Why Warren Buffett’s Berkshire Hathaway bet $ 7 billion on 5 Japanese stocks

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  • Warren Buffett’s Berkshire Hathaway on Sunday revealed 5% stakes in five Japanese trading houses.
  • Les postes à Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo were worth a total of $ 6.9 billion at Wednesday’s close.
  • The billionaire investor was likely drawn to their depressed valuations and sprawling operations, and perhaps viewed them as hedges against inflation risk and the weak US dollar.
  • Here are six reasons Buffett was able to invest.
  • Visit the Business Insider homepage for more stories.

Warren Buffett’s Berkshire Hathaway recently revealed that he owns 5% of each of the five largest Japanese trading companies or “sogo shosha”: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. The positions, which Berkshire has built over the past 12 months, were worth a total of $ 6.9 billion at Wednesday’s close.

The famous investor may have supported the companies due to their cheap valuations and varied operations, as well as the macroeconomic environment.

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Here are six potential reasons why Buffett is betting on the Japanese quintet:

1. Advantageous price

Buffett is renowned for identifying and investing in companies that are undervalued by the market. It has lived up to its reputation with the five Japanese trading houses, as four of them trade at a significant discount to their book value, meaning their market capitalization is lower than their net assets.

The investor may have turned to Japan after struggling to find value there. Shares were far from a bargain around the same time last year, when Buffett started building the Japanese stakes, and rebounded from the coronavirus crash in record time, thanks to unprecedented government interventions US and Federal Reserve.

Buffett has invested in Japanese companies at “ridiculously low” prices, underlining the “huge” value offered in the island nation, Jamie Rosenwald, head of Dalton Investments, told Reuters.

2. Low risk

Buffett may be investing in a foreign country, but he knows exactly what the five trading houses are doing. They could be described as mini-Berkshires, as they are conglomerates focused on traditional industries such as natural resources and shipping and have business interests around the world.

The Japanese quintet is also solidly established, generates plenty of cash, has a competitive moat to ward off rivals, and several are paying large dividends, Jefferies Japan analyst Thanh Ha Pham told Bloomberg.

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Japanese companies are also known for their honest bookkeeping, making the nation a “natural fit” for Buffett, Pham said in another Bloomberg story.

The five companies are offering a “winning combination” of global operations and “fingers in a lot of pies at an attractive price,” James Armstrong, chairman of Henry H. Armstrong Associates, told Reuters.

3. Team up

Buffett appears to view Japanese companies not only as investments, but also as potential partners for Berkshire affiliates.

The investor highlighted the quintet’s many joint ventures around the world in his statement on Sunday, and expressed hope that “opportunities for mutual benefit” will emerge.

4. Prepare for inflation

Inflation fears are mounting as governments and central banks continue to try to emerge from the coronavirus crisis. Their efforts so far have included sending stimulus checks, bailing out struggling businesses like airlines and cruise lines, and injecting billions of dollars into financial markets.

Central bankers have also cut interest rates to near zero, and Federal Reserve Chief Jerome Powell said last week that inflation would be allowed to exceed the bank’s previous annual target of 2% for periods.

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Buffett may be betting on higher prices with his Japanese investments, Bill Smead, boss of Smead Capital Management, told Reuters.

“Buffett migrates his investment to where you can create value through inflation,” he said. “These are companies that will earn more money if the price of oil [or] all entry goes up. ”

5. Falling dollar

Concerns about the brutal fallout from the pandemic and the stalemate in stimulus measures have pushed the US dollar to its two-year low, and a stronger Japanese yen means bigger profits for many Japanese companies.

Buffett may have anticipated a decline in the US dollar and turned to Japan to diversify his currency exposure. Indeed, Berkshire sold 430 billion yen ($ 4 billion) worth of bonds last September – the largest sale of yen-denominated bonds by a non-Japanese issuer in history.

It sold an additional 195.5 billion yen ($ 1.8 billion) in April, which means it has a total of 625.5 billion yen-denominated bonds outstanding. Berkshire cited this figure on Sunday as the reason it has “minor exposure to yen / dollar movements”.

6. Money to burn

Buffett is constantly looking for ways to responsibly spend Berkshire’s huge cash flow, which totaled $ 147 billion at last count. Its disclosure of Japanese betting follows a wave of buying in recent weeks.

For example, Berkshire struck a $ 10 billion deal to buy the natural gas assets of Dominion Energy in July, invested nearly $ 2.1 billion in shares of Bank of America in the 12 days leading up to August 4. and appears to have bought back over $ 7 billion. stock between May and July.

Buffett may have simply bought the Japanese stocks because he had the cash to spare and they met his investment criteria.

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