7 experts share their hopes for Warren Buffett's Berkshire Hathaway this year. Cutting back on Apple, boosting buybacks, and landing a big acquisition are on the list.

  • Warren Buffett should slash his Apple stake, boost stock buybacks, and hunt for acquisitions, experts say.
  • Berkshire Hathaway was cautious when the pandemic struck, then deployed more than $35 billion later in 2020.
  • Seven experts on Buffett and his company told us what they hope and expect to see this year.
  • Visit Business Insider’s homepage for more stories.

Warren Buffett’s Berkshire Hathaway had a rollercoaster ride of a year in 2020.

The famous investor’s company owns scores of businesses including Geico, See’s Candies, and the BNSF railway, as well as billion-dollar stakes in Apple, Bank of America, Coca-Cola, Kraft Heinz, and other public companies.

As a result, Berkshire was hit hard when the COVID-19 pandemic spurred authorities to impose lockdowns, shutter non-essential businesses, and roll out travel restrictions last spring.

Buffett initially took cover, selling Berkshire’s stakes in the “big four” US airlines and slashing its positions in JPMorgan, Wells Fargo and other financial stocks in the second quarter of last year. The approach surprised many commentators who had expected the investor to deploy a chunk of Berkshire’s roughly $130 billion cash pile when markets tanked.

However, the Treasury and Federal Reserve moved quickly to pump liquidity into the economy and shore up asset prices, giving Buffett little time to find bargains, or strike the kinds of lucrative deals he made during the financial crisis.

Buffett and his team sprung back into action in the third quarter, when they were confident the pandemic didn’t pose an existential threat to Berkshire. They announced more than $35 billion of investments in the period, including $18 billion in stock purchases, a record $9 billion in share buybacks, and $10 billion worth of deals.

Berkshire will reveal how its operations fared in the fourth quarter, as well as which stocks it bought and sold, later this month. We asked seven experts to share what they’re hoping and expecting to see from Buffett, his business partner Charlie Munger, and the rest of the team this year.

Several of them called for Berkshire to cash out some of its Apple stock, boost its share buybacks, and make acquisitions at the right price. Here are their thoughts, lightly edited and condensed for clarity:

Bill Smead, founder and investment chief of Smead Capital Management:

“We expect Buffett and Munger to sit on their hands and wait patiently for this financial euphoria episode to end. When euphoria breaks, it will punish stock prices. Buffett can then pick and choose among meritorious bargains.

We expect 60% declines for popular growth stocks, 80% declines for glam revenue growth stories, and total annihilation of concept stocks!”

Paul Lountzis, founder and president of Lountzis Asset Management:

“We would like Buffett to maintain his discipline through these unique times, as he always has. We would also like him to sell 20% to 25% of his Apple holdings, buy back a minimum of $10 billion to $20 billion of Berkshire shares depending on their price, and pay a special dividend of $10 billion to $20 billion.

Apple is a great company, but may not be an attractive stock given current valuation levels. The sale of Apple shares would provide a great deal of money to be used for buybacks and the special dividend. Berkshire would still have an enormous amount of cash, but that is fine with us. We are extremely patient with very long time horizons.

I do not recommend Berkshire make any additional technology investments as many are selling for 40 to 100 times revenues and will never grow into their valuations.”

Darren Pollock, portfolio manager at Cheviot Value Management:

“We would not be averse to Buffett and his team reducing Berkshire’s stake in Apple. The shares ended the year at more than 30 times next year’s earnings, a valuation that is more than 2.5 times higher than its average during the prior decade.

Apple is a great business, just very highly priced at this time. We know Buffett regretted not selling at least a portion of Berkshire’s giant stake in Coca-Cola in 1998, and today the Apple position is much larger.
 
We’d like to see large, continued share buybacks as long as Berkshire stock remains attractively priced. We think Berkshire can easily buy $20 billion worth of its own shares annually and still add to its cash balance each year. Moreover, large buybacks should not hinder its ability to make acquisitions. This is a company in such strong financial condition that it can have its cake and eat it, too.
 
As Munger likes to say, to be a great investor one needs a combination of great patience and then great gumption to act aggressively when opportunities arise. Over time, Berkshire management has consistently shown both – though more patience than gumption in recent years. We hope to see more gumption, although only when the opportunity makes sense.”

Adam Mead, founder and CEO of Mead Capital Management, and author of “The Complete Financial History of Berkshire Hathaway”:

“I expect to see the same broad playbook that’s brought Berkshire to this point, which is patient opportunism. Berkshire has no master plan, or strategic plan, which is intentional.

I’m confident Buffett and his team will continually weigh all opportunity costs and make the right decisions as they arise. That could mean additional marketable securities if markets are favorable, purchases of whole businesses, or additional share repurchases.”

James Shanahan, senior equity analyst at Edward Jones:

“Many of Berkshire’s businesses struggled in 2020. For example, BNSF was challenged by lower shipping volumes. NetJets, Flight Safety, and Precision Castparts were impacted by reduced demand for aviation services. And the insurance segment experienced elevated life and business-interruption claims, as well as lower premiums for workers’ compensation and commercial auto insurance.

Berkshire is well-positioned to benefit from a broad-based economic recovery in 2021. We are also hopeful that we observe continued cash deployment throughout 2021, at least to keep total cash at or below the $140 billion-to-$145 billion level.

Buffett was also building a large position in a public company in the third quarter, and wanted to complete the purchases prior to making its identity public. As a result, it would seem likely that Buffett purchased more of the stock in late October and beyond.”

Tyler Hardt, portfolio manager at Pelican Bay Capital Management:

“My greatest hope this year is that Buffett is able to put his substantial cash pile to work. His swelling checkbook of $140 billion means there are very few major companies that are off limits.

Theoretically, between the cash on hand and value of Apple stock, Berkshire could buy a major company like Exxon without issuing a penny of debt. The very thought of that possibility would be mind-boggling just a year or two ago.

I would also like to see Buffett and his team consider trimming their holdings in Apple, which has become Berkshire’s single largest position, with a recent market value of $137 billion.

I applaud Buffett for his acumen to buy Apple shares and the confidence to make it a significant investment. However, Apple is now boasting a price-to-earnings multiple of 44. This seems exuberant, particularly in light of other uses of that capital, such as buying more shares of Berkshire itself.”

Brian Gongol, veteran shareholder and long-time follower:

“The signs point to a consolidation of Berkshire’s banking investments. I don’t think Buffett has lost his taste for banks, but it’s clear he’s lost his patience with certain bankers. Further consolidation in banking is inevitable, and Berkshire may be in a position to get in before the mergers start taking stupid turns. In other words: I don’t think Buffett is done investing in Bank of America.

The Biden administration may pose less political risk to markets, but the more the government spends and borrows, the greater the urgency in putting the Berkshire cash mountain to work. If inflation starts to rear its ugly head, then suddenly a lot of cash-deployment opportunities that looked only OK before start to look more attractive.

Sentimentally, I’d love to see Berkshire pull off another transformative acquisition like the BNSF purchase. It’s fun — like watching your team make a playoff run. But in light of the market conditions right now, I doubt there are any such opportunities hidden in plain sight.

I would be very satisfied if Berkshire took this year’s earnings and used them to buy more of the things it already loves, starting with share repurchases. It’s not the mouth-watering deal at $230 a share that it was at $180, but it’s still far from overpriced.

If the company bought another 5% of Kraft Heinz, or inched up its holdings in the Japanese trading houses from 5% to 7.5% or so, or tacked on another couple of regional utilities, that would be a thoroughly satisfactory way of staying the course without holding still.”

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