Investing

Return to Article

Off Year for Berkshire Doesn't Cow Buffett Buff

Gregg Greenberg

Last week, Warren Buffett's Berkshire Hathaway(BRK.A Quote) announced second-quarter earnings of $3.1 billion, or $2,018 per Class A share. That's a healthy 33% jump up from $2.3 billion, or $1,522 per share, a year earlier. Berkshire's results were propelled by its insurance business, which pulled in nearly $6 billion in premiums during the quarter, up from $5.8 billion a year ago.

As a result, the A shares of Buffett's Omaha-based holding company shot up almost 2% to $113,000, from $111,000, rewarding the Berkshire faithful for a trust that has been tested lately.

Buffett's magical touch as a long-term investor is so well known, it has become the stuff of financial legend. Investors still dream of the compounded millions they would have banked had they -- or their parents -- been smart (or lucky) enough to buy a handful of shares back when Buffett took control of Berkshire in 1965.

Recent shareholders, however, are still waiting to see some wizardry. Berkshire's shares have returned 2.7% year to date vs. 4% for the S&P 500 index. Over the past five years -- a boom time for value investors -- Berkshire shares are up 61% compared with 70% for the index.

One renowned value investor not cowed by Buffett's recent relative underperformance is Whitney Tilson, portfolio manager of the $23 million (TILFX Quote)Tilson Focus fund. The fund, which is down 3.5% year to date, has 15% of its assets in Berkshire stock.

"According to our conservative estimates, Berkshire's intrinsic value has grown at least 10% in the first seven months of 2007," says Tilson in an Aug. 7 interview on TheStreet.com TV. "So if the stock stays flat, that's an even greater margin of safety for shareholders. Or, in other words, it's more upside with less risk."

Tilson, who is rumored to be one of the candidates to replace Buffett upon his retirement, conservatively places fair value for Berkshire around $150,000 a share. Moreover, for those desiring proof that Buffett is doing something more than trading on his reputation, Tilson urges them to look at how much money he is throwing around this year.

"He's putting cash to work at a rate of more than $1 billion a month, but he is buying stock instead of companies," says Tilson. "He spent $5.1 billion in the first quarter, with approximately $3 billion going to railroad shares like Burlington Northern Santa Fe(BNI Quote). And in the second quarter, he spent $6 billion in equities, so the rate which they are deploying capital is increasing."

In a Securities and Exchange Commission filing on Tuesday, Berkshire upped its stake in Burlington to 11.5%, or 40.6 million shares. Berkshire purchased the shares at different prices between Aug. 3 and 7. Where that $6 billion in second-quarter equity investments was spent will be revealed in the next few weeks.

But right now, Tilson says investors should focus on how well Berkshire's diversified portfolio performed in the second quarter.

"He was hurt by his exposure to housing in companies like Johns Manville, Shaw Industries, U.S. Gypsum(USG Quote) and Benjamin Moore Paints in the quarter, but the portfolio is so large and diversified that the other businesses more than offset the losses."

Tilson does warn, however, that year over year the comps will be tougher in upcoming quarters, because last year was benign on the hurricane front.

"In a normal year, Berkshire will pay out a couple billion dollars in reinsurance claims," says Tilson. "That's just part of the business and it didn't happen this year."

Finally, Tilson dispels the idea that Buffett would ride to the rescue of a Wall Street firm on the ropes, as he did with Salomon Brothers back in 1991.

"Salomon was a profitable yet painful experience for him," says Tilson. "He had to come to New York City under a great deal of pressure and he does not like to travel too often. And he definitely does not need the stress at this age."

But even if Buffett does not play the role of white knight should Bear Stearns'(BSC Quote) credit troubles go from crunch to crisis, for example, Tilson says he may bid for the assets of a beaten-down fund.

"During the Long Term Capital crisis, he bid for some of their assets, but did not get them. So you know he would take a look," says Tilson. "If there is value, he'll find it."