OMAHA, Neb. (
) -- One of the many side effects of Warren Buffett's planned acquisition of
is the rampant market chatter about
likely addition to the S&P 500 Index. Should short-term traders be getting ready for a profit opportunity as a result of this impending index event?
Berkshire Hathaway announced this week that it will hold
a Jan. 20 shareholder vote on a 50-1 stock split in its B shares. If approved as expected, the level of share would bring Buffett's investment company into compliance with a major S&P 500 requirement which it has never been able to previously satisfy: sufficient trading volume.
Being added to the S&P 500 is a historical achievement over which Warren Buffett has voiced previous ambivalence, if not outright reluctance. Still, many index mavens are expecting the S&P 500 inclusion to be a fait accompli once the stock split is executed.
If so, are Berkshire Hathaway's shares trading too low when analyzed in relation to the likely price bump it will receive from S&P inclusion?
At least one -- of the select group of analysts who cover the company, and academics who have studied the S&P 500 Inclusion Effect -- thinks the answer to this question is 'yes.'
Eric Lin, an assistant professor of finance at California State University and co-author with John Kensinger of University of North Texas of a soon-to-be-published research paper on the S&P 500 price bump, said short-term traders, in particular, will see an opportunity to profit from Berkshire Hathaway's the S&P 500 inclusion.
Lin explained that traders most likely will trade Berkshire stock after Standard and Poor's officially announces its inclusion because on the effective inclusion date (usually several days following inclusion announcement) index fund managers and institutional investors would have to buy the same stock to mimic the composition of the index. Existing literature has documented that stocks added to the S&P 500 experience an average excess return of over 5% on the day of announcement. Traders (or speculators) would buy on the announcement and sell on the effective day to capture profits, Lin explained.
Of course, Berkshire's legendary portfolio is more than just a model train enthusiast's newfound investment world love as a result of Buffett's Burlington play. The largest holdings in the Buffett family are: a 12.8% stake in
; 9.4% in
; close to 7% in
; a little under 1% of
; close to 9% of
; and a shade under 4% of
Is it a fait accompli that Berkshire will be the next S&P 500 component? Lin was leaning in that direction, but stopped short of saying it was as good as a done deal. "Given Berkshire's current market cap of over $150 billion, there is a chance that the company could be the next to be added to the index. The S&P 500 usually adds large companies with significant market representation/industry leadership into the portfolio. When that happens, I expect to see a significant increase in price, trading volume and volatility of the stock on and following the announcement," Lin said.
Paul Howard, analyst at Janney Montgomery Scott's Langen McAlenney division -- and one of the few analysts who cover Berkshire -- said the 50-1 stock split will be a huge step towards S&P 500 inclusion. "Berkshire is well on its way to the volume requirement that has been the big hindrance in years past," Howard said.
The logical conclusion related to volume is what has Howard scratching his head over Berkshire's recent price movement. Berkshire shares have dropped close to $175 in the past two weeks, and have been on a general downward price trend since the Burlington acquisition was announced. If Lin and Howard are correct, that seems strange given that we are moving closer to the 50-1 stock split and the S&P 500 requirement hurdle.
"If you think of the ETFs and the S&P 500 index funds, not to mention the closet indexers, it's a lot of money that is going to have to chase this thing. In terms of demand for buying it, it could really move the stock up, yet based on how it has traded since the Burlington announcement, it doesn't look like anyone is factoring this in," Howard said.
Berkshire is clearly good to go as far as the S&P market cap requirement -- and would be among the top 15 biggest market companies in the index. The issue is the volume characteristics to which Lin alluded. "I don't know how it will be measured by S&P in terms of the volume hurdle and enough shares trading as a percentage of market cap, but if you look back on a six-months basis, and assume for the sake of argument that the stock split had been done six months ago, we look at the B share volume and say, 'Berkshire passes that test,'" Howard explained, adding, "but the stock is still not trading that way."
If short-term traders are the ones to reap the biggest benefits, as Lin suggests, it wouldn't be the first time that Mr. Buy-and-Hold Buffett's railroad bet
has provided a gift to the most cold-hearted, trading-oriented of capitalists.
For a more complete look at the Buffett investment universe, check detailed holdings analysis
-- Reported by Eric Rosenbaum in New York.
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