It's Time to Buy Buffett

Berkshire Hathaway has recieved a beating during the past year, near the highs of $150,000 a share to lows below $70,000 a share. A big reason for this is because of the equity losses that evolved in Buffett's stock portfolio. In addition, his derivative bets were resulting in quarterly losses, however, he assures they will pay off in the long-term. I recently did an analysis on Berkshire Hathaway's equity holdings and found the following:

1. Berkshire Hathaways equity portfolio dropped 21% in value from Dec 31 08 to Mar 31 09. Rather interesting, considering the S&P was down 12% during the same time period.

2. Only 3 stocks in BRKA's equity portfolio were in positive % change value during that time period.

3. The biggest losses were in four (rather sizeable) holdings: WFC (-52%) , BAC (-41%), STI (-60%), and USB (-41%).

In the past month, Fitch has came in and downgraded Berkshire, which took the credit rating down from AAA. Moody's came out yesterday and did the same thing, causing many analysts and investors to question and fear Warren Buffett, Berkshire Hathaway, and his decision making.

Well, in reaction to this, I believe the ratings agencies are dead wrong and I think BRK.A is a buy!

Here is why:

1. The downgrade is absurd and not needed. Berkshire has over $35 billion in cash on the books and has plenty of capital, with no fear of liquidity. In addition, Buffett has striked brilliant debt deals with Harley Davidson that yield Berkshire 15% and preferred shares with GS and GE that yield him 10%. I am sure he would have preferred to negotiate better strikes on the preferreds but he will be fine with a five year time period. In addition, the derivative bets are based really on the S&P and he doesn't have to provide any collatoral. The long buyers of these derivatives are pension funds, who are looking to hedge their risk, not hedge funds.

2. The current stock price discounts the core businesses away from the equity portfolio. It is true that the insurance premiums and underwriting profitability is maturing; however, Buffett has created new companies, like bond insurance units, that can crush MBIA and Ambak. MBIA and Ambak underwrote insurance on toxic assets, which killed them. Buffett started fresh and is very risk adverse and will prosper, the "old traditional way".

Some analysts believe that the Berkshire's current equity portfolio is about $65,000-$75,000 a share. Currently, BRK.A is selling at $90,000, therefore you are getting the rest of the other companies at $15,000 per share, lol. This also takes in account the current value after Q1 2009, not the current or future state of those depressed equity values. WFC bounced 35% and Buffett owns like 10-15% of the firm, which can really help the equity portfolio. Anotherwards, if these finanicals bounce, BRKA can soar, due to the increased value in the equity portfolio. My last point comes from reading the annual report and studying the books. It seems that your are really paying like 2x EBITDA on these operating firms, which is screaming "buy me". He does have some cyclical names, like Nebraska Furniture Mart for example; however, they also some durable companies like GEICO. These businesses are stable, have a great parent firm, and will appreciate with time.

In conclusion, there may be many bears and short sellers of BRK.A (BRK.B is the 1/16 of it) but this stock opportunity offers great value. What really brought this to my light is WFC's good news Friday, it will greatly help Berkshire's stock price. BRK.B is the best way for the ordinary trader to play it. It sells for around $3,000 a share (very expensive in price lol) but I think it will hit $3750 within 2009, representing a great buy/hold opportunity, with 25%+ upside.