The Oracle of Omaha has still got it. Warren Buffett’s Berkshire Hathaway ($BRK.A) reported its most profitable quarter ever, particularly driven by Buffett’s buy-and-hold, slow-and-steady investments.
Strength in the U.S. economy spurred Berkshire’s growth, with net income up a massive 41% year-over-year to $6.4 billion. Operating income, a metric that Berkshire emphasize above all else, increased 11% to $4.3 billion, far surpassing analyst expectations and sending the stock close to all-time highs.
Berkshire’s numbers were outstanding, but two big stories from the report stole the headlines: the resilience of buy-and-hold investing and Berkshire’s curiously large cash pile.
Buffett’s Buy and Hold Driving Profits
Todd Combs and Ted Weschler, Warren Buffett’s presumed successors, have allocated billions of Berkshire’s dollars into newer, tech and energy-related companies that Buffett refuses to touch. Last quarter, Buffett admitted that Combs and Wechsler outperformed Berkshire’s traditional investments, raising question about Berkshire potentially phasing in new-age investment strategies.
However, Q2 belonged to Buffett. Strength in Berkshire’s traditional long-term investments defied the notion that Buffett’s classic investment tactics are dated. A stronger U.S. economy generated growth in the dozens of company’s the Berkshire has invested in during Buffett’s 40+ years as the Chairman and CEO.
Geico was an excellent performer for Berkshire, with EBIT up 17% year-over-year to $393 million, with premiums up over 10%. Berkshire Hathaway Energy Company posted $578 million in EBIT, 33% higher from the same quarter last year. The old reliable BNSF railroad also posted solid results, and Berkshire recorded a $1.1 billion gain on its acquisition of a Miami-based TV station.
With all this said, there’s no doubt that Buffett is still on top of his game. The quarter establishes that “buy and hold” is anything but dead, and Berkshire Hathaway’s inevitable transformation is still quite some time away.
Berkshire’s Loaded Cannon Points to Overvaluation?
In the midst an extended period of quiet acquisition activity and enormously profitability quarters, Berkshire is sitting pretty on $55 billion in cash, the most amount of money that Buffett has ever had to work with. All eyes are on Buffett’s next move, which will surely be a major investment in a high cash flow company with staying power in a competitive industry – a typical Buffett investment.
Buffett is famous for his uncanny ability to time the market. He has never and will never invest for investment’s sake, and right now just isn’t the time for Buffet to pull the trigger. The S&P 500 is up 61% over the last three years and 38% since 2013. Stocks have hit very little selling resistance over the last couple years, and Buffett simply doesn’t see anything that catches his eye at current valuations.
Thus, investors may be justified to interpret Berkshire’s lack of acquisition activity as a sign that stocks are overvalued. As the market processes the ills of Ukraine, inflation, the Middle East, the imminent Fed taper, and a possible overextension of stock advances, Buffett is on the prowl to strike at the right moment, and the right moment won’t arise until valuations come down.