Berkshire's tech, airline bets add to intrigue on Warren Buffett's Letter

By Noah Buhayar

With almost US$85b on hand at the end of September, there are many options for what Warren Buffett will do next. Photo / AP
With almost US$85b on hand at the end of September, there are many options for what Warren Buffett will do next. Photo / AP

Few things have mattered more to markets this year than the daily headlines (and tweets) streaming out of Washington. On Saturday, though, lots of investors are likely to shift their attention to the U.S. heartland, when billionaire Warren Buffett releases his annual letter to Berkshire Hathaway Inc. shareholders.

Here are some of the topics the 86-year-old Sage of Omaha may discuss:

Airlines, Apple

Investors will be eager to learn more about some big and surprising additions to Berkshire's stock portfolio last year. As of December 31, the company held US$6.6 billion of shares in Apple Inc. and US$9.3b in the four largest U.S. airlines: American Airlines Group Inc., Delta Air Lines Inc., Southwest Airlines Co. and United Continental Holdings Inc.

The bets seem to go against some of Buffett's long-held ideas. He's generally avoided investing in technology companies, because he finds it harder to predict whether they'll be around for the long haul. He's also spent years criticising airlines as terrible businesses.

Berkshire investment manager Ted Weschler could have helped spur the shift in thinking. He explained to a German magazine last year how cloud computing and apps had made customers more loyal to the iPhone maker. People familiar with the matter have said that Weschler studied up on the airline industry last year after seeing a presentation from American Chief Executive Officer Doug Parker.

Wall Street analysts have speculated that Berkshire could eventually buy one of the airlines. Buffett previously acquired railroad BNSF after taking a minority stake in the company and two of its competitors.

Trump

Buffett was an outspoken supporter of Hillary Clinton in last year's election, so Donald Trump's victory in November will be a delicate subject. Since then, the Berkshire chairman has called for unity and said he "overwhelmingly" supported the president's choices as he picked a cabinet. Buffett also reiterated that the U.S. Economy will do fine over the long run, regardless of who's in the Oval Office.

That tone is almost certain to carry over to Saturday's letter. While Buffett may not mention Trump by name, it's possible he could comment on some of the business before the new administration and the Republican-led Congress, like an overhaul of the corporate tax code. The letter could also strike a different note than Trump on immigration.

Earnings power

Beyond stock bets and politics, Buffett always uses his letter to update shareholders on the sprawling, US$418b conglomerate he's run for more than five decades. While Berkshire's share price surged 23 per cent last year, earnings through the first nine months showed more muted gains.

Warren Buffett, chairman and CEO of Berkshire Hathaway Inc., walks with Maria 'Mel' Lagomasino, CEO of financial advisory firm WE Family Offices. Photo / Bloomberg
Warren Buffett, chairman and CEO of Berkshire Hathaway Inc., walks with Maria 'Mel' Lagomasino, CEO of financial advisory firm WE Family Offices. Photo / Bloomberg

The addition of two manufacturing businesses, Precision Castparts and Duracell, helped lift operating profit at Berkshire by 4 per cent to US$13.2b through September 30, even as income dropped at its railroad, BNSF.

The long-term earnings power of Berkshire's 80-odd subsidiaries are of deep importance to Berkshire shareholders. As Buffett has shifted his focus from picking stocks to buying companies outright, more of the company's value is tied to he fortunes of these businesses. Expect Buffett to devote a lot of attention to how they fared last year and what they're doing to advance their competitive positions.

The deal hunt

Cash has been piling up at Berkshire, so investors are going to want an update on Buffett's hunt for acquisitions. One possible target -- Unilever -- just came and went. That proposed transaction would have been done with 3G Capital, a buyout firm that Buffett has teamed up with on profitable takeovers in the food industry.

The billionaire also knows how to go it alone. He's purchased insurers, retailers, the railroad, manufacturers, newspapers, electric utilities and a network of auto dealerships. That range of interests will keep spectators guessing on what he might do next. With almost US$85b on hand at the end of September, there are many options.

Value-destroying fees

Buffett usually includes a passage on a general investing topic in his letter. This year, he's suggested it'll be about the fees that investment managers and consultants charge. (Hint: He thinks they're excessive.) It's part of why he's become a booster of low-cost funds that passively track stock market indexes like the S&P 500.

For some of his disciplined followers, the message has been jarring. After all, Buffett became one of the wealthiest people on the planet by refusing to settle for average returns. His example inspired legions of people to try to beat the market. Those investment pros will be eager to read his latest thoughts on the matter.

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