If you are still hoping against hope that Warren Buffett has lost his investment touch, we are afraid you’ll be sorely disappointed. Berkshire Hathaway (NYSE:BRK.A) is set to report 2Q-earnings after the close this afternoon, amid increased optimism that the insurance giant and conglomerate may post its best quarter in at least two years.
Warren Buffet’s holding company is expected to show improvements in its investment portfolio and derivative bets. That will be a sharp contrast from recent quarters when market losses dejected Berkshire’s net numbers and its PPS. Operating earnings excluding investments however, may still decline as Buffett has said he’s seen few signs of green shoots in the economy of yet.
The main reason that overall earnings may rise is the Berkshire’s derivative bets tied to major stock indexes. The four indexes Buffett bet on were the S&P, the FTSE 100 Index, Nikkei 225, and the Dow Jones Euro Stoxx 50 Index. Berkshire has derivatives contracts tied to where four indexes trade between 2019 and 2028. Each of these indexes had a major second-quarter gain. That factor, combined with Berkshire’s investments in such companies as Goldman Sachs (NYSE:GS) and Wells Fargo (NYSE:WFC), help explain why the conglomerate’s Class-A shares rallied above $100K this week for the first time since early January.
“Some of the stocks had a remarkable turnaround,” said Janet Tavakoli, author of “Dear Mr. Buffett” and founder of Chicago based advisory firm Tavakoli Structured Finance. “Combine that with the sold equity puts going up [in mark-to-market value (Berkshire sold puts so the value of the short position will rise), relatively small additional mark-to-market write-downs on the high yield credit derivatives and (gains on warrants if these are marked to market)], and this is going to be a very interesting quarter.”
Mrs. Tavakoli goes on ta say that “gains and losses on stocks that are marked-to-market on the balance sheet and mark-to-market gains (or losses in previous quarters) on equity derivatives positions have little practical analytical value. Some of Berkshire Hathaway’s stock holdings have benefited from government bailouts including TARP funds and ongoing guarantees and funding support including Wells Fargo, Goldman Sachs, General Electric, US Bankcorp, M&T Bank, Bank of America, Suntrust, and American Express. One should look at insurance revenues and the operating business which may look weak relative to prior years. If Berkshire Hathaway isn’t writing insurance business, someone else is probably doing it at the wrong price, which positions BH better in the future…”
A few weeks ago as Berkshire’s stock was trading in the mid-$80Ks, Barron’s called it a “bargain” based on a relatively low price-to-book ratio of 1.60+/-, and set a price target of $110K.
BH currently has a market cap of $165 bln. The co.’s operating margin trailing 12 is 3.5% while profit margins stand at 2.40% on $105 billion in revenue. Net prints at 2.5 bln.