Berkshire Hathaway stock has slumped to an 18-month low as markets roil. Don't be surprised if Warren Buffett strikes deals, snags bargains, and boosts buybacks.
Buffett may seek to capitalize on cheaper Berkshire stock and wider market weakness, as the investor has in previous downturns.
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- Berkshire Hathaway stock closed at an 18-month low on Monday.
- Warren Buffett's company has been hit by fears of inflation, recession, and further market declines.
- Buffett might seek to strike deals, buy stocks and businesses, and boost buybacks.
Shares of Warren Buffett's Berkshire Hathaway slumped to $264 on Monday, marking their lowest close since April 2021.
Worries about inflation, recession, and further equity declines threaten to drag the stock lower still. However, Buffett will probably seek to capitalize on widespread fears about markets and the economy, by striking deals, snagging bargains, and ramping up buybacks.
Berkshire's "B" shares have tumbled 27% from their record high of $362 in March. The decline partly reflects a broader sell-off of stocks this year, in response to the Federal Reserve hiking interest rates to curb inflation.
Investors, worried that soaring prices and higher rates will tank the US economy, have dumped stocks as they're riskier than other assets such as bonds, and offer worse relative returns as rates rise.
Buffett's conglomerate is a microcosm of the US economy, given it owns scores of businesses across sectors including insurance, energy, transportation, retail, manufacturing, and distribution. Its stock has likely dropped on a range of concerns: that inflation is squeezing consumer demand, that labor shortages and supply constraints are still disrupting US commerce, and that a recession may be looming.
Moreover, Berkshire owns billion-dollar stakes in several public companies, meaning it derives some of its market value from their stock performance. Most of its largest holdings have slumped this year including Apple (-17%), Bank of America (-33%), American Express (-18%), Coca-Cola (-2%), and Kraft Heinz (-6%).
Berkshire is clearly exposed to rising prices, economic weakness, and further declines in stocks. However, Buffett and his team famously focus on the long term, and views periods of panic and turmoil as opportunities to profit.
For example, they invested $5 billion in Goldman Sachs and $3 billion in General Electric during the fall of 2008. Given a dearth of available financing at the time, they were able to strike numerous deals on attractive terms, and will undoubtedly seek to repeat that strategy if liquidity dries up again.
Buffett also specializes in snapping up undervalued businesses. Bargains were rare during the pandemic boom, but a prolonged downturn could throw up some cut-price stocks for him to buy. The investor might also be able to acquire some quality businesses, without waging a bidding war with private equity firms and special-purpose acquisition companies (SPACs).
Finally, Berkshire's stock-price decline could revive Buffett's appetite for buybacks. Berkshire only spent $1 billion on buybacks in June, and didn't repurchase any shares in April or May. In contrast, it used $3.2 billion for repurchases in the first quarter of this year, and spent upwards of $6 billion in each of the five quarters before then.
The drop in buybacks this year partly reflects Berkshire opting to spend a record $51 billion on stocks in the first quarter instead. However, Berkshire shares are now trading comfortably within Buffett's price range for repurchases, so the investor might decide to scoop up some of his own company's shares on the cheap.
Importantly, Berkshire had about $105 billion in cash at the end of June. It has pledged to keep $30 billion in reserve, but that leaves around $75 billion in dry powder. Armed with that sum, Buffett and his team will be looking to capitalize on the current turmoil by striking deals, purchasing discounted stocks and businesses, and scooping up more Berkshire stock.