Lookback: Wedgewood Partners 2019 Berkshire Hathaway (BRK.B) Thesis

If you are looking for the best ideas for your portfolio you may want to consider some of Wedgewood Partners top stock picks. Wedgewood Partners, an investment management firm, is bearish on Berkshire Hathaway Inc (NYSE:BRK.B) stock. In its Q3 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Berkshire Hathaway Inc (NYSE:BRK.B) stock. Berkshire Hathaway Inc (NYSE:BRK.B) is a multinational conglomerate holding company.

In October 2019, Wedgewood Partners had released its Q3 2019 investor letter. The investment firm sold its position in Berkshire Hathaway Inc (NYSE:BRK.B) stock in Q3 2019. The stock has posted a return of 5% in the trailing one year period, underperforming the S&P 500 Index which returned 14.2% in the same period. This suggests that the investment firm was right in its decision.

Wedgewood Partners fund posted a return of 0.39% in the third quarter of 2019, underperforming the S&P 500 Index which returned 1.87% in the same quarter. Let’s take a look at comments made by Wedgewood Partners about Berkshire Hathaway Inc (NYSE:BRK.B) in the Q3 2019 investor letter.

"We sold our multi decade-long position during the third quarter after first trimming the position during the second quarter this year. We went into some detail in our change of thesis on Berkshire in our last Client Letter. In short, Berkshire’s industrially/economically sensitive businesses have slowed considerably over the course of 2019. Their utilities business (Berkshire Energy) needs continued acquisitions to restart utility growth. In addition, Warren Buffett’s cash hoard of +$125 billion continues to be a considerable impediment of growth, rather than our previous hard expectation of a valuable call option on opportunity in the hands of one of the most elite capital allocators extant. Further, the efficacy of putting this cash pile to work (plus +$25 billion in annual operating cash flows in Omaha) will be paramount if Berkshire Hathaway is to once again regain their former status as a meaningful grower over just baseline U.S. GDP growth. Thumb-sucking has not cut the Heinz mustard during the Great Bull Market of 2009 – 2019. The Great Bull could have been one helluva of an astounding career denouement for Messrs. Buffett and Munger.

In terms of errors of omission by Buffett & Co. over the past ten years, a few stocks stand out to us as considerable head scratcher errors that should have been in Buffett’s wheelhouse, and should have been huge winners for Berkshire shareholders. The first stocks are Mastercard and Visa. Buffett is incredibly well-versed in the payments processing industry given his half-century knowledge in longtime holding American Express. These two stocks should have been layups for Buffett. Mastercard and Visa have been massive wealth creators during the Great Bull Market.

Indeed, since the Great Bull started back on March 9, 2009, Berkshire Hathaway B stock is up a notable +269% through the recent ending 3rd quarter. Over the same time period, the S&P 500 Index is up +370%. Mastercard is up a stunning +1,521%. Visa is up a nearstunning +1,137%. Not all is lost, though. Buffett’s two CIO lieutenants currently own both stocks at a combined weight of just a thumb-sucking 1.50% of Berkshire’s current equity portfolio. The current combined weighting should be 15.00%!.

Two other layups are Costco and Microsoft. Buffett has had at his disposal unrivaled expert tutelage on each company in his hind pocket for years – but to no shareholder avail. Charlie Munger has been a director at Costco for 22 years. Costco’s stock Great Bull gain is +522%. Once again, not all is lost. Buffett’s lieutenants currently own a whooping 0.55% position in Coscto.

More numbing still is Microsoft. Buffett first met Bill Gates nearly 30 years ago. They became fast best friends. In 2004, Gates joined Berkshire’s board of directors. Buffett probably spends more time talking with Gates (Gates Foundation and bridge playing too) each day than he does with key Berkshire vice-chairman employees Ajit Jain and Greg Abel. Buffett has long (and proudly) proffered his opinion that “technology” companies are far outside his “circle of competence.” His more recent multibillion foray into IBM and Apple belie his longheld assertion. In our view, if Buffett can endeavor to figure out the business models of both Apple and IBM enough to pour multibillions in stock purchases, then figuring out Microsoft’s business model under sensai Gates should have been Remedial Technology 101. Microsoft’s stock Great Bull Market gain is +657%.

A final lament, if Berkshire’s current Breaking Bad-style cash hoard represents stock market timing, then shareholder-partners deserve to be informed of as much.

On this capital allocation front we have growing concerns. Buffett & Co. have repeatedly stated their considerable disadvantage in competing against private equity (with levered billions in tow)for acquisitions, yet Buffett & Co. continue to play this game – very un-Buffettlike, in our opinion. Buffett has also repeatedly offered his opinion for a few years now that if interest rates would stay at their current low levels then stocks aren’t (weren’t) expensive, yet Berkshire’s equity portfolio on a net basis to total corporate assets hasn’t really grown that much. (Our portfolio does though share Buffett’s success in his outsized Apple position.) Last, despite Buffett’s share-buyback tutorials – and our perceived signaling – over the past few years that he is open to large, accretive share repurchases, little has been done on this front as well. (Buffett seems to abhor returning “capital paint” to shareholders while his Berkshire canvas is still “in paint.”) Net-net, capital allocation needs to improve dramatically in order to reaccelerate the current stasis of middling, GDP-like growth. Recent billions in capital investments in notable mistakes such as IBM, Lubrizol, Precision Castparts and Kraft do not inspire confidence that Buffett & Co. are still at the top of their game. Any future conviction of ours in Berkshire Hathaway shares will closely mirror that of Buffett’s own conviction in Berkshire share buybacks."

Last month, we published an article revealing that Black Bear Value Partners is bullish on Berkshire Hathaway Inc (NYSE:BRK.B) stock. The investment firm believes that Berkshire Hathaway Inc (NYSE:BRK.B) stock is a safe compounder which will prove it’s worth over the long-haul.

In Q1 2020, the number of bullish hedge fund positions on Berkshire Hathaway Inc (NYSE:BRK.B) stock increased by about 2% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Berkshire's growth potential. Our calculations showed that Berkshire Hathaway Inc (NYSE:BRK.B) is ranked #16 among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds' poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets. Tesla's stock price skyrocketed, yet lithium prices are still below their 2019 highs. So, we are checking out this lithium stock right now. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website:

Disclosure: None. This article is originally published at Insider Monkey.