Friday was a big day for Berkshire Hathaway (BRK-B, BRK-A) having completed the Burlington Northern Santa Fe (BNI) acquisition and formally joining the S&P 500 Index after the markets closed. Now everyone is left wondering what’s next for Buffett’s Berkshire.
The long and short of it is that profit-taking is very likely. Class B shares of Berkshire Hathaway (BRK-B) rose a whopping 13% after the index addition, and investors and traders (and S&P 500 index managers) had more time than usual to enter their trade.
Visa Inc. (V) was the most recent similar company that saw a huge influx due to its S&P 500 Index addition. The announcement came on December 11 after shares closed at $81.22. The stock closed at $84.64 on that next Monday and then closed at $88.84 on a whopping 84,383,400 shares the following Friday when the stock formally went into the S&P 500.
Getting back to Berkshire — it was on the evening of January 26 that the announcement of Berkshire’s S&P addition was announced. Shares were at $68.00 on the close, and they rose to $1.36 on that day. Despite a weak and choppy stock market over the last two weeks, Berkshire Hathaway shares closed at $76.90 Friday. That is roughly a 13% gain.
This is almost a classic textbook scenario to expect a “sell the news” reaction. A 13% move for an index addition over more than two weeks when it should have traded lower, or at least flat, in a choppy market makes this even more of the case.
S&P 500 Index-tracking funds have been able to have more discretion over entering an index-change trade. It used to be that fund managers would have major imbalances on the actual day of an index change. Now, this occurs in the days (or in this case weeks) ahead, while some of the index changes are done on the day and some of the weighting may comes in the days and weeks after the formal change.
Some noted that about $14 billion of Berkshire Hathaway needed to be bought. That may have been the case, but much of that was seen ahead of the event. As far as whether this crashes, that is unlikely. It is just normal to expect profit-taking in the coming days.
