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Warren Buffett’s Large Acquisition (BNI, BRK.A, BRK.B)

November 6, 2009 Leave a comment
warren_buffett

Warren Buffet

Warren Buffett has picked up one of the stocks I have championed before on this blog, railroad stock Burlington Northern Santa Fe (BNI).  Berkshire Hathaway (BRK.A, BRK.B) had previously acquired a sizable minority position in BNI, and Mr. Buffett must have liked it a lot because he decided to buy the rest of the company at a price of $100 per share (about a 30% premium from the previous days close).

In addition to the announcement of his largest acquisition ever, Buffet announced a 50-to-1 split of the Baby Berkshire shares, his class B tranche (BRK.B).  This announcement, he said, was so that he could offer the small investors some BRK shares, whereas before they couldn’t afford the high prices (somewhat of a contradiction to what he said a few years ago about how a stock split was stupid and would allow inferior investors to own its’ stock…).

This puts BRKB on the radar of both Mike and myself.  Previously, we both had looked at BRK as a favorable investment, especially during March when it had reached such a low level, however, the price was cos prohibitive. Now, Warren has offered me the chance to either accept $100 in cash for my shares of BNI, or some of his new, cut price, BRK.B shares.  And I am unsure how to act.

On the one hand, BRK is a one stop diversification stop.  It has exposure to banks, insurers, manufacturing, transportation, and a host of others.  It has a proven track record of providing its investors with outsized gains, and excellent capital preservation.  And it is the best way to ride the coattails of the one who is considered the world’s greatest investor.

On the other hand, Mr. Buffett is not a young man anymore.  I am aware that there are several remarkably smart people waiting in the wings at Berkshire, but it is a huge risk to assume that the company can continue its remarkable run without its point man at the helm.  His deal with Goldman Sachs (GS) during the height of the financial crisis was inspired and hugely profitable, but his similar timing with a similar deal with General Electric (GE) was less so, with the warrants he acquired remaining worthless.  Finally, BRK is highly leveraged to the US economy.  With this deal, Warren openly admits that he is taking a huge risk on the future of America, which he is undyingly positive about. Add to this his other positions and you have a company which is leveraged to a country with anemic growth, a declining currency, and a government with a huge debt load.

During the course of writing that last paragraph, I have convinced myself that I will take Warren’s offer of cash to the bank.  There are too many variables involved in Berkshire, especially as Mr. Buffett gets older.  I respect him hugely as an investor, I just think I can achieve a superior Sharpe ratio investing elsewhere.

Disclosure: Long GE, GS and BNI (pending the buyout)

S AAPL @189.59-190.00

October 14, 2009 6 comments

green_appleThis is somewhat of a joint post between the two of us, as we have both sold Apple (AAPL) in the last week (AH, all shares@$189.59 and MB, 66% shares@$190.00) after having some discussions about the stock.

Our thought process was fairly simple and it revolved around the question: What is priced into the stock?  There is no bad news surrounding Apple right now.  Any thoughts that they, being a manufacturer of premium products, would be struck down by the recession have been quelled as they rolled out earnings numbers that almost defied belief.  The myth that without Steve Jobs the company would be a body with no head has been squashed, as they performed admirably during the health-related absence of their CEO. They continue to excite and amaze the population with relatively minor and incremental upgrades to their products, due to the strength of their existing market position and their incredible marketing abilities. The ever-persistent rumors about a tablet or touchscreen notepad-like product have reached the pinnacle as analysts expect a product arriving early next year that will energize that dormant segment like they did the music and mobile phone industries. Even beyond this, this is the belief that Apple’s innovative power will continue at the speed of Moore’s Law and that everything they do will work so well in the future as to cause network effects that will cause limitless profits.

As stated before, there seems to be no bad news priced in, but I see a few dark clouds on the horizon. Windows 7 is arriving soon, and is supposed to be the first product from Microsoft (MSFT) that can truly compete with OS X.  Apple may no longer stand to benefit from having a unworthy competitor. Additionally, Apple’s impeccable track record with nearly everything they touch means that if the much hyped tablet concept turns out to be anything other than astounding, investors could be disappointed.

At the time of this writing, Apple is within 5% below its all time, intra-day high of approximately 202.98.  That price was reached in December 2007, just before the financial crisis really took hold of the markets.  At that point, there were equally no reservations among analysts that AAPL was going to the moon. It was after that point that doubts began materializing.

Given the abundance of good news and the lack of bad catalysts, we are not calling a top on AAPL. However, until the good expectations baked into Apple’s price begin to materialize in a meaningful way we think there are other investment opportunities with better potential rates of return after considering Apple’s 100%+ run from the bottom on March 9th, 2009.

Disclosure: Michael is long AAPL, Andrew is long MSFT. Both love Apple products.

Playing With Fire – UltraShort S&P 500 (SDS, SH, SKF, QID, INTC, JPM)

October 14, 2009 Leave a comment

“When the facts change, I change my mind. What do you do sir?” – John Maynard Keynes

I bought SDS before the close yesterday (10/13) after looking at one of my more reliable long term technical indicators which predicted a fairly serious iminent fall in the market. Combined with the fact that Intel (INTC) and J.P. Morgan Chase (JPM) were reporting after the close and in the morning made me want to get some protection.

Their earnings not only had high expectations, but they are also bellwether of their industry and of the overall market. Had anything not gone off perfectly in their reports, the results would most likely have been bad with a run down to at least 1030 on the S&P. I also felt that Dow 10,000 could pose strong psychological resistance in the market

That being said, I heeded the wisdom of Mr. Keynes and covered the position early in the morning after anticipating a half gap fill. In the end I only lost 1.7% (including trading fees) on a trade that could have returned at least 5% easily. I also put on additional long positions which I will get into later.

-MJB

S VXX @ 45.96

October 14, 2009 1 comment

I sold my VXX position for a loss, as earnings are coming in better than I expected.  The all important, for this earnings season at least, revenue estimates are being beaten and the market is buoyant. As I mentioned before, I bought VXX as a hedge, but now that it seems the market has determined its direction I feel I no longer need that protection.

Additionally, my opinion is that VXX is an ETF that is not designed to be held for a long period of time, because of the way it is structured anything much more than a day trade can show a divergence from the index it is supposed to track.

S RIMM @$83.60

September 24, 2009 1 comment

I wasn’t even going to post on the RIMM earnings but Andrew’s has given me food for thought that I hope readers may enjoy. I have been long RIMM for months and believe strongly in it’s longer term prospects due to the secular growth trend in mobile computing and smart phones.

That being said, I sold 30% of my shares ahead of earning because I felt that expectations had exceeded reality. Andrew points out that revenue missed (consensus) estimates by only 2%. However, whisper numbers were above the high end of the spectrum closer to $5.75B which would imply a miss of closer to 8%.

I’m maintaining my $100 price target but I will be taking some profits at earlier levels. I now consider my self under invested in RIMM and I will be buying around $66-69.

Disclosure: I am long much of the mobile wireless market with positions in RIMM, AAPL, QCOM, TEF, T, TSM (and I was stopped out of my NVTL position today).

-MJB