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Minority Stock Positions Stock Portfolio Todd Combs and Ted Weschler

Buffett’s Belief in Todd Combs and Ted Weschler Continues to Grow

(BRK.A), (BRK.B)

Todd Combs and Ted Weschler, the former hedge fund managers that Warren Buffett hired to manage a portion of Berkshire Hathaway’s stock portfolios, have continued to see their portfolios grow.

Combs was hired in 2010, and Weschler was hired in 2011, and each was initially given a billion dollar portfolio to separately manage. Over the past five years Buffett has increased their portfolios as he has grown confident in their abilities, with the portfolios reaching $7 billion each in 2014.

Those portfolios have now reached $9 billion each, according to information in Warren Buffett’s 2015 annual shareholder’s letter.

The total stock holdings for Berkshire total a whopping $132 billion.

As Warren Buffett’s handpicked protégés, Buffett has praised their success, noting that “They have made Berkshire billions already that we wouldn’t have otherwise made,” Buffett said on CNBC in 2014. “They both have a fundamental combination of soundness and brilliance.”

That brilliance has certainly played out big in 2014 and 2015.

It was Todd Combs’s belief in aerospace manufacturer Precision Castparts that directly led to Buffett’s $32 billion acquisition of the company.

“You have to give Todd Combs credit for the deal,” Buffett said, noting that he had never heard of the company before Combs brought it to his attention. ”Todd told me a lot about it, and over the last few years I have become familiar with it,” he added.

Another winner was Combs and Weschler’s positions in DirecTV in 2014. The satellite broadcaster’s acquisition by AT&T brought an over $3 billion windfall for Berkshire, as its 4.5 million shares were purchased at roughly half the tender price of $95 per share offered by AT&T.

Sooner or later, the day will come when the entire Berkshire portfolio will be in Todd Combs and Ted Weschler’s hands, and Berkshire’s shareholders will be able to sleep well at night knowing it is well-managed.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Minority Stock Positions

BYD Profits Surge as Electric Vehicle Sales Soar

(BRK.A), (BRK.B)

BYD Company Limited, the Chinese battery and vehicle-maker that is 9% owned by Berkshire Hathaway, saw its net profits in 2015 grow a dramatic 550% to 2.82 billion yuan ($431 million).

The growth comes as BYD took over the number one position as the world’s top selling EV manufacturer.

BYD was only ranked seventh in 2014, and its position as the global leader comes while it has yet to retail its EV cars in the United States.

BYD’s success is due in part to the popularity of its Qin sedan and Tang SUV in China, and on the growing sales of its pure-electric buses, not only in China, but around the world.

BYD has pure-electric bus orders from the U.S, Brazil, Columbia, England, Malaysia and Thailand.

In September 2015, BYD scored a massive order in the U. S. from the state of Washington. BYD won a contract from the Washington State Department of Transportation (WSDOT) for up to 800 pure electric buses.

On the auto front, the company will introduce two new models in 2016, the SUVs Song and Yuan.

In 2008, Berkshire Hathaway bet on BYD’s potential and purchased 225 million shares, and today owns roughly 9.1% of the company.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Clayton Homes Warren Buffett

Warren Buffett Vigorously Defends Clayton Homes in Annual Shareholder Letter

(BRK.A), (BRK.B)

“The Best defense is a good offense,” is the old saying, that is exactly the approach Warren Buffett continues to take in defending Berkshire Hathaway’s mobile-home manufacturer Clayton Homes from those who say it preys on low-income home buyers.

It was less than a year ago that the company first came under attack, when with the force of a volcano, a Seattle Times and the Center for Public Integrity investigative report titled “The Mobile Home Trap” accused Clayton Homes of relying on “predatory sales practices, exorbitant fees, and interest rates…trapping many buyers in loans they can’t afford and in homes that are almost impossible to sell or refinance…”

Buffett’s immediately addressed the accusations head on at the 2015 Berkshire Hathaway annual meeting, when he said, “I make no apologies whatsoever about Clayton’s lending terms.”

Now, in his 2015 annual letter to shareholders, Buffett has a devoted one and a half pages to defending Clayton Homes from its detractors.

In a vigorous defense, Buffett wrote:

“Our retail outlets, employing simple language and large type, consistently inform home buyers of alternative sources for financing – most of it coming from local banks – and always secure acknowledgments from customers that this information has been received and read.”

In an unusual move, Buffett went so far as to include the actual form on page 119 of the 2015 annual report.

In the Same Boat as the Home Buyer

In defending Berkshire’s practices as a home seller and mortgage lender, Buffett points to Berkshire’s holding on to the mortgages it originates rather than selling them off in the broader market. Buffett notes that this adds risk to Berkshire, and that by holding on to the mortgages it is in the same boat as the home buyer. If a home buyer defaults on their mortgage it leaves Berkshire not only with a bad loan, but it also has to eat the costs associated with repossessing a used mobile home.

“At Clayton, our risk retention was, and is, 100%. When we originate a mortgage we keep it (leaving aside the few that qualify for a government guarantee). When we make mistakes in granting credit, we therefore pay a price – a hefty price that dwarfs any profit we realized upon the original sale of the home. Last year we had to foreclose on 8,444 manufactured-housing mortgages at a cost to us of $157 million. The average loan we made in 2015 was only $59,942, small potatoes for traditional mortgage lenders, but a daunting commitment for our many lower-income borrowers. Our buyer acquires a decent home – take a look at the home we will have on display at our annual meeting – requiring monthly principal-and-interest payments that average $522.

Some borrowers, of course, will lose their jobs, and there will be divorces and deaths. Others will get overextended on credit cards and mishandle their finances. We will lose money then, and our borrower will lose his down payment (though his mortgage payments during his time of occupancy may have been well under rental rates for comparable quarters). Nevertheless, despite the low FICO scores and income of our borrowers, their payment behavior during the Great Recession was far better than that prevailing in many mortgage pools populated by people earning multiples of our typical borrower’s income.”

Congress Weighs In

The Seattle Times report did not fall on deaf ears in the halls of Congress. In January, Representatives Maxine Waters, Michael Capuano, Emanuel Cleaver and Keith Ellison wrote a letter to the Justice Department and the Consumer Financial Protection Bureau calling for a probe of the company’s lending practices.

So far, there has been no action by the Justice Department or the Consumer Financial Protection Bureau, and in his annual letter Buffett forcefully touts what he feels is Berkshire’s outstanding record in regards to adhering to the regulations that govern mortgage lending.

“Let me talk about one subject of which I am particularly proud, that having to do with regulation. The Great Recession caused mortgage originators, servicers and packagers to come under intense scrutiny and to be assessed many billions of dollars in fines and penalties.

The scrutiny has certainly extended to Clayton, whose mortgage practices have been continuously reviewed and examined in respect to such items as originations, servicing, collections, advertising, compliance, and internal controls. At the federal level, we answer to the Federal Trade Commission, the Department of Housing and Urban Development and the Consumer Financial Protection Bureau. Dozens of states regulate us as well. During the past two years, indeed, various federal and state authorities (from 25 states) examined and reviewed Clayton and its mortgages on 65 occasions. The result? Our total fines during this period were $38,200 and our refunds to customers $704,678. Furthermore, though we had to foreclose on 2.64% of our manufactured-home mortgages last year, 95.4% of our borrowers were current on their payments at yearend, as they moved toward owning a debt-free home.”

While all has been quiet recently in regards to Clayton Homes, the fact that Buffett has devoted so much space in his annual letter to defending the company may mean that more tremors are coming, and issues related to Clayton Homes could erupt again in the future.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Commentary

Commentary: Never Mind the Stock Price, Berkshire’s Booming!

(BRK.A), (BRK.B)

With Berkshire Hathaway’s stock price down roughly -12% in 2015, you would think that the conglomerate was suffering a series of major setbacks. Nothing could be further from the truth, as Berkshire just reported record year that brought a 6.4% gain in book value, and saw profits skyrocket 32% in the fourth quarter.

Earnings per share in Q4 were $3,333 (up from $2,529 for the same period in 2014), which beat Wall Street estimates by a hair.

Nervous shareholders may be feeling a little bit better these days, as Berkshire’s stock price year-to-date has been steady (if flat) while the S&P 500 is down -4.59%, and they should rest assured that better days are ahead.

You want to be nervous? Just look at Chesapeake Energy (CHK), and its plunging stock price in 2015, if you want to see a stock really worth panicking about. Chesapeake saw its stock down a precipitous -77.5%, which was related to a very real drop in energy prices that is bringing bankruptcies to a number of players in the sector.

Berkshire on the other hand is flourishing, and it’s only getting stronger with the newly completed acquisitions of aerospace manufacturer Precision Castparts, and battery-maker Duracell.

The stock market is just that, a market, and it is not always logical—at least not in the short term.

While the disconnect between Berkshire’s profits and its languishing stock price draws lots of sniping from pundits, it should be remembered that a stock can’t wander too far from its fundamentals forever. Eventually, it’s going to move up or down based on the actual value of the company.

As Benjamin Graham famously said, “’In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Berkadia

Berkadia Continues to Rise as Freddie Mac and Fannie Mae Lender

(BRK.A), (BRK.B)

In 2015, Berkadia, Berkshire Hathaway’s joint venture with Leukadia, was the second largest Freddie Mac Program Plus lender and the third largest Fannie Mae DUS lender for multifamily loans.

Berkadia arranged $6.35 billion with Freddie Mac in 2015, up from $4.4 billion the year prior, which was the fourth consecutive year that the company has been named the second largest lender.

Berkadia was also in the number one spot as the top DUS Producer for seniors housing in 2015 by Fannie Mae, up from second in 2014, as well as the top Program Plus Seller in the Western Region by Freddie Mac for the second year in a row.

“Berkadia’s rankings speak volumes to our teams’ deep expertise and dedication to delivering the best financing across the country,” said Berkadia CEO Justin Wheeler. “We are extremely proud of our continued performance and strong record as a top Fannie Mae and Freddie Mac lender, and we look forward to building upon our momentum in 2016.”

In 2015, Freddie Mac provided nearly $47 billion in multifamily loans, accounting for 650,000 units. Fannie Mae settled $42.3 billion in financing for the multifamily market, comprising 569,000 multifamily units.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Berkshire Hathaway Energy

“Outlook Stable” as Fitch Affirms Solar Star’s Senior Notes at ‘BBB-‘

(BRK.A), (BRK.B)

Fitch Ratings has affirmed the ‘BBB-‘ rating on Solar Star Funding, LLC’s (Solar Star) $1.325 billion senior secured notes due June 2035, and describes the rating outlook as “Stable.”

Owned by Berkshire Hathaway Energy, Solar Star is a portfolio of two adjacent crystalline, single-axis tracking photovoltaic plants totaling 586 net MW at the point of interconnection. Solar Star 1 and Solar Star 2 represent 310 net MW capacity and 276 net MW capacity, respectively.

According to Fitch, the rating affirmation is based upon the project’s completion within budget and ahead of schedule with stable operating performance to date. The rating is supported by stable cash flows anchored by contracted long-term revenues with an investment grade counterparty, conventional technology and expected financial performance consistent with an investment grade rating.

KEY RATING DRIVERS

Revenue Risk – Price: Midrange

Stable Contracted Revenues: Revenue risk is low with annually escalating, fixed-price, 20-year power purchase agreements (PPA) with Southern California Edison (SCE, rated ‘A-‘/Outlook Stable by Fitch). The energy production requirement is consistent with the project’s capabilities, and PPA termination risk is low.

Revenue Risk – Volume: Midrange

Sufficient Solar Resource: Total generation output in Fitch’s rating case is based on a one-year P90 estimate of electric generation to mitigate the potential for lower-than-expected solar resource. The project can meet debt obligations under a one-year P99 generation scenario.

Operation Risk: Midrange

Proven Technology and Experienced Operator: Crystalline technology has a long operating history, which mitigates plant performance risks. SunPower, as the plant operator, has a track record of high plant availability. Long-term agreements support routine and major maintenance needs. Fitch’s financial analysis incorporates operating cost increases to mitigate unforeseen events including contractor replacement risks.

Debt Structure: Midrange

Conventional Debt Structure: The debt structure is typical for project financings with fully amortizing fixed-rate debt, a standard equity distribution test, and additional leverage controls.

Stable Initial Financial Performance

Base case debt service coverage ratios (DSCR) average 1.51x with a minimum of 1.44x. Fitch’s rating case includes increased expenses and reduced energy output, resulting in an average DSCR of 1.32x with a minimum of 1.31x, metrics that are supportive of the rating.

Peer Comparison: Solar Star’s projected rating case financial profile is consistent with Fitch’s minimum investment grade criteria but lower than Topaz Solar Farms (‘BBB’/Outlook Stable), which has an average rating case DSCR of 1.58x.

RATING SENSITIVITIES

Negative – Inadequate Operating Results: Energy production persistently underperforming original projections or expenses persistently higher than the forecast that result in DSCRs below 1.30x would result in a downgrade.

Positive – Demonstrated stable operating and financial performance consistently above base case expectations may result in a rating upgrade.

CREDIT UPDATE

Completion risk has been removed as a key rating driver for Solar Star due to the fully operational nature of the project following early completion under the PPA. The project reached commercial operation (COD) on July 1, 2015, approximately four months ahead of scheduled completion, and total construction costs remained approximately $60 million under budget. The completed project’s capacity totals 586 MW of capacity, providing an additional 7 MW of capacity compared to design specifications. Solar Star is permitted to sell the additional capacity under the two PPAs and large-generator interconnection agreements.

Operating performance was strong in 2015 with plant availability at or above 99% every month since COD. Energy production for the six months following COD has exceeded Fitch’s base case and rating projections by 5% and 12%, respectively. Actual monthly generation in 2015 since COD was above Fitch’s base case forecast every month except for the month of October as a result of inclement weather conditions. Higher energy production compared to Fitch’s projections is largely due to the project’s early commercial operation.

Fitch maintains its original base and rating case forecasts, which projects metrics supportive of the current rating, due to the project’s short operating history. Fitch will assess whether changes to financial stresses are warranted based on a more extensive history of actual energy production and operating costs. The additional 7 MW or 1.2% of capacity is not factored into Fitch’s financial analysis since the debt was sized to original design specifications, but this increased capacity could contribute modestly to additional cash flow for the project. Fitch’s rating case financial analysis includes a combination of one-year P90 electric generation, a 10% increase in costs, reduced output, and accelerated panel degradation resulting in an average DSCR profile of 1.32x and a minimum of 1.31x.

The project’s cash flow remains resilient to potential cost stresses as a 10% increase reduces the average DSCR by only two basis points and the project could withstand a 205% increase in costs and still meet debt obligations, as reflected in a breakeven DSCR of 1x. Cash flow is more sensitive to, yet remains resilient to, reductions in generation output. A 1% reduction to total electric generation output reduces the average DSCR by two basis points and the project could withstand an output reduction of 29.5% and still achieve breakeven DSCRs.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
BNSF

BNSF Earmarks $130 million for Minnesota Upgrades

(BRK.A), (BRK.B)

BNSF Railway has budgeted $130 million for Minnesota in 2016. The money will be used for replacing and upgrading rail, rail ties and ballast. BNSF has already spent $550 million in Minnesota over the last three years.

In 2015, BNSF spent $326 million in Minnesota, which included 13 miles of new double tracks in the Staples area, new track in the Twin Cities, and upgrading a connection with another railroad in the Twin Cities.

With a slowdown in shipping revenues, last year’s record $6 billion in capital spending by BNSF will be cut 26% to $4.3 billion for 2016, which represents the first reduction in spending in six years.

Heavy spending in 2015 helped resolve shipping bottlenecks that outraged grain producers when their shipments experienced extensive delays in 2014. The investment included 82 miles of new double track on the northern tier.

“Each year, our capital plan works to balance our near term need to regularly maintain a vast network that is always in motion with the longer term demand outlook of our customers,”said Carl Ice, BNSF president and chief executive officer. “While our customers’ demand outlook has softened in a number of sectors, regular maintenance of our network continues to drive the majority of our annual investments and helps ensure we continuously operate a safe and reliable network.”

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
GEICO Insurance

GEICO Makes Ridesharing Coverage Available to South Carolina drivers

(BRK.A), (BRK.B)

South Carolina drivers that have been approved to drive for Uber (UberX and UberXL), Lyft, Sidecar and other on-demand services, now can get ridesharing coverage through GEICO.

GEICO first entered the ridesharing market in February of 2015 in Virginia, and has been selling a ridesharing product in Connecticut, Georgia, Maryland, Ohio, Pennsylvania, Texas, Virginia and Washington, D.C. The company is now expanding its ridesharing offering to drivers in South Carolina

“In a short time span, ridesharing has turned into a staple of everyday life,” said Othello Powell, director of GEICO commercial lines. “Whether you have that entrepreneurial spirit or are just making a few extra dollars, GEICO’s ridesharing product delivers a complete insurance solution to drivers in South Carolina at an affordable price.”

Powell noted that ridesharing comes with a unique set of insurance needs that go well beyond a traditional auto insurance policy. He points out that most personal auto policies exclude any commercial (driver for hire) use.

In addition, GEICO points out that having two policies for one vehicle can become confusing and costly.

GEICO’s hybrid ridesharing product replaces the driver’s personal auto policy and provides coverage for personal, ridesharing and other on-demand services whether the rideshare app is on or off, and with or without passengers in the vehicle or even if you’re working for multiple services.

GEICO offers the product through GEICO Commercial at a price significantly lower than taxi and traditional commercial rates.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Minority Stock Positions Stock Portfolio Todd Combs and Ted Weschler

Heavyweights Agree with Berkshire on Kinder Morgan

(BRK.A), (BRK.B)

George Soros’s Soros Fund Management has moved into Kinder Morgan, as other heavyweight investors seem to see the opportunity in the pipeline company that Berkshire Hathaway does.

Berkshire Hathaway recently reported that it had acquired 26.53 million shares of Kinder Morgan in the fourth quarter of 2015, with a market value of roughly $456 million.

In the fourth quarter of 2015, Soros Fund Management purchased 50,700 shares of Kinder Morgan, and hedge fund manager David Tepper of Appaloosa Management acquired 9,445,321 shares of the company.

As with many of Berkshire’s stock holdings in recent years, it’s not known whether the purchase was made my Warren Buffet, or his lieutenants Todd Combs and Ted Wechsler.

While global oil prices have tumbled, they haven’t kept Berkshire from investing in Kinder Morgan and refiner Phillips 66.

Berkshire recently raised its Phillips 66 stake to 72,293,310 shares. The new purchases bring Berkshire’s stake in the refiner to roughly 13.7%. In contrast, its stake in Kinder Morgan is only 1.2% of the company.

Kinder Morgan owns an interest in or operate approximately 84,000 miles of pipelines and approximately 180 terminals. Its stock price has dropped by two-thirds in a year.

Apparently, now is the time to buy.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Marmon Group

Thorco Closes Plant as Online Retail Reduces Demand for Store Fixtures

(BRK.A), (BRK.B)

Berkshire Hathaway’s Thorco Industries, which the conglomerate owns as a part of its Marmon Group of manufacturers, is shuttering its Lamar, Missouri manufacturing plant and laying off 93 employees.

The closing will take place this spring.

The company designs and manufactures custom point-of-purchase merchandisers and store fixtures from wire, sheet metal and tubing for the retail industry.

General Manager Debra Probert noted that “retail industry changes, including the growth of e-commerce and the opening of fewer brick-and-mortar stores, has resulted in a continued decline in demand for store fixtures, such as the wire-based merchandising displays and accessories produced by Thorco.”

Thorco Industries has been in Lamar for almost 117 years, with its origins as a manufacturer of wire potato scoopers. The company was founded in 1899 by F.M. Thorpe.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.