Berkshire Hits 'Don't Touch List' After Warren Buffett Drops a Bomb

On Saturday, Berkshire Hathaway BRK.A, BRK.B held the firm's annual shareholder meeting and reported the firm's first quarter financial results. 

For the three-month period ended March 31, Berkshire posted operating earnings of $9.64 billion on revenue of $89.725 billion. The revenue print reflected a year-over-year contraction of 0.2%, while that operating result showed a year-over-year contraction.

Net income attributable to shareholders dropped an almost disturbing 63.8% to $4.603 billion after such items as interest, taxes, other income and expenses were accounted for. While total costs and expenses did increase by 2.3% to $78.268 billion, it was the investments of these earnings that really took their toll on performance. Investment gains/losses dropped from $1.876 billion for the year-ago period compared to a gnarly looking -$6.435 billion for this period.

On that note, the S&P 500 has largely recovered its losses suffered in early to mid-April, but only now is approaching where it was on March 31. Hence, I am not sure the firm's Q2 performance would reflect much of a rebound from what was a tough-looking first quarter. At least not yet anyway.

Buffett Drops a Bomb

Of course, the firm's financial release played second fiddle to the news that would break toward the end of the meeting. 

We had known for quite some time that this would eventually happen. I had recently exited my long position in Berkshire Hathaway, the B stock BRK.B. I did not know this would happen now. I held on to those shares for years, but one had to at least think that at one of these annual meetings soon, the firm's chief executive since 1970, Warren Buffett, often considered the greatest fundamental investor of all-time, would step aside.

At 94 years of age, holding down a terribly demanding position and executing his duties at a high level, had to have become difficult without his career-long friend and business partner, Charlie Munger. Not to mention, probably a lot less fun. Munger was, in my opinion, just as revered as Buffet, even if slightly lower high-profile in nature, and had passed on at the age of 99 in November 2023.

Toward the end of the annual meeting, Warren Buffet told his audience, many of whom had been with him for a very long time, "Tomorrow, we're having a board meeting of Berkshire, and we have 11 directors. Two of the directors, who are my children, Howie and Susie, know what I'm going to talk about there. The rest of them, this will come as news to, but I think the time has arrived where Greg should become the chief executive officer of the company at year end."

As mentioned in Monday morning's Market Recon column, Buffett was referring to Greg Abel, who was appointed as the firm's eventual day-to-day chief executive by Buffett and Munger back in 2021. Abel is the current vice chair of Berkshire's non-insurance operations and he will, as of the new year, have the final word on all operational and capital deployment. 

As for Buffett's future, he tried to reassure investors that he will still "hang around" to help. He'll have to, as he has not expressed a plan to eventually surrender his position as chairman of the firm's board. Regardless, the stock is down a rough 3% overnight.

Fundamentals

For the period reported, the firm's businesses generated operating cash flow of $10.903 billion, out of which came capex spending of $4.281 billion. This left free cash flow of $6.622 billion. The firm did not return capital to shareholders during the first quarter.

Turning to the balance sheet, the firm stands with a cash position of $626.451 billion inclusive of investments in equity securities, fixed income securities and U.S. T-Bills. Total assets amount to $1.1645 trillion including $118.338 billion in goodwill and other intangibles. The numbers are gigantic, but at just more than 10% of total assets, this is not of concern. Total liabilities less equity comes to $507.79 billion. Total debt stands at $125.927 billion, which is something that the firm could take care of out of pocket roughly five times over.

The Chart

I think it's safe to say that Berkshire's stock would react poorly to the idea that Buffett might be stepping back from his full-time stewardship of the firm. With the markets open now, I see the shares off a rough 5.5%. Take a look at the above chart. It's fairly clear to me that BRK.B has put in a double-top pattern of bearish reversal.

As the stock's relative strength plummets, the shares have at least for now, surrendered their 21-day EMA and 50-day SMA. That will have swing traders abandoning the stock while risk managers force portfolio managers to reduce long-side exposure. The stock did rebound off of its 200-day SMA in early April. That was at $462 at the time.

I'd like to call that a downside target, but it could be a downside pivot, which could signal significantly lower prices. If the second quarter does not at least reverse some of that Q1 performance, investors will not return. With Buffett basically a lame duck CEO for about seven months, the pressure to do something with all of that cash other than grabbing a few percentage points using T-bills will mount.

This could be a tough time for the stock, as Buffett tries to sunset gracefully. I do not become the least bit interested in buying back my shares until I see if the stock can make a real effort to maintain contact with that 50-day line that had been pierced this morning. For now, BRK.B is on my "don't touch" list.

At the time of publication, Guilfoyle had no positions in any securities mentioned.