My investment hero is Warren Buffett, chairman of US conglomerate Berkshire Hathaway. The 92-year-old legend — who started buying stocks in his teens — has grown Berkshire into a $740bn behemoth. But I think the value investor should run the rule over one fallen FTSE 250 share.
Buying abroad
In its latest set of results, Berkshire Hathaway reported that its cash pile had swelled to $130.6bn by the end of March. But bargain-hunting Buffett is always keen to put this cash to work. Hence, Berkshire recently increased its stakes in five major Japanese trading houses.
Although he’s been buying US and Japanese stocks, he’s rarely shown much interest in UK shares. This surprises me somewhat, given the deep value on offer in the blue-chip FTSE 100 index and mid-cap FTSE 250.
Also, the Oracle of Omaha has repeatedly praised the economics of owning insurance companies. He loves the ‘insurance float’ — the pile of assets that insurers hold to meet future claims. Last year, Berkshire’s insurance float leapt to $164bn, from $147bn in 2021.
I think this would be a great fit
While pondering value shares, insurance companies and Warren Buffett lately, I had a thought. Would the maestro be interested in owning major UK insurer Direct Line Insurance Group (LSE: DLG) outright? I doubt he would, but I think he’d be missing a big opportunity.
For the record, my wife bought Direct Line stock at a price of 200.3p in late June 2022. We bought this share as a double play on deep value and high dividends. Unfortunately, things took a turn for the worse in 2023, sending Direct Line’s share price plunging.
Almost a year ago, the shares hit their 52-week high of 260p on 29 June 2022. They then almost halved in value, hitting their 2023 low of 133.29p on 29 March. They’ve lost 37.9% over one year and 55.8% over five.
On Monday, this FTSE 250 share closed at 153.4p, 15.1% above its March low. This values the insurer at £2bn — a mere morsel for the likes of Berkshire and Buffett.
Raising premiums
One big problem — for me as a shareholder and also if Buffett ever decided to cast his eye over it — is that soaring claims costs forced Direct Line to cancel its generous dividend in January. When this bad news broke on 11 January, the stock plunged by 23.5%. Ouch.
Given the surging cost of claims, UK insurers have responded by raising their premiums. Furthermore, analysts expect these premium hikes to continue for two years. This should help to boost Direct Line’s revenues and earnings. And suspending its dividend will bolster its balance sheet and solvency.
Buffett’s been burned before in the UK
As a shareholder, I’d personally be delighted if ‘Uncle Warren’ bought Direct Line. However, he’s had his fingers burnt by FTSE stocks before. In 2015, he complained that “thumb sucking” over ditching his stake in grocery giant Tesco cost Berkshire $444m (£287.6m at the time).
Summing up, if I were the Nebraska-based multi-billionaire, I’d be buying up undervalued FTSE 100 and FTSE 250 stocks like crazy. After all, earnings ratings are lower and dividend yields much higher for the S&P 500 index. But I know that Buffett prefers to ‘bet on America’, rather than reaching across the Atlantic to seek bargain buys!
