) (20-25x earnings), that is definitely the answer. I am just not sure sure that makes sense, at this point anyway.

Full Disclosure: Long shares of Apple and Amazon at the time of writing, but positions may change at any time

Does Buffett’s Big Buy Signal A Top In Apple?

For decades legendary investor Warren Buffett refused to buy technology stocks. He missed the huge bull market in the mid to late 1990’s and people repeatedly questioned his decision in light of the obvious tech revolution. After the dot-com bubble burst he looked brilliant, for a while at least. Interestingly, Buffett avoided tech stocks not due to some core issue such as high valuation, but instead because he simply did not understand the industry. As someone who popularized the term “circle of competence,” his lack of deep understanding of the sector meant that he did not feel like he could analyze these companies well enough to make an investment.

Then in 2011 something changed. Buffett started to amass a huge stake in his first technology investment; IBM. Close followers of the Oracle of Omaha, especially those who knew a decent amount about the tech sector, were doubly shocked at hearing this news. Not only had Buffett violated his decades old rule, but he had chosen for his first tech investment a giant that was widely seen within the industry as being a symbol of “old tech” – one that was only going to be marginalized by newer companies and technologies.

Fast forward six years and Berkshire Hathaway’s 2016 annual report shows that Buffett’s firm owns a staggering 81.2 million shares of IBM. Since purchasing 63.9 million in 2011, he has increased his position by another 27% in subsequent years. That stake was worth $13.5 billion as of year-end 2016. The annual report also discloses his total cost basis in IBM; $13.8 billion. Given a cumulative loss since the initial purchase in 2011, it is hard to argue that Buffett should have ventured into an industry he admittedly knew little about.

While the IBM story is old news for Buffett watchers, I think it is noteworthy given his recent comments on CNBC two weeks ago that during the month of January he acquired 76 million shares of Apple. Buffett admitted in the interview that he did not have an iPhone and that he queried his young family members to see how they like Apple products.

Apple shares have been on a tear in 2017, in part due to news that Buffett was buying.

I have to wonder if this second step into the tech world will share any of the same characteristics of the IBM investment.

Perhaps the bigger point is this idea of one’s circle of competence when it comes to investing. When I look back at my own career managing money it is obvious that my batting average is far higher within industries I am more familiar, and vice versa. There are multiple instances where I have lost money on energy exploration stocks and early stage biotech stocks, to name a couple of areas outside my circle. While I have never instituted a rule that prohibits me from buying stocks in certain sectors, over the years I have definitely allocated more capital to sectors I know best.

That decision does not always help me, especially when investment managers are compared with very diversified indexes. For instance, since the election of President Trump, companies focused on manufacturing, construction, and infrastructure have performed very well. I own very few of these types of names, and in some cases none at all. That lack of exposure to a strongly performing group has materially impacted my short term performance.

My hope is that my clients would rather me avoid sectors I don’t understand well (even if that means poor relative short-term results), as opposed to feeling like I need to have exposure to a little bit of everything in case sectors outside my circle of competence happen to perform well for a while. If I am going to be judged on mt ability to pick individual securities, I may as well stack the odds¬†more in my favor, right?

Regardless, I can’t help but believe that such a strategy makes the most sense, even if it does not always pay off in spades. And if I had to guess, that probably goes for most other (both professional and amateur) investors too.

As for Apple stock, while I continue to hold some both personally and on behalf of clients, the recent run-up to $140 per share probably means that future returns will be more muted, as the stock now trades for roughly 15 times annual free cash flow per share.

Full Disclosure: Long shares of Apple at the time of writing, but positions may change at any time

U.S. Stocks Reach Valuations Rarely Seen, Making Material Earnings Growth A Requirement For Strong Future Returns

In the face of the current highly ebullient stock market, close watchers of valuation metrics are frequently dismissed as ignoring the prospect for accelerating GDP growth and lower corporate tax expense, but I will step onto that turf anyway. It may make me look foolish, as Warren Buffett recently played down concerns about the market’s valuation, even though his often-preferred metric in years past (total stock market value relative to annual GDP) is dangerously high, but that’s okay.

Here is a look at my preferred valuation metric; a variant of the P/E ratio that uses “peak earnings” (the highest level of corporate profits ever produced in a 12 month period) instead of trailing 12 month earnings (impacted solely by the current economic environment) or forward earnings estimates (usually overly optimistic). We’ll go back more than 50 years, not only to get an idea of historical trends, but also because that is the data I have.

When people ask me about my view of the market, I tend to give a tempered response because it is hard to argue that we should really get any earnings multiple expansion. After all, we now sit above 20 times “peak earnings” and that has only happened once in the last 55 years. As you can see, that one time (the dot-com bubble of the late 1990’s) is not exactly a time we probably want to emulate this time around.

It is important to note that high valuations do not guarantee poor future returns. There is a high correlation, but you can map out mathematical scenarios whereby P/E ratios mean-revert and stock prices don’t crater. Simply put, it requires extraordinary earnings growth that can more than offset a decline in P/E ratios (which we should expect if interest rates continue to increase). Right now the U.S. market is banking on this outcome, so earnings and interest rates are probably the most important things to watch in coming quarters and years when trying to gauge where the market might go from here.

Author’s note: The use of “peak earnings” is not common, so it is worth offering a brief explanation for why I prefer that metric. Essentially, it adjusts for recessions, which are temporary events. If investors use depressed earnings figures when they value the market, they might conclude stocks are not undervalued even if prices have declined materially. This is because they inherently assume that earnings will stay low, even though recessions typically last only 6-12 months and end fairly abruptly.

As an example, let’s consider the 2008 recession. The S&P 500 fell 38% that year, from 1468 to 903. S&P earnings fell by 40%, from ~$82 to ~$50. If we simply use trailing 12-month earnings, we see that the P/E multiple on the index was 18x at the beginning of 2008, and was also 18x at the end of the year. So were stocks no more attractively priced after a near 40% fall? Of course they were, but using traditional P/E ratios didn’t make that evident.

If we instead used “peak earnings” (which were attained in 2006 at ~$88), we would have determined that the market was trading at ~17x at the outset of 2008 and had fallen to just 10x by the end of the year. By that metric, investors would have realized that stocks were a screaming buy when the S&P traded below 1,000.

 

Is Facebook Stock Approaching Bubble Territory?

Here is a list of the U.S. companies that are worth at least $300 billion today based on stock market value:

  1. Apple $522B
  2. Microsoft $392B
  3. Exxon Mobil $365B
  4. Berkshire Hathaway $357B
  5. Facebook $336B
  6. Amazon.com $318B
  7. Johnson & Johnson $311B

If you are surprised to see Facebook (FB) registering as the 5th most valuable U.S. company you are not alone. Given the company’s high growth rate, many investors do not mind the stock’s valuation. At $117 per share, the stock trades at 33 times this year’s consensus forecast of $3.54 per share of earnings. Given that Wall Street is currently estimating more than 30% earnings growth in 2017, this P/E ratio seems high, but warranted, if you are a true believer in the company’s future.

I am not going to delve¬†into the company’s future growth prospects in this post, as I have been wrong about them so far. My thesis was that Facebook usage would decline over time as early adopters such as myself tired of the service and the network became overloaded with parents, grandparents, aunts, uncles, etc. That has proven to be wrong. Perhaps Facebook has evolved from a cool place to connect with friends to a crucial hub to connect with family. At any rate, the stock’s valuation is what has peaked my interest lately.

Facebook is one of a growing number of growth companies in the technology space that is overstating its profitability by paying its employees with stock and not treating it as an expense when speaking to Wall Street analysts. The official GAAP financial statements do disclose how much stock they dole out to employees (for instance, in 2015 the figure was a stunning $3 billion), but when investors quickly look at earnings estimates, they see the $3.54 figure for 2016 which does not include stock-based compensation.

So what happens to the stock’s valuation if we treat stock compensation as if it were cash? After all, if Facebook decided to stop paying its employees with stock, we can assume they would have to replace it with cash. Below I have compiled the company’s free cash flow generation since 2012 and subtracted the dollar amount of stock they have paid their employees. This simply tells us how much actual free cash flow Facebook would have generated if they compensated solely with good ol’ U.S. dollars and cents.

FB-FCF

As you can see, adjusted for stock-based compensation Facebook had free cash flow of $1.09 per share in 2015, which is about 50% less than their actual reported free cash flow ($2.13). Put another way, Facebook’s employees (not their shareholders) are being paid out half of the company’s profits.

From this perspective, Facebook stock looks a lot more overvalued. If you annualize the company’s first quarter 2016 free cash flow adjusted for stock compensation ($0.38 per share), the company trades at a P/E of 77 ($1.53 of free cash flow). There is certainly an argument to be made that such a price resembles bubble territory. That potential problem could be rectified if the company continues to grow 30% annually for the next five years, resulting in $4.05 of “adjusted” free cash flow in 2020. But buyers of Facebook stock today at paying about 30 times that 2020 estimate right now, which is still a very high price.

Below is a summary of Facebook’s stock market value relative to reported and adjusted free cash flow since 2012, as the stock has nearly quintupled in price:

FB-Pr-FCF

How do situations like these typically play out? One of two ways. The less likely scenario is probably one where Facebook’s growth hits a wall and investors quickly slash the P/E ratio they are willing to pay by 2-3 times. That would be ugly, but does not appear to be the most likely outcome given their momentum right now. The more likely scenario is the one that we usually see with very good companies that have staying power but simply have seen their stock prices get ahead of the fundamentals. In that case, the cash flow multiple comes down slowly over a period of several years, resulting in the stock price lagging the company’s underlying profits.

If I had to guess, I would say the latter seems like a real possibility going forward from here. Regardless, investors should check to see how much of a hit a high-flying tech company’s cash flow would take¬†if stock compensation was factored into the equation. As Warren Buffett likes to say, “if stock-based compensation is not a real expense, I don’t know what it is.”

Full Disclosure: No position in Facebook at the time of writing, but positions may change at any time

Down 45%, Warren Buffett & Berkshire Hathaway Are On Sale

About a year ago, I commented on an article that appeared in Barron’s which argued that Warren Buffett’s Berkshire Hathaway (BRKA) was overvalued. In my post, entitled Barron’s Pans Buffett’s Berkshire, I agreed with the article that Berkshire Hathaway stock looked overvalued. A lot has changed since then. Berkshire shares have fallen 45% from their high and hit a fresh yearly low on Wednesday at $84,000 per share. At that price, the stock looks cheap.

As I discussed in my 2007 post, the best way to value Berkshire Hathaway looks to be on a price-to-book basis. Berkshire’s core business is insurance (which is valued with price-to-book) and the company’s assets are largely in publicly traded securities, whether it be common stocks or various types of debt instruments. Going a bit further, I would use tangible book value, rather than total shareholder’s equity, because Berkshire has more than $30 billion of goodwill on its books.

The essential question is, at what price would Berkshire Hathaway be cheap? I would love to purchase the stock at tangible book value of $56,000 per share, but that appears to be a long shot, as one might expect given Buffett’s track record and the strong management team he has assembled there.

Accordingly, wouldn’t you agree that even 1.5 times tangible book would be a solid entry point for a long term investment in Berkshire Hathaway? I certainly think so. Well, guess what? Today the stock closed at $84,000 per share, which just happens to be both a new 52-week low and exactly 1.5 times tangible book value of $86.6 billion. Not only does that look cheap, but all of us non-billionaires can buy the class “B” shares for only $2,783 each.

Full Disclosure: No position in Berkshire Hathaway at the time of writing, but positions may change at any time

Warren Buffett Op-Ed Explains Why He Is Buying, Not Selling

Warren Buffett’s Op-Ed in the New York Times today is a must read. He echoes many of the same thoughts I offered in my quarterly letter to clients last week, but don’t take it from me, the Oracle of Omaha feels the same way.

You can read the full piece here:

Some highlights:

In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. So… I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

I haven’t the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “skate to where the puck is going to be, not to where it has been.”

Buffett Adds $3B of GE Preferreds, Still Takes No Equity Market Risk

Warren Buffett is stepping up to the plate again, buying $3 billion in 10% preferred stock from General Electric (GE), after adding $5 billion of Goldman Sachs (GS) preferred just days ago. Many are focusing on the confidence factor the Buffett moves suggest, which I agree with to a large extent. However, keep in mind that this second deal is just like the first in that he is not taking on any equity market risk by purchasing preferred stock. As long as these firms stay afloat, Buffett can’t lose a dime, regardless of where the common shares trade in the future.

Full Disclosure: Peridot was long shares of GE at the time of writing, but holdings can change at any time

Buffett Treads Lightly With Goldman Sachs Investment

If one of your first reactions upon hearing of Warren Buffett’s $5 billion investment in Goldman Sachs (GS) was, “Wow, I didn’t think Goldman was a Buffett-type company,” you are probably not alone. Warren has typically preferred consumer-related businesses with wide moats (high competitive advantage and barriers to entry). He often tells people that he would feel perfectly fine owning Coca Cola (KO) or Wrigley (WWY) if the stock market closed down for five or ten years. It would be hard to have the same level of confidence with Goldman Sachs.

So before you go out and load up on GS common stock on this news, let’s review exactly what Buffett is getting, and more importantly, the price he is paying. The $5 billion deal involves two parts:

1) $5 billion in preferred stock

These preferred shares are senior to common stock and pay a 10% annual dividend. Think of them as unsecured bonds paying 10% interest. He is not buying common shares with the initial $5 billion. In addition, if Goldman ever wants to retire these preferred shares (companies typically “call” preferred shares when they have excess cash), they have to pay Buffett a 10% premium to their face value. The vast majority of normal preferreds are callable at par, not at a premium.

2) Warrants to buy $5 billion of common stock at $115 per share

Buffett has the option to buy $5 billion of common stock at $115 per share at any time over the next five years. Keep in mind that while this part is common stock, there is absolutely no risk for Buffett on these warrants. Five years from now, Buffett earns a profit of $43 million for every dollar GS stock trades above $115 per share. If the stock is below $115, he does not lose a dime, as there is no risk on his part. These warrants are essentially call options he is getting free of charge.

From the terms of this investment, we can see why Buffett has decided to invest in an investment bank even though he typically goes for much safer and predictable operating businesses. Goldman does have a superior management team and great talent, but investment banking is not a business I would expect Berkshire to expand into anytime soon.

While he is taking a bit more risk by banking on Goldman’s survival, consider how the landscape has changed for Goldman in recent days. Not only has the government indicated they are willing to take dramatic action to help these firms survive, but it also has allowed Goldman to become a bank holding company. Goldman may very well use this new capital to build out their commercial banking operation.

With this deal, Buffett is banking on government intervention succeeding in greatly lowering the risk that Goldman Sachs gets into deep trouble. For such a bet, I’d say Buffett got a great deal by waiting things out and not investing until he figured the odds were stacked strongly in his favor.

Full Disclosure: No positions in the companies mentioned at the time of writing

Despite Recent Weakness, Buffett’s Berkshire Hits Buyout Trifecta

UPDATE: 7/14 11:45AM

It has been brought to my attention that Berkshire does not own shares of Rohm & Haas. For some reason I incorrectly thought it did. Maybe Buffett used to own some of it, or maybe I just got confused some other way. At any rate, my apologies. Obviously, 2/3 of this post still applies, but just ignore the ROH part. Sorry for the confusion!

Things have not been great lately for Warren Buffett and Berkshire Hathaway (BRKA) shareholders. BRK stock has dropped more than 20% since December and large Buffett holdings in the financial services area such as American Express, Wells Fargo, Moody’s, and U.S. Bancorp are hurting his equity portfolio. Buffett has also taken some heat for publicly bashing the use of derivatives, but privately writing billions in credit default swaps.

Despite the recent headwinds, you may have noticed that Buffett is still hitting some home runs. Just this year three Buffett investments have received takeover offers, all at significant premiums of 50% to 80%. What is amazing to me has been the prices offered for some of these companies. For instance, Mars is paying 32 times 2008 earnings for Wrigley (WWY). Dow Chemical (DOW) just offered a staggering 11.5 times EBITDA for chemical company Rohm and Haas (ROH).


Those are hefty prices by any measure, so I will be interested to see how smart those deals turn out to be several years from now. Buffett, for one, seems to think $80 per share is a bit steep for Wrigley. He is selling his stake to Mars for $80 per share, providing financing for the deal, and after the deal closes he inked a deal to buy a stake in the Wrigley subsidiary at a discount to the $80 purchase price. Not a bad deal if you can get it.

Full Disclosure: The author and/or his clients were long shares of Anheuser-Busch and U.S. Bancorp for investment purposes, and Wrigley as a merger arbitrage play, at the time of writing