March 16, 2020 BARRON’S M3
could buy, such as blue-chip stocks like
Alphabet(GOOGL),Microsoft(MSFT),
Visa(V), andCostco Wholesale(COST).
It is also possible he could provide rescue
financing to companies in the hard-hit
travel industry. And there has been specu-
lation that he might invest inBoeing(BA).
Buffett, 89, often does his rescue deals
through convertible preferred stock, which
is senior to common shares, pays a high
dividend, and comes with an equity kicker
that gives Berkshire upside participation if
the common stock rallies. A Berkshire res-
cue can be useful to a struggling company
because it comes with Buffett’s imprimatur.
During the financial crisis, Buffett did
just that, buying $5 billion of 10% convert-
ible preferred stock fromGoldman Sachs
Group(GS) and $3 billion of 10% convert-
ible preferred fromGeneral Electric(GE).
While not a rescue deal, Buffett agreed to
buy $10 billion ofOccidental Petroleum’s
(OXY) 8% preferred stock last spring with
equity warrants, as Occidental sought fi-
nancing for its bid for Anadarko Petroleum.
One advantage that Buffett provides to
companies seeking financing is a quick
decision—often in hours. These deals some-
times take shape over the weekend.
It is also possible that Buffett might buy
an entire company. Cruise industry leader
Carnival(CCL), for instance, now has a
market value of about $11 billion after a 65%
plunge in its stock this year, to $17.
Given the rout in airline stocks, there has
also been talk that Berkshire might buy an
airline. It already owns about 10% of each
of the four leading U.S. carriers:Delta Air
Lines(DAL),American Airlines Group
(AAL),United Airlines Holdings(UAL),
andSouthwest Airlines(LUV). It recently
added to its stake in industry leader Delta.
Buffett, however, said in a CNBC inter-
view in February that it was unlikely that
Berkshire would buy an airline, citing regu-
latory reasons, including its large stake in
American Express(AXP), which has a
credit-card partnership with Delta.
Asked about a purchase of a major air-
line, here’s what he said: “It’d be very un-
likely that we would do that. I’m not saying
it’s impossible. But—it’s complicated.”
Buffett does only friendly deals, so any
merger would come after the company in-
vites Berkshire to bid.
Berkshire is taking its own lumps in its
large equity portfolio, which totaled about
$250 billion at the end of last year. Some of
its wholly owned companies, including the
Burlington Northern Santa Fe railroad, are
also exposed to a weaker economy.
Barron’sestimates that the Berkshire
equity portfolio is down by about $40 bil-
lion since year-end 2019, hurt by its big
holdings in such financial companies as
Bank of America(BAC),Wells Fargo
(WFC), American Express, andJPMorgan
Chase(JPM).Apple(AAPL) is the largest
holding, accounting for about 30% of its
portfolio. It is down about 5% this year,
against a 16% drop for the S&P 500.
Berkshire’s class A shares closed down
7%, to $289,000, this past week. Its book
value ended 2019 at around $261,000 per
class A share. We estimate book value is
now between $245,000 and $250,000 a
share due to the decline in its portfolio.
Based on that estimate, Berkshire would
be trading at about 1.2 times book value—
low by the standards of recent years, but
understandable in the context of the big
market decline this year.
Berkshire’s fans think the stock is attrac-
tive, given its relatively low valuation, the
company’s strong balance sheet, and its
ability to make investments when others
may be unable to do so.
This is the kind of panicked market that
Buffett relishes and may never see again.
—Andrew Bary
Industry Action
Performance of the Dow Jones U.S. Industrials, ranked by weekly percent change.*
–12.90% Telecommunications
–13.01 Health Care
–15.65 Technology
–15.87 Consumer Services
–16.74 Consumer Goods
–18.32 Industrials
–18.93 Utilities
–19.36 Financials
–19.77 Basic Materials
–30.80 Oil & Gas
- For breakdown see page M36. Source: S&P Dow Jones Indices
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