What Warren Buffett’s Latest Deal Tells Us About the Stock Market

November 24, 2019 20:00 UTC
  • Berkshire Hathaway has mostly sat out the stock market’s 2019 recovery.
  • However, Warren Buffett’s firm just made a surprising acquisition.
  • Here’s what that tells us about the stock market.

Warren Buffett-led Berkshire Hathaway purchased about $234 million worth of RH shares earlier this month, making a rare acquisition amid one of the strongest stock market rallies in recent history.

With high profile investors forecasting that the Dow Jones Industrial Average could surge as high as 30,000 within the near future, Berkshire’s recent deal could indicate that the investment firm does not intend simply to sit out as the markets soar.

Why Berkshire Hasn’t Been Loading up During Stock Market Surge

In early November, CNBC reported that it had been almost four years since Warren Buffett’s last major acquisition, despite the strong performance of Berkshire-backed companies.

As Berkshire’s businesses continued to succeed in generating cash, analysts remained puzzled about Buffett’s reluctance to go on a spending spree.

The $532 billion investment firm has likely not found many deals to its liking. Berkshire targets companies that are undervalued by the market and expected to scale. RH seems to be the first “undervalued” firm it has found in quite some time.

The Dow Jones is up almost 20% year-to-date. | Source: Yahoo Finance

Due to the relatively small size of the deal in comparison to Berkshire’s previous investments, David Kass, University of Maryland’s Robert H. Smith School of Business finance professor, told Bloomberg that executives other than Buffett and Charlie Munger most likely led the deal.

Kass said:

Maybe they saw a certain growth opportunity here that other analysts are missing. Much of their investment career is to try to find those rare under-priced opportunities where they expect to outperform the market.

However, that doesn’t mean it’s any less notable than if Buffett had pulled the trigger himself.

Value Investors Don’t Have to Sit Out the Dow Jones Rally

Year-to-date, the Dow Jones has risen by nearly 20%, closing last week above 27,875. The stock market’s rally has mainly been fueled by improving sentiment around a US trade deal with China.

The rapid recovery of the Dow Jones in the past six months is what likely has created a difficult environment for Berkshire to make big deals in, as businesses tend to get overvalued during a bull market.

The sustained trade deal optimism also presents investors with significant downside risk. According to some analysts, the market has already priced in a trade deal. A breakdown in talks could ignite a rapid sell-off.

However, the RH deal – whether executed by Warren Buffett or his deputies – shows that while the stock market as a whole may be getting ahead of itself, that doesn’t mean value investors have to sit around and wait for the next crash.

This article was edited by Josiah Wilmoth.

Last modified: November 24, 2019 23:23 UTC

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