Image Shown: Shares of Berkshire Hathaway Inc Class B are recovering from the steep pandemic-induced fall as the company has started to put its enormous cash-pile to work.

By Callum Turcan

On August 31, Berkshire Hathaway Inc (BRK.A) (BRK.B) announced it had  “acquired slightly more than 5% of the outstanding shares in five of the leading Japanese trading companies” and that the firm considered these to be “passive stakes.” Those positions were acquired over approximately the past year through purchases made on the Tokyo Stock Exchange. Here are the five companies in alphabetical order (by ticker): Itochu Corporation (ITOCF), Marubeni Corporation (MARUF), Mitsui & Co. Ltd. (MITSF), Mitsubishi Corporation (MSBHF), and Sumitomo Corporation (SSUMY).

Berkshire

As of June 30, 2020, Berkshire Hathaway had $146.6 billion in total cash, cash equivalents, and short-term investments in US Treasuries on hand company-wide. Please note the firm also had significant holdings of fixed maturity securities, equity securities, and equity method investments on hand as of the end of June.

It appears Berkshire Hathaway is finally starting to put its enormous cash-pile to use after announcing its deal to acquire Dominion Energy Inc’s (D) natural gas pipeline and storage assets, along with an equity stake in an liquified natural gas (‘LNG’) export terminal based along the US East Coast, back in early-July (we covered that in detail here). Please note that on August 20 (link here), we trimmed the weighting of Berkshire Hathaway Class B stock (ticker BRK.B) in our Best Ideas Newsletter portfolio noting that:

Though we think Warren Buffett is getting back on track now that he has dumped the airlines and many of the banks, we no longer think Berkshire warrants a top-weighted position. The position has largely been a drag on otherwise stellar portfolio performance this year.

As of this writing, Berkshire Hathaway still trades at a discount to our fair value estimate of $229 per share, and has room to run higher should its performance improve (the top end of our fair value estimate range sits at $275 per share). With the reduced Berkshire Hathaway weighting, we increased our position in Apple Inc (AAPL) and Microsoft Corporation (MSFT), as we continue to prefer large-cap tech firms with promising growth outlooks and pristine balance sheets as the best way to navigate the ongoing coronavirus (‘COVID-19’) pandemic.

Future Deals Possible

Pivoting back to Berkshire Hathaway’s recent investment in the five Japanese trading houses, here is what Berkshire Hathaway’s CEO Warren Buffett had to say in the press release announcing the accumulation of these positions:

“I am delighted to have Berkshire Hathaway participate in the future of Japan and the five companies we have chosen for investment. The five major trading companies have many joint ventures throughout the world and are likely to have more of these partnerships. I hope that in the future there may be opportunities of mutual benefit.”

It appears that part of the motivation behind acquiring stakes in these firms is to help set the stage for future joint-ventures between Berkshire Hathaway and the five Japanese trading houses. Shares of the five trading houses that trade over-the-counter in the US surged higher during normal trading hours on August 31, possibly due to excitement over what future strategic partnerships could bring. According to the WSJ, the equity stakes would collectively be worth roughly $6.0 billion (though that likely changed as investors bid up those five firms).

Going forward, Berkshire Hathaway noted it may increase its equity stake in any one of (or all of) those five companies up to 9.9%, but would not go over that threshold unless it receives approval from the board of the company in question. Effectively, Berkshire Hathaway is communicating to the five trading houses that the company does not intend to build up a large equity stake in their company and then push for change in leadership or strategy (often referred to as “shareholder activism”).

The five trading houses have wide ranging business interests that include stakes in companies that operate in the financial, industrial, energy, consumer staples, retail, apparel, and resource extraction industries. Where, in terms of industries and sectors, Berkshire Hathaway would want to establish a joint-venture remains to be seen though the opportunities are limitless. One common theme is that these trading houses have large energy portfolios, including investments in LNG terminals.

For instance, Mitsui has economic interests in existing LNG terminals and LNG projects in Russia, Mozambique, the US (along with various natural gas assets in Australia). Marubeni “participates in global LNG projects in Qatar, Equatorial Guinea, Peru, and Papua New Guinea” according to its corporate website. Given that Berkshire Hathaway is acquiring an equity stake in the Cove Point LNG terminal in Maryland, it is possible that its bet on these five Japanese trading houses centers has to do with Berkshire Hathaway seeking to grow its energy business further. Additionally, these five companies have large raw materials extraction businesses. For instance, Itochu has economic interests in iron mines in Brazil and Australia. Berkshire Hathaway could potentially see those assets as a way to play a rebound in the global economy.

Concluding Thoughts

As things stand today, Berkshire Hathaway has only provided a glimpse as to what the industrial and insurance conglomerate’s ultimately goal is with respect to its equity investment in these five Japanese trading houses. Berkshire Hathaway is finally starting to put its enormous cash-pile to use, and we are intrigued by the possibilities.

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Diversified Mining Industry – BHP FCX NEM RIO SCCO VALE WPM

Oil & Gas Pipeline Industry – ENB ET EPD KMI MMP

Utilities (Large) Industry - AEP, D, DUK, ED, EIK, ETR, EXC, FE, NEE, NGG, OKE, PCG, PPL, SO, XEL

Utilities (Mid/Small) Industry - AEE, ALE, BIP, CNP, CMS, DTE, ES, LNT, MGEE, NFG, NI, PEG, PNW, SCG, SJI, SR, SRE, WEC

Data Sheet on Stocks in the Insurance Industry

Related: AAPL, AMLP, AMZA, ITOCF, JETS, MARUF, MITSF, MSBHF, MSFT, SPY, SSUMY, VDC, XLF, XLU, EWJ, EWJV, EWJE, DXJ

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Callum Turcan does not own shares in any of the securities mentioned above. Berkshire Hathaway Inc (BRK.A) (BRK.B) Class B shares are included in Valuentum’s simulated Best Ideas Newsletter portfolio. Newmont Corporation (NEM) is included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Apple Inc (AAPL) and Microsoft Corporation (MSFT) are both included in Valuentum’s simulated Best Ideas Newsletter and Dividend Growth Newsletter portfolios. Enterprise Products Partners L.P. (EPD), Magellan Midstream Partners L.P. (MMP), Utilities Select Sector SPDR (XLU), and Vanguard Consumer Staples ETF (VDC) are all included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.