Going against the grain can be very profitable, and if not tell those who bet against the mortgage market in 2008, like Michael Burry. Common sense dictates that it is not sensible to bet against one of the investment gurus of the last half century, but that is what they have recommended from KBW, who point to Warren Buffett as the model to avoid in the coming months.
Meyer Shields, an expert at this analysis house, has sent a note to his clients this week in which he has included Berkshire Hathaway, the company run by the ‘Oracle of Omaha’, on his list of stocks to position himself short.
The analyst stresses that consumer spending will be reduced by high inflation. Although Buffett has always focused on stocks that have a loyal following, such as Coca-Cola or Apple, Shields believes that he will be negatively affected by a decrease in spending due to price booms. In the first case, Berkshire owns 400 million shares and at the moment the soft drink company is trading positive so far this year, with earnings of 5%. In the case of technology, it falls back more than 13% in 2022. Buffett’s firm has almost 900 million shares of the company led by Tim Cook.
But Berkshire’s portfolio also includes securities from the insurance, manufacturing and retail sectors, which could be significantly affected by the reduction in household consumption in the context of the price boom and a recession whose depth is yet to be seen. something that the company itself has already warned about in its results for the second quarter of the year.
Another of the arguments that Shields uses to position himself against Berkshire is his rate of repurchase of shares, which is an indirect way of remunerating the shareholder. The analyst recalls that the company dedicated 3.2 billion dollars to buybacks in the first quarter and only 1 billion dollars in the second, compared to the 52 billion that the company bought back between 2020 and 2021. It should be remembered, however, that the company de Buffett has made various investments in recent months, such as Occidental Petroleum, Ally Financial, Paramount Global or Chevron.
On the other hand is Geico, a Berkshire subsidiary auto insurer, which is seeing its accounts fall due to the increase in the prices of used cars and spare parts. At the moment, it went from a profit of 626 million dollars in the second quarter of 2021 to a loss of 487 million in the same period of the previous year. Shields also stresses that the increased investment in marketing by the insurer could further complicate the firm’s balance sheet.
All these reasons lead the KBW expert to distrust Berkshire in the short term, but he continues to believe in Buffett’s philosophy, which has proven effective in the long term. In fact, they set the price target for their class A shares at $535,000, 25% more than their current price. Analyst consensus recommends holding the firm’s shares, with the most optimistic forecasting a 12-month value of $559,000 per share.