Maybe stocks aren’t so cheap, after all. We’re more than halfway through the year, and Warren Buffett still can’t find a deep enough bargain to make his big annual acquisition.
That’s helped Buffett’s holding company, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), see its war chest climb to the highest level in a year. After paring its stakes in some big consumer stocks and failing to find a suitable deal target, Berkshire’s cash hoard swelled to nearly $41 billion in the second quarter, up from $38 billion from the first quarter.
True, Buffett is in a bidding war for Residential Capital, the bankrupt mortgage business of Ally Financial, formerly the financing arm of General Motors (NYSE:GM) known as GMAC. But even if Berkshire succeeds in capturing ResCap, the purchase price of $2.4 billion, plus perhaps another $1.4 billion for its loan portfolio, is small beer by Buffett’s standards.
The Oracle of Omaha says he likes to make one big acquisition a year. He hasn’t made a big buyout since 2011, when Berkshire paid $9 billion for engine-additives maker Lubrizol. And even that wasn’t a huge splash. At least not when compared with 2010’s buyout of Burlington Northern Santa Fe railroad for $27 billion.
So here we have Buffett sitting on $41 billion in idle cash — and Buffett hates sitting on cash if there are undervalued assets to be found. Buffett said in May that he found a juicy potential target that he was prepared to spend $22 billion on, but he couldn’t come to an agreement with the undisclosed company.
No one is more stubborn than Buffett when it comes to paying what he sees as the right price for an asset. As he likes to say, price is what you pay, value is what you get. The fact that he can’t find anything of value at the right prices suggests the big game may be too dear.
Berkshire has also been paring its stakes in consumer-products stocks, while increasing its holdings in financial stocks. We won’t get the names of the individual holdings for a couple weeks or so, but we can guess what’s changed.
We know Buffett is a big fan of Wells Fargo (NYSE:WFC), the nation’s fourth-biggest bank by assets that just rode the strength of its dominant mortgage business to record quarterly profits . And we wouldn’t be surprised if he pared his bets on Johnson & Johnson (NYSE:JNJ) and Procter & Gamble (NYSE:PG), both of which have made mistakes and suffered for it.
But the takeaway is that the clock is ticking on 2012, and Buffett still can’t find a big bargain.
The forward price-to-earnings ratio on the S&P 500 remains stuck well below it long-term average, suggesting stocks are cheap. But based on Buffett’s lack of buyouts, the really deep discounts have yet to materialize.
As of the writing, Dan Burrows held none of the securities mentioned here.