(Bloomberg) – Warren Buffett's third quarter marked a new peak in many ways.
To start, Berkshire Hathaway Inc.'s operating profit topped the best levels. This was lifted by record revenue from the BNSF railway, his largest acquisition ever. Gains on the stock exchanges pushed conglomerate's net income for 2019 to a staggering $ 52 billion, making Berkshire the most profitable public company in the world.
And the legendary investor now has more money than ever to play with: $ 128 billion. That's the record that has left Berkshire's stock gone when investors struggle with a question among all the superlatives: What comes next?
"Berkshire has some kind of embarrassment with wealth," said Cathy Seifert, an analyst at CFRA Research, in an interview. "Those cash may burn a hole in their pocket, and it is justifiable for them to be cautious, but at some point it becomes almost a burden to the extent that they are going to pull down their overall return."
Buffett, 89, has built the most valuable public company off the West Coast with major businesses in industries, from energy and insurance to car dealerships and jewelry. Now he faces the rare problem where he can write a check for $ 10 billion and face questions about whether he is aggressive enough.
Buffett's highs climbed again in the quarter, and his liquidity gives him potentially lucrative deals such as crisis time investments in Goldman Sachs Group Inc. and General Electric Co., and a third-quarter $ 10 billion investment in Occidental Petroleum Corp. which enabled an agreement with Anadarko Petroleum Corp.
But deals spurred by turmoil are more difficult to find with the S&P 500 Index hitting fresh highlights. And Berkshire has not kept pace this year. Berkshire's A shares are up 5.7% this year through Friday, short of the 22% gain in the S&P 500.
The period also provided examples of the limits Buffett faces in trying to spend money to spend to continue the great growth that made him famous. He is pushed further into financial equities, but in his two biggest efforts, he is right around regulatory ceilings on bank ownership. At Bank of America Corp. he applied for permission to potentially increase his stake; at Wells Fargo & Co., he sold shares during the quarter.
Buffett has admitted that the immediate prospects of buying up businesses are not good amid "soaring" prices. But he said he was still starving for an "elephant-sized purchase."
Buffett benefits from being selective on what deals he chooses, though that means he spends time waiting $ 128 billion in cash and treasury, said shareholder Thomas Russo.
"The Occidental thing came to Berkshire, no one else, for a reason — they wanted his stamp," Russo, who invests in Berkshire through the Gardner Russo & Gardner company, said in an interview. "This stamp is only valuable if people think that the investments he's making have been well scrubbed, rather than rushed through."
While Buffett has been stymied on the big acquisition front in recent years, he has been able to put some money into working in the stock market. In recent years, Berkshire's summarized shares in JPMorgan Chase & Co. and Apple Inc. One of Buffett's investing deputies even bought shares in Amazon.com Inc. this year. But there are limited stocks that even have the potential to move the needle.
There are about 55 US companies in which Buffett can invest $ 10 billion and remain below his preferred 10% threshold. He already owns a stake in 13 of them and has previously invested in at least another eight. About a dozen of the companies will be considered technology investments, a sector that Buffett began to venture into after years of trying to avoid the industry.
"The anchor in size is just a huge question," said Paul Lountzis, president of Lountzis Asset Management who oversees more than $ 200 million including investments in Berkshire stock. Lountzis said Buffett's track record and adaptability soothes him. Still, "he's so big now, where's he going to distribute stuff? And where can things go from here? It's a real challenge."
And such significant efforts can make Berkshire less quick. Buffett acknowledged just as much with this year's battles in the Kraft Heinz Co., which he said in February that a stake of more than $ 10 billion would be complicated.
"You dance like an elephant, not like a guy on & # 39; Dancing With The Stars & # 39 ;, "said Buffett.
As crisis-era efforts as his derivative efforts began to run out, Buffett sought other ways to distribute capital. Berkshire's board loosened the buyback policy last year. That has allowed him to buy back $ 2.8 billion in 2019. These moves have been relatively modest – JPMorgan spent more than $ 6 billion on net repurchases in the third quarter alone – but that's a significant change for an investor who prefers to spend their money to buy operating businesses or snatch up shares in other companies.
The biggest profit gap between Berkshire and the S&P 500 in recent years may give Buffett more incentive to jump into the market for his own stock.
"There is not much opportunity for big deals," said Jim Shanahan, an analyst at Edward Jones, in an interview. "The more reason to ask, given the valuation of the stock, why they had not been more aggressive in the market of buying back their own shares. It may represent the best use of cash right now, and it may represent the easiest way for them to distribute capital. ”
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