Berkshire Hathaway Stock Buyback

| September 27, 2011 | 0 Comments

In Warren Buffett’s annual shareholder letter in February he said, “Our elephant gun has been reloaded, and my trigger finger is itchy.”

At the time, Mr. Buffett was bullish on the economy and on the hunt for a major acquisition.  Investors liked what they heard and sent shares of Berkshire Hathaway (BRK/A) soaring to a 52-week high of $131,400 on March 1st.

He eventually pulled the trigger on a deal to buy chemical maker Lubrizol (LZ) for $9.7 billion on March 14th.  But since then, the economy has weakened and stocks have been in freefall.

As you can see, the shares shed a whopping $32,448 from the March high to the recent low of $98,952.  That’s an eye popping 25% selloff!

Obviously, the Oracle of Omaha isn’t happy to see Berkshire’s stock in the tank.

He just couldn’t stand to see the market mis-value BRK/A any longer.  As he put it, “The underlying businesses of Berkshire are worth considerably more than this amount.”

In other words, BRK/A shares are cheap.

Thing is, Berkshire has more than $48 billion in cash.  So Buffett doesn’t have to accept the market’s valuation.  He can do something about it… And that’s exactly what he did.

Yesterday, he announced Berkshire will repurchase shares for as much as 110% of their book value.  Not surprisingly, BRK/A shares jumped more than 8% higher on the news.

Look, this is the first time Buffett has ever authorized a share repurchase for Berkshire.  That means he thinks his stock is dirt cheap right now.

In the shareholder letter, he said there’s only one way to justify a stock buyback.

“First, the company has available funds beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated,”

In other words, Buffett thinks 1.1x book value is way too cheap for Berkshire shares.  So he’s putting his money where his mouth is and buying the stock.

I think this is a great move… It basically puts a floor under the stock.

According to Capital IQ, BRK/A was trading at 1.1x book value on June 30th.  And the stock closed at $116,105.  That means Buffett should continue buying BRK/A up to $116,105.  That’s another 7% higher than yesterday’s closing price.

Clearly, there’s still plenty of upside for BRK/A.  And don’t worry if the price tag on the Class A shares are too pricey.  The Class B shares (BRK/B) offer just as much upside.  And they’re only trading for $72.

Take a look at BRK/A and BRK/B shares for your portfolio today.  After all, the greatest investor of all time thinks these shares are dirt cheap.

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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