Warren Buffett, Chairman and CEO of Berkshire Hathaway.
Andreas Harnik | AP
Warren Buffett’s loyal following of value investors is about to hear from the legend himself, at a crucial time when interest rates have soared and recession fears are raging.
The 92-year-old Berkshire Hathaway chairman and CEO is expected to release his annual shareholder letter along with the conglomerate’s latest quarterly earnings on Saturday morning. The letter from the “Oracle of Omaha” has been required reading for investors for decades, and this year’s message is particularly awaited given the changing investment landscape.
Notably, there has been a fundamental shift in Treasury yields, which have risen to their highest levels since the global financial crisis amid the Federal Reserve’s aggressive rate hikes. Six-month and one-year yields have each topped 5% for the first time since 2007, while the benchmark 10-year government bond yield is just under 4%. After more than a decade of near-zero interest rates, the sharp rise in yields could hurt stocks’ appeal and weigh on asset prices, Buffett previously said.
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“Interest rates are to asset prices like gravity is to an apple,” Buffett famously said at Berkshire’s 2013 annual meeting. He believed that high interest rates could be a major “pull” to the company’s values.
“We have about a 15-year period of unusually and historically low interest rates. The short-term interest rates we have now are more normal,” said David Kass, finance professor at the University of Maryland’s Robert H. Smith School of Business. “Interest rates are the main determinant of stock prices, to quote Buffett, so I think I’m looking for and expecting a discussion about interest rates.”
Perhaps that explained why Berkshire was likely a net seller of stocks in the fourth quarter. The conglomerate sold a significant portion of Taiwan Semiconductor, a chip stock it only bought in the third quarter. Berkshire also reduced its holdings in Bank of New York Mellon and US Bancorp last quarter.
Thanks to rising interest rates, Berkshire’s cash pile — nearly $109 billion at the end of September — has delivered significant gains to the conglomerate, which held $77.9 billion in U.S. Treasury bills.
“One comment Buffett might make in his letter is that sitting on cash isn’t that painful. There’s an alternative now and it’s called Treasury bills or short-term Treasury bills,” Kass said.
The environment of rising interest rates could also benefit Buffett’s famous deals. Not only because of falling asset prices, but because it has plenty of liquidity while its competitors like private equity firms need to borrow to close deals.
“Private equity and others thinking of acquisitions would have to go into the market to borrow [at] higher interest rates. This would give Berkshire a competitive advantage,” Kass said.
Berkshire last year bought insurance company Alleghany for $11.6 billion in cash, its largest deal since 2016.
Big energy bets
Buffett continued to add to his position in Occidental Petroleum over the past year, with Berkshire’s stake in the oil giant exceeding 21%. In August, Berkshire received regulatory approval to buy up to 50%, spurring speculation that it could eventually buy all of Houston-based Occidental.
Many are curious to see if Buffett has an appetite for more Occidental stock given the oil and gas producer’s underperformance in 2023. The stock is down about 6% this year and is trading below $60 after more than doubling in 2022.
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“He’s shown a lot of discipline here when it comes to buying OXY stock on the open market,” said James Shanahan, a Berkshire analyst at Edward Jones. “There are very few occasions when he’s spending more than $60 a share to acquire Occidental stock.”
Meanwhile, Chevron remained Berkshire’s third-largest holding at the end of 2022, just behind Apple And Bank of America.
With a recession looming, investors are also interested in updates on Berkshire’s operations.
“As a shareholder, what I’m most excited about is an update on the underlying operations,” said Bill Stone, CIO at Glenview Trust and a Berkshire shareholder. “We have already looked at the listed portfolio. To be honest, I’m more interested in how well the underlying businesses are performing and his assessment of strengths and weaknesses.”
Berkshire’s auto insurance company Geico has been under pressure lately with consecutive quarters of underwriting losses.
“What (if any) corrective action is Berkshire taking to address this situation? Many of GEICO’s peers are struggling with the same issues and have raised premium rates to counter adverse claims trends,” said Catherine Seifert, analyst at CFRA in Berkshire.
Buffett watchers are also looking for his comment on buybacks.
The pace of Berkshire’s share buybacks has slowed over the past year, having bought a total of $5.25 billion through the end of the third quarter. That was significantly slower than the pace seen in 2021, when Berkshire bought back a record $27 billion of its own stock as Buffett found fewer outside opportunities amid a sky-high bull market.
Buffett himself told shareholders at his annual meeting last year that he’d rather buy shares in other companies than buy back his own stock.
“If we have the choice of buying companies we like or buying back stocks — the determinant is how much money we have — we’d rather buy companies,” Buffett said in Omaha in April.