New York - October 27, 2014
When short-sellers take positions opposite from Warren Buffett, it appears to be wise to side with the short-sellers. In the past year, activist short-sellers have clashed with Berkshire Hathaway at three companies: International Business Machines (IBM), Chicago Bridge & Iron (CBI) and Exxon Mobil (XOM). In all three cases, the short-sellers are currently ahead. In addition, Berkshire has suffered losses on its position in Tesco, which prominent hedge funds successfully shorted earlier this year (though not in an “activist” fashion).
IBM: IBM is down 11% since Stanley Druckenmiller of Duquesne Family Office pitched IBM as a short at the Robin Hood Investors conference last year on 11-22-2013, while the market has been up significantly. Druckenmiller had said IBM’s business would be replaced by cloud computing, with competition particularly strong from Google and Amazon, and he reiterated his short case at the Delivering Alpha conference on 7-16-2014. Berkshire Hathaway has owned IBM, its fourth-largest holding, since 2011, and it increased its stake in Q2 2014. Last week, IBM fell 11% after reporting weak earnings.
Chicago Bridge & Iron: CBI is down 27% since Eiad Asbahi’s Prescience Point Research Group published a 38-page report on 6-17-2014, alleging that CBI had used accounting tricks to hide a poorly performing acquisition and that a liquidity crisis was impending. Berkshire Hathaway has owned CBI since 2013. Despite Prescience including a section titled “We believe Warren Buffett would agree with our conclusions if made aware of the highlighted issues” (see page 29), Berkshire Hathaway instead soon reported a stake increase. (Earlier this month, Fortune reported that Berkshire Hathaway’s CBI stake was likely driven by portfolio manager Todd Combs.)
Exxon Mobil: On 10-17-2011, Jim Chanos of Kynikos Associates presented a short thesis on Exxon Mobil at the Value Investing Congress. Chanos said XOM was not generating enough cash to cover its cash uses of capex, acquisitions, dividends and buybacks and that he was bearish on the integrated oil company sector. Yet on 11-14-2013, Berkshire Hathaway reported a $3.45 billion stake in Exxon. Days later, Chanos said of Buffett at the Reuters Global Investment Outlook Summit, "He's got his reasons but unmistakably the returns are dropping. It increasingly looks to us like a value trap." Since just before Berkshire Hathaway reported its stake in Exxon until today, XOM has returned only 3%, while the S&P 500 has returned 12% (including reinvested dividends). Since Chanos originally announced his short position in Exxon in 2011, XOM has returned 31%, while the S&P 500 is up 75%.
In fact, despite a relentlessly rising market, companies targeted by Kynikos since 2011 have returned -6.3% during the length of the campaign (campaigns are generally closed after a year of inactivity from the short-seller). Below is a screenshot of a simple search in the Activist Shorts database.
A fourth name where prominent (but non-activist) short-sellers have challenged Buffett is Tesco (TSCO in London). Because of disclosure rules in the U.K., it was widely reported that Lone Pine Capital and Lansdowne Partners were short more than 0.5% of Tesco’s total share capital in September. Both hedge funds have profited immensely as Tesco’s stock has fallen 27% since Tesco disclosed accounting concerns on 9-22-2014. Since then, Buffett has called Tesco a “huge mistake” and has sold off at least a large portion of his stake.
However, Berkshire Hathaway has tangled with short-sellers before and come out ahead. Most prominently, Berkshire Hathaway has been rewarded for standing behind its long-standing stake in Moody’s (MCO) despite criticism from Kynikos Associates from 2007 to 2011 and Greenlight Capital from 2009 to 2013. When Jim Chanos announced his short in 2007, Moody’s stock price was at $73; it closed Friday at $97. Greenlight announced its short position in 2009, when the stock price was at $29. Notably, Buffett may have agreed with some of the bear case, as Berkshire Hathaway disposed of one-third of its Moody’s shares in 2009, and has since sold further portions of its stake. Moody’s is still Berkshire Hathaway’s 11th-largest stake.
Despite the missteps detailed above, Berkshire Hathaway stock is currently having an excellent 2014, up 18% compared to the S&P 500’s 8%. We strongly believe Warren Buffett and Charlie Munger, along with Todd Combs and Ted Weschler, are among the greatest investors of our time. We simply suggest that when short-sellers cross Berkshire Hathaway, it may be worth it to listen to the short-sellers.
If you’re Berkshire Hathaway, we believe our service could save you a few billion dollars. We’d love to have you as a client, and so we hereby offer you a lifetime subscription for free; just email Adam Kommel at firstname.lastname@example.org. All other prospective clients can request a 30-day trial.
Links for subscribers (requires log-in):
IBM/Druckenmiller campaign: http://www.activistshorts.com/companies/205/campaigns/273
CBI/Prescience Point campaign: http://www.activistshorts.com/companies/252/campaigns/356
XOM/Kynikos campaign: http://www.activistshorts.com/companies/90/campaigns/111
MCO/Kynikos campaign: http://www.activistshorts.com/companies/129/campaigns/166
MCO/Greenlight campaign: http://www.activistshorts.com/companies/129/campaigns/167
Tesco shorts are not included in database, as there were no public comments by Lansdowne or Lone Pine.