Buffett's Message
By: Dr. Charles Lieberman
Date: 11/9/2009
Buffett's decision to buy the rest of Burlington Northern at a significant premium to the stock's price is representative of purchases by astute investors to take advantage of the decline in equity prices in the wake of the credit crisis. Investment titans become rich by scooping up bargains when others do not see them. Thus, Buffett's purchase is another signal that stock prices are cheap and investors should be buyers, just like Buffett. Plus, it is a sign that Buffet is seeing the economy bottom/turn. On June 24th, 2009, Buffet was quoted on CNBC saying the US economy is in shambles. Now, 131 days later, Buffet is making an all-in wager on the economic future of the United States.
Warren Buffett's investment acumen has never been in doubt, so when he steps up to make a major purchase, investors should pay attention. Why now and why Burlington Northern? The now part is very straightforward. Despite their dramatic rebound off the March 9 lows, stock prices remain very cheap and remain below pre-Lehman bankruptcy levels. From a longer term perspectivethe only perspective used by Buffettan economic recovery will buoy the profits and value of an industrial stalwart like Burlington. Unambiguously, buying Burlington is a play on the recovery of the domestic economy.
The case for choosing Burlington Northern, as opposed to another industrial company, is somewhat less clear and possibly even debatable. As Buffett explained, moving goods by rail is very efficient, especially if energy costs increase over time. So he's made a bet that the rail industry will capture market share from long haul traffic carried by trucks. (Trucks retain an enormous advantage for short haul traffic.) However, coal is one of the primary products carried by rail, accounting for nearly 25% of Burlington's revenues, while the Administration seeks to reduce our dependency on coal as an energy source for environmental reasons. Whatever drags there may be from reduced coal traffic, it is clear that Buffett is convinced that the economic recovery will be the dominant factor that enhances rail profits.
Acquisition activity is picking up more broadly, as other astute strategic investors also take advantage of attractive stock valuations to position themselves for the recovery. Several firms have raised capital to invest in commercial real estate, even as defaults in this sector remain high. Apollo Commercial, Starwood Property Trust, Penny Mac, and others are actively buying property and commercial mortgages. As Buffett once said, Be fearful when others are greedy and greedy when others are fearful. That remains outstanding advice. Following in Buffett's footsteps wouldn't be bad strategy either. Download this article in PDF Format
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