A veteran value investor explains Warren Buffett's record $9 billion in buybacks last quarter, and warns of challenges ahead for Pfizer's vaccine

  • Warren Buffett's Berkshire Hathaway bought back a record $9 billion of stock last quarter because it didn't land a major acquisition, according to one of the billionaire investor's longtime shareholders.
  • "Buffett's inability to find attractive, sizable, external acquisitions during, and after, the market's swoon caused him to look inward," Darren Pollock, a portfolio manager at Cheviot Value Management, told Business Insider.
  • However, Pollock praised Buffett for repurchasing Berkshire shares at a bargain price.
  • Pollock also discussed the surge in stocks on Monday, following the news of Pfizer's successful COVID-19 trial, saying the market reaction makes sense but might be premature given the challenges ahead.
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Warren Buffett's Berkshire Hathaway repurchased a record $9 billion of its stock in the third quarter. The surge in share buybacks likely reflects the famed investor's failure to bag an "elephant-sized acquisition," one of his longstanding shareholders told Business Insider.

"To know Buffett is to understand that he would prefer to make large investments in public company shares, or buy businesses in their entirety, instead of buying Berkshire's own shares," Darren Pollock, a portfolio manager at Cheviot Value Management, said in an email.

In other words, the Berkshire boss views repurchasing shares as an inferior use of funds compared to buying either a large chunk, or all, of a company. The reason is that businesses can rise in value, pay dividends, and generate cash for him to allocate across his conglomerate.

The billionaire investor may have allowed Berkshire's cash pile to swell to a record $147 billion in the second quarter because he was hoping an elephant would enter his sights, as the pandemic ravaged markets, Pollock said. The buybacks last quarter suggest that didn't happen.

"Buffett's inability to find attractive, sizable, external acquisitions during and after the market's swoon caused him to look inward," he said.

On the bright side, the Berkshire chief repurchased his company's shares at less than 1.2 times book value last quarter, Pollock said. Buffett has vowed in the past to aggressively buy Berkshire stock at that multiple or lower.

"As a shareholder, I'm very pleased to see him capitalizing on the market underpricing Berkshire's shares," Pollock said. Cheviot owned $39 million of Berkshire stock at the end of June, and Buffett's company has been its largest holding for more than 20 years.

Vaccines and value stocks

The news that Pfizer and BioNTech's COVID-19 vaccine proved extremely effective in a late-stage trial sparked a massive stock-market rally on Monday, although some of the gains faded as investors realized the challenges ahead.

Pollock described the prospect of a working vaccine as "the largest step in the right direction that the medical community has made thus far to fight COVID."

"Stay-at-home" stocks such as Zoom, Peloton, and Snap tumbled on Monday, while airlines, cruise lines, cinemas, theme parks, and other "real economy" stocks soared in value. Indeed, Berkshire gained as much as $35 billion in market value as the conglomerate's stakes in Bank of America, Coca-Cola, and American Express soared in value.

"Today witnessed a great rotation out of those companies' shares which did best the past several months under the view that a vaccine was far off in the distance, and into the beaten-down shares that will benefit the most from a reopening of society," Pollock said.

The market reaction makes sense as widespread inoculation in a matter of months could revitalize many companies' prospects, he continued.

However, Pollock added, investors may have jumped the gun as "the vaccine's production, distribution, and acceptance still have a long way to go – even without potential setbacks, something that is not uncommon in drug trials."

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