Why it’s a fit for the legendary value investor
The legend of Omaha is not a market timekeeper as such, but his timing on this one looks exceptionally good. Buffett and his longtime business partner Charlie Munger are known for their approach to investing in value – a method little appreciated on Wall Street these days where growth stocks are revered, celebrated and bought.
Berkshire’s timing on the gold sector makes me think they’ve actually looked at price charts that value-oriented investors are often supposed to dismiss and ignore as largely irrelevant.
Gold metal, for example, looks like this on a daily price basis:
Do you see how it recovered from the March selling lows, recovered in April, and then deteriorated for the remainder of Q2? Do you see how it’s going just before the breakout to the upside? Some of that was returned this week, of course, but the uptrend remains in place.
Barrick Gold, whose shares were added to Berkshire Hathaway’s portfolio in Q2, looks like this:
The stock was a part of the underlying metal’s rally, although it is not yet clear whether the investment firm could still turn a profit on the position. Since they are value investors and the long term is what matters, this is not seen as a big deal.
Barrick gold’s price-to-earnings ratio is 11, which puts it well below Schiller’s p / e for the S&P 500, which currently sits at 31. To compare and contrast with big growth stocks names: Amazon
Barrick’s “anchor ratio” is 0.82 – this is the price / earnings ratio divided by the miner’s expected earnings. Getting below 1.0 puts him in the company of “dumped” people.
Profits have been solid for Barrick: excellent, in fact, for this year and very good for the past 5 years. The stock is trading at 2 times the book value which may be higher than Benjamin Graham could pay, but certainly in the value stocks realm, especially compared to the book value of growth stocks.
What else do you like about Barrick if you’re an old-fashioned value investor? Well, that pays a dividend: 1.04%. Not a spectacular amount, to be sure, but reassuring and comfortable for a fund like Berkshire Hathaway, without a doubt.
The fact that the stock is very liquid with an average daily volume of almost 18 million shares makes entry and exit relatively easy for the large investor. Buffett and Munger must be feeling relaxed about owning a mining company that trades high volumes on the New York Stock Exchange.
Statistics courtesy of FinViz.com.
I do not hold any positions in these investments. No recommendation is made one way or the other. If you are an investor, you would like to explore each of these situations further. You can lose money by trading or investing in stocks and other instruments. Always do your own independent research, do your due diligence and seek advice from a licensed investment advisor.