Billionaire investor Bill Ackman, who once was deemed washed up, has come back with a vengeance in the past 16 months. His latest move was adding to his stake in Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). The purchase by Ackman, who paid approximately $210 million to $250 million for BRK stock over the past month, is as clear a signal as investors are going to get.
Here’s why I think you should follow in Ackman’s footsteps.
Why Did Ackman Buy Berkshire?
There are two reasons why Ackman bought so much of Berkshire’s stock.
The first is that he’s awash with money. You might have heard about his little trick of turning $27 million into $2.6 billion by betting the novel coronavirus would pummel the markets. Using “large notional hedges” to limit his downside, Ackman was correct and his bet paid off in a big way.
Despite the losses from some of his fund’s equity positions in March, Ackman’s hedging activities ensured that his investments delivered a 7.9% return for his investors, 25 percentage points higher than that of the S&P 500.
Not surprisingly, you don’t hear too many negatives about Ackman these days after he got lambasted by the business news media in 2018. He got the last laugh. There’s not much you can say about a $2.6 billion profit in a single month except, “Well done!
“Berkshire Hathaway was built by Warren Buffett to withstand a global economic shock like this one. With more than $120 billion of free cash available for investment, Berkshire is well positioned to deploy capital opportunistically,” Ackman wrote in his fund’s 2019 annual report.
“We believe that Berkshire will not be materially negatively impacted as a result of the [coronavirus] crisis. Rather, we believe that Berkshire will emerge from this crisis as a more valuable enterprise as the market decline will enable it to invest a substantial portion of its cash in investments which will accelerate its long-term growth in intrinsic value.”
Now, I don’t know about you, but if a billionaire who just made a pre-tax annualized gain of 114,356% tells me he’s buying Buffett’s stock, and he gives a perfectly logical reason for doing so, I’m going to believe that he knows what he’s doing.
The Bottom Line on BRK Stock
Last June, I highlighted seven ways to make Berkshire Hathaway stock more attractive.
The ideas included:
- Paying a special dividend
- Increasing share repurchases (I’m sure we’ll see a bunch in the company’s 13F)
- Selling McLane Company, its distribution business
- Spinning off $30 billion in cash into a separate company that invested in smaller businesses
- Acquiring alternative asset manager Brookfield Asset Management (NYSE:BAM)
- Buying the S&P 500 through an ETF
Interestingly, Berkshire actually did buy a couple of S&P 500 ETFs in the final quarter of 2019, but it did so on behalf of a pension plan.
Anyway, despite my suggestions, I still view BRK stock as an excellent play in good times and bad.
And the fact that Bill Ackman has gotten excited about Berkshire’s stock says everything about its future potential.
“Berkshire was one of PSH’s two new investments in 2019. As long admirers of the company, we took advantage of the opportunity to invest at a valuation which represents one of its widest discounts to intrinsic value in many years,” Ackman wrote.
“Berkshire’s discounted valuation, large excess cash balances, and substantial margin opportunities at several key operating subsidiaries provided an attractive investment opportunity.”
Ackman’s decision to invest much more money in Berkshire Hathaway stock is as good an endorsement as investors going to get.
Should you buy Berkshire Hathaway? Heck, ya!
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.