Writing about Berkshire Hathaway (NYSE: BRK.B) makes me nervous. I feel uncomfortable because analyzing one of the great geniuses of our age; Warren Buffett, is intimidating.
I write about Berkshire Hathaway (NYSE: BRK.A) because it is still one of the best company’s around. Berkshire proved that again by delivering a stellar performance in 2nd Quarter 2018.
For example, Berkshire’s year-to-year revenue growth rate increased by 8.63% during 2nd Quarter 2018. Impressively, the revenue growth rate increased by 17.79% over 1st Quarter 2018. Berkshire Hathaway reported a negative revenue growth rate of -9.16% on March 30, 2018.
Berkshire Hathaway is making a Lot of Money again
Quarterly revenues increased to $62.2 billion on June 30, 2018. That was the highest revenue achieved since 1st Quarter 2017 when BRK.B reported $64.37 billion in revenues.
Best of all, the quarterly net income grew to $12.011 billion in June 2018. That was a $13.149 billion increase over 1st Quarter 2018 when Berkshire reported a loss of -$1.138 billion. However, it is still well below the incredible $32.551 billion in quarterly net income reported for 4th Quarter 2018.
There was an operating income of $8.93 billion up from $7.238 billion in 1st Quarter 2018 and $7.058 billion in 2nd Quarter 2017. Uncle Warren’s money machine is running more smoothly than ever.
How Much Cash is Berkshire Hathaway Generating?
Berkshire Hathaway’s companies are generating a lot of cash.
The Buffett Empire reported a cash flow of $8.535 billion and a free-cash flow of $4.795 billion for 2nd Quarter 2018. There was also a modest investing cash flow of $122 million.
Beyond that, Berkshire Hathaway had accumulated $64.561 billion in cash and equivalents by June 30, 2018. Tellingly, that figure was more than three times the $26.418 billion reported on June 30, 2017.
Why is Buffett Hoarding Cash?
An important question to ask here is why Uncle Warren hoarding so much cash?
My guess is that Buffett thinks a major correction is imminent. Accordingly, he is saving up for some bargain hunting.
Another obvious explanation is that Berkshire has been unloading stock. The ridiculous share prices for very questionable companies like McDonald’s (NYSE: MCD) make it a good time to sell stock.
Remember, Buffett loves cash, and he is always searching for more of it. One reason why Uncle Warren is seeking more cash is to increase the amount of private investing Berkshire conducts.
Some enormous companies; including Uber, Ant Financial, and Amazon (NASDAQ: AMZN) have been raising a lot of money in the private equity markets lately. Last year Amazon, sold $16 billion worth of bonds to buy Whole Foods, The Wall Street Journal reported.
Buffett tried to invest $3 billion in Uber earlier this year, only to get turned by CEO Dara Khosrowshai, Car Insurance Samurai noted. That story demonstrates Buffett is open to massive private equity investments.
Why Berkshire Hathaway is Like a Hedge Fund
There’s a lot of demand for private equity in China too. Ant Financial conducted the world’s largest ever fundraising round of $14 billion in June 2018, Reuters reported.
News reports did not say if Buffett bought into Ant. That company’s Alipay digital wallet is the kind of consumer product Uncle Warren loves.
The obvious conclusion is that Buffett plans to make huge investments in private equity. His thinking is that private equity is a cheaper and better deal than overheated stocks.
Something to remember is that Berkshire Hathaway (NYSE: BRK.B) is more like a hedge fund than a traditional company. Like a hedge Fund, Berkshire invests its money where it can get the best return.
What Will Berkshire Hathaway Buy Next
Therefore, I do not expect Buffett to make any acquisitions of public companies for the foreseeable future. If Berkshire acquires, it will probably purchase a private company.
Buffett’s likely strategy is to concentrate on undervalued consumer brands. There are several such stocks out there right now. My gut instinct is that Buffett will buy up low-priced stocks that pay a respectable dividend.
An obvious example is Ford (NYSE: F) which was trading at $9.67 on August 20, 2018. Ford scheduled a 15¢ dividend for September 4, 2018. Ford shareholders enjoyed a dividend yield of 6.3%, a payout ratio of 43.5% and an annualized payout of 60¢ on 14 August 2018.
Ford looks like a Buffett buy because it has a lot of cash. The automaker reported $36.476 billion in cash and short-term investments on June 30, 2018. Remember Buffett loves cash and he loves receiving dividends.
There are dividend bargains in Silicon Valley right now. Oracle (NYSE: ORCL) was trading at $48.42 on August 20, 2018, and paid a dividend of 19¢ on July 31, 2018. Oracle reported $67.261 billion in cash and short-term investments on May 31, 2018.
Then there was Microsoft (NYSE: MSFT) the software giant was trading at $106.98 on August 20, 2018. Microsoft plans to pay a dividend of 42¢ a share on September 13, 2018. To add icing to the cake, Microsoft reported cash and equivalents of $133.768 billion on June 30, 2018.
Where will Berkshire Hathaway Invest
My prediction is that Buffett will buy up lower priced stocks of cash-rich dividend paying companies. Since there are lots of those out there it is hard to predict what will catch his eye.
Berkshire will be confine major investments to private equity, which is booming right now. Likely, private equity targets for Berkshire Hathaway include Lyft, Instacart, and Airbnb.
Lyft and Airbnb which both have the potential to generate a lot of cash will attract Uncle Warren’s attention. Instacart, which has escaped attention by operating in an unsexy; but huge, market groceries might catch Buffett’s eye.
Expect Berkshire Hathaway to make bold and unprecedented moves this year. My prediction is that Warren Buffett will surprise the market with his next move.
This article first appeared at Market Mad House where we love value investing.