7 experts explain Warren Buffett’s $23 billion bet on Oxy, HP, Alleghany

  • Warren Buffett has made or accepted about $23 billion in investments in recent weeks.
  • Berkshire Hathaway took stakes in Occidental Petroleum and HP, and reached an agreement to buy Alleghany.
  • Seven pundits mostly praised Buffett’s recent bets and hailed the investor’s fiscal discipline.

Warren Buffett, perhaps the world’s most famous bargain hunter, has been starved of offers in recent years as stocks soared to record highs and private equity firms and SPACs drove up prices. acquisition prices.

Buffett’s luck has finally turned, if his conglomerate Berkshire Hathaway’s recent $7 billion investment in Occidental Petroleum stock, the $4 billion bet on HP stock and the deal to buy Alleghany for $12 billion is an indication of that.

We asked seven experts from the 91-year-old investor and his company to discuss his recent buying spree. They largely welcomed all three bets and praised Buffett for having the discipline to wait until three juicy pitches came along and the determination to take big hits from all of them.

Here’s what the 7 experts told Insider. Their comments have been lightly edited for length and clarity:

1. James Shanahan, Senior Equity Analyst at Edward Jones:

“Occidental and HP are classic Berkshire stocks. They both generate lots of free cash flow, pay good dividends and buy back stock. Both have high single-digit and double-digit price-to-earnings ratios.

“Alleghany is very similar to Berkshire. It owns reinsurance and property and casualty businesses, but also owns operating businesses and manages investments. We view this agreement as complementary and a good use of the large excess cash of Berkshire.”

2. Bill Smead, Founder and CIO of Smead Capital Management:

“Alleghany is another source of float in the insurance industry. Buffett loves float and outperforms the previous investment format. (Smead was referring to the difference between premiums collected and claims paid; Berkshire invests the money remaining.)

“Buffett is betting you’ll get rich in the oil business as we transition to a cleaner energy future. HP seems by size to be a Ted or Todd investment.” (He was referring to Ted Weschler and Todd Combs, Buffett’s two portfolio managers, who manage about $30 billion in assets between them.)

3. Lawrence Cunningham, law professor at George Washington University and author of several books on Buffett and Berkshire:

“Alleghany is the perfect Berkshire company, a microcosm of it. The other investments seem to be moving forward, on par with the course. I like the way they’re sticking to their Sox – not following ESG and other modes.”

4. Darren Pollock, Portfolio Manager at Cheviot Value Management:

“Recent activity at Berkshire reflects one thing: Buffett and his lieutenants will act when good opportunities present themselves. Making acquisitions only when price is smart is the sole driver of Berkshire’s investment behavior. If prices aren’t appropriate, Berkshire’s cash levels The money can be used within the company to fund operations in dozens of subsidiaries while the investment team waits for attractive opportunities in the financial markets, public or private.

“Occidental generates tons of free cash flow and uses it to pay down debt, repurchase stock and pay dividends to shareholders – of which Berkshire is now the largest. Buffett loves the company’s CEO, Vicki Hollub. Even after The significant move up, Occidental’s shares are trading at a very low multiple of free cash flow.

“The merger of Alleghany into Berkshire is a perfect and obvious solution. The company is run in a very similar way to Berkshire; it prioritizes the quality and profitability of insurance underwriting rather than to subscription growth, and corporate leadership is cut from the same cloth as those It’s valuable to have someone of Joe Brandon’s caliber on the bench at Berkshire.

“Operating within Berkshire, Alleghany’s insurance divisions can take advantage of more underwriting opportunities as the parent company maintains excess insurance capital. Berkshire also stands to gain by increasing the yield of Alleghany’s investment portfolio, the majority of which is currently invested in bonds.

5. David Kass, professor of finance at the University of Maryland:

“The confluence of these three big investments in a short period could be a coincidence. Buffett patiently waits for opportunities to develop and jumps on them when they arise.

“Western may have become more attractive to Buffett because he expects high oil prices to continue. In the current inflationary environment, oil prices are expected to remain high and oil companies appear to be attractive investments.

“HP’s investment may have resulted from a very attractive price, which Buffett viewed as undervaluing the business. It also has a highly regarded and respected brand with a ‘moat’ protecting its market share in its business. laptops and printers.”

6. Adam Schwartz, CIO of Black Bear Value Partners:

“Many of Berkshire’s existing assets have pricing power and an ability to weather volatile and difficult times. Being patient with so much money is something most wouldn’t be able to do, despite having invested significant capital to buy back Berkshire stock.

“Usually when investors hit the exits and the market stops mindlessly rising and to the right, more reasonable prices and opportunities arise. If there’s a good deal, they act fast and when there’s when there are fewer opportunities, they wait.The quote from Confucius applies to their style: “Don’t rely on applause.

“Occidental has reduced its balance sheet and appears to be approaching a time when a prodigious amount of free cash will be generated. The CEO has expressed a desire to reduce the number of shares, so if they can meet their operating plan, Berkshire should benefit from increasing the property without more cash outlay.

“It’s hard to know what the price of oil is in the long term, but with the return of post-COVID demand, the reduction of existing supply from Russia and the lack of investment in space, one should not not much imagination to see energy prices rise to benefit Occidental and others in space.”

7. Adam Mead, CEO and CIO of Mead Capital Management and author of “The Complete Financial History of Berkshire Hathaway”:

“What you see is luck in the sense that any correlation is just happenstance. Berkshire has no strategic plan. Sometimes we wait a long time, other times we see a flurry of Another time was in the early 2000s, when Berkshire acquired a list of “boring” grassroots companies like Benjamin Moore, MiTek, Shaw, Fruit of the Loom and others.

“Occidental is a clear supply/demand game. Alleghany is a kind of ‘mini-Berkshire’ headed by Joe Brandon, former CEO of Berkshire subsidiary General Re, who could be a great second or successor to Ajit Jain The deal brings in about $12 billion in working capital and an insurance operation that has managed an underwriting profit over time.

“In short, this is a great ‘plug and play’ operation to expand Berkshire’s already massive insurance business. I expect the company to operate independently like other Berkshire subsidiaries, although the management of the investment portfolio will almost certainly be transferred to Omaha.”

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