Warren Buffett’s impending retirement has sent Berkshire Hathaway (NYSE:BRK.B) shares down. But I think this could be a good time to consider buying.
The current CEO’s retirement marks the end of an era. But there are a lot of reasons for investors to feel positive about the stock going forward.
Transition
The first – and most obvious – reason is that Warren Buffett is 94. The company and its shareholders have had a lot of time to prepare for a change in leadership.
This is more important than it might seem. Investors have had a chance to find out about Greg Abel and there have been signs that a transition was on the way.
In the most recent shareholder letter, Buffett stated that Abel would be writing the CEO letters relatively soon. And this is something that I took note of at the time.
Furthermore, Buffett staying with the company in an advisory role should help smooth the transition. So I don’t think any dramatic changes are on the cards in the near future.
Capital allocation
In my view, one of the most important differences is the way Abel and Buffett each approach the existing subsidiaries. Buffett has historically preferred a hands-off approach.
By contrast, Abel has been much more involved in understanding what’s going on. And I think it’s fair to say this is the biggest risk for the company with the change in CEO.
Buffett’s approach has allowed Berkshire to acquire companies run by managers that value autonomy. A change in leadership might compromise that and wouldn’t be a good thing.
A closer focus on individual subsidiaries, though, might be an advantage for identifying internal investment opportunities. And that’s been the firm’s biggest challenge recently.
Cash
Berkshire has around $350bn in cash on its balance sheet. With around $50bn needed for covering potential insurance liabilities, this leaves somewhere in the region of $300bn available.
Over the last few years, there haven’t been many opportunities to deploy that kind of capital in the stock market. And carrying that much cash has been weighing on overall growth.
In addition, the recent stock investments have been something of a mixed bag. None has been big enough to make a meaningful difference, but there have been some significant failures.
Given this, a shift in perspective might be just what Berkshire needs. While I’m not expecting anything dramatic, I’m excited to see what Abel brings to the role of capital allocation.
A new beginning?
It feels like Berkshire Hathaway is at the start of a new chapter, but a lot of what has made the company great is still very much intact. And I view this as a very positive thing.
I’m not expecting Abel to make any huge changes – especially in terms of Berkshire’s culture. But I would be surprised if the CEO has no new ideas to bring to the business.
The biggest challenge recently has been what to do with that $350bn in cash. And I think a shift to focusing on developing existing subsidiaries could be very valuable.
I’ve been a shareholder for some time. While I’m sad in some ways to see Buffett moving aside, I see this as a buying opportunity ahead of an exciting new chapter for the company.
