Warren Buffett just inked his biggest deal in four years. That doesn't mean he's suddenly transformed into a stock market bull.
After sitting out the stock market crash in March, Warren Buffett finally made his first deal of the year – and his largest since 2016. Berkshire Hathaway paid $9.7 billion for a gas pipeline network from Dominion Energy.
While some traders may see Berkshire’s deal as evidence that Warren Buffett is turning bullish, they’re misguided.
There are plenty of reasons this specific deal makes sense, no matter what Buffett believes about the overall stock market.
With the stock market near all-time highs, it’s tempting to say the deal suggests Buffett thinks stocks are undervalued.
This thesis is gaining traction on Wall Street. Proponents cite excess cash “on the sidelines” that could move into the market, including Buffett’s. With many “story stocks” making big moves, there’s a clear fear of missing out – FOMO – in the markets.
This FOMO could drive valuations higher in the short-term. Don’t expect Warren Buffett to get caught up in the euphoria.
Earnings season is quickly approaching. With so many companies pulling guidance this year on uncertainty, investors are flying blind – even more than usual.
The data we do have doesn’t lend credence to the argument that Berkshire Hathaway is growing bullish on equities. The ratio of the value of the stock market to GDP – colloquially known as the Buffett Indicator – shows that markets are at historically high valuations.
It’s no stretch to claim that Berkshire’s biggest acquisition in four years isn’t going to rock the boat.
Berkshire Hathaway and Warren Buffett spent the past few years stockpiling cash – $137 billion worth of it. That’s 31% of the company’s market capitalization of $434 billion.
Even if Berkshire had purchased Dominion’s natural gas pipeline in a pure cash sale, that would have represented just 7% of the company’s war chest.
Since the deal included the assumption of $5.7 billion of existing debt, the out-of-pocket cost dropped to $4 billion, or just under 3% of Berkshire’s cash on hand.
Berkshire’s “big” acquisition isn’t a grand sign that Warren Buffett expects the market will head significantly higher from here. It’s a narrow bet on the beaten-down natural gas space.
Buffett didn’t make a major buy during the March collapse when overall valuations were much lower. If anything, the razor-thin scope of this asset-based acquisition indicates he’s still worried about the danger of another equities sell-off.
Given the size of Berkshire’s cash holdings, critics have been pounding Buffett for being “out of touch” with the markets. Don’t forget that those same attacks surfaced before the Great Recession and dot-com bubble crash.
On both occasions, Buffett – not his critics – got the last laugh.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.
Last modified: September 23, 2020 2:02 PM