The novel coronavirus pandemic has made over 150,000 people across the globe sick with Covid-19, leading to nearly 8,000 deaths. It has caused entire cities and countries to go into lockdown, sent financial markets into a panic and put the global economy on the brink of a recession. For Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) stock, the coronavirus pandemic has a silver lining. Actually, it has 128 billion silver linings.
While BRK stock has plunged nearly 20% over the past month on escalating coronavirus fears, investors seem to have forgotten that Buffett has been preparing for this moment for years.
Shareholders and analysts alike have, for several years, pushed the famed investor to spend the company’s huge cash pile on buybacks or a splashy acquisition. He did neither. For years, he simply let Berkshire’s cash pile grow, and grow, and grow.
Now, the company is sitting on $128 billion in cash at a time when everything is on sale.
Buffett is finally going to deploy some, most, or even all of that $128 billion into the hardest hit parts of the economy, much like he deployed a bunch of cash during the 2008 Financial Crisis. Back then, Buffett’s big bet on banks and the like paid off hugely, and Berkshire Hathaway’s stock price rallied big in the years after the crisis.
The same thing should play out this time around.
Buffett Doesn’t Have to Panic
Perhaps the best thing about having $128 billion in cash on the balance sheet is that Warren Buffett doesn’t have to panic.
He nor Berkshire are in any rush to pay off any debt. They don’t have cash burn problems. Their cash balance is sufficient to withstand decades of billion-dollar losses (if it comes to that).
While the rest of the market panics, Buffett and company — who have seen a lot — are patiently waiting to deploy $128 billion to distressed equity and assets, at bargain prices and under favorable terms.
Back in 2008, Buffett injected banks with capital. In return, he demanded an arm and a leg. They gave him all of that, because they needed Buffett’s money to survive.
This time around, Buffett will likely inject airlines, cruise lines, and travel and entertainment companies with capital. Again, he will demand an arm and a leg. And they will give him whatever he wants, because these heavily indebted, cash-poor companies need Buffett’s money to live another day.
Big picture — the coronavirus crisis is creating panic everywhere. But when you have $128 billion in cash like Buffett, there’s no need to panic. Instead, over at Berkshire Hathaway, Buffett and company will probably score some big, highly favorable deals out of this crisis.
Berkshire Hathaway Stock Could Breakout
Bears will be quick to point out that Berkshire Hathaway stock has been a huge underperformer for years, and that the company’s core businesses — including a railroad business and an insurance unit — have huge risks in the event the economy keeps tumbling. Both of those things are true, but they’re also highly debatable.
With respect to underperformance, one could easily chalk it up to Buffett’s tendancy to hoard cash instead of investing. This results in slow growth which doesn’t impress investors. But if Buffett does finally pull the trigger and deploy a bunch of Berkshire’s huge cash reserves, then the company will be in all-out investing mode. That should spark faster growth in coming years, which leads to stronger returns.
Meanwhile, because the novel coronavirus is a fleeting headwind (that is, social distancing works in “defeating” the virus, as evidenced by South Korea, China and Iran), the economic impact on Berkshire’s core businesses will be temporary. Even further, any such impact will be absorbed by the company’s $128 billion cash balance.
Net net, despite years of underperformance, it looks like BRK stock is finally ready to breakout … once the crisis passes.
Bottom Line on BRK Stock
Berkshire Hathaway has a huge cash balance. The company also has a history of successfully navigating through turbulent times. Combining those two facts, BRK stock looks like a relatively safe investment during the coronavirus outbreak. There’s also healthy upside potential over the next six months through a broad economic rebound.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.