A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here.
Warren Buffett is arguably the most legendary investor of all time. But the Oracle of Omaha has missed out on this year’s stock market rally. So far, at least.
Shares of Buffett’s Berkshire Hathaway
(BRKB) conglomerate, a company that owns businesses ranging from Geico and the Burlington Northern Santa Fe railroad to consumer brands like Dairy Queen, Duracell and Fruit of the Loom, are down slightly this year — lagging the market, as the S&P 500 is up 6%. (The Nasdaq has done even better, surging 12%.)
Berkshire Hathaway also has a giant stock portfolio that Buffett helps run. Apple
(AAPL) is now by far the top holding for Berkshire, which also has big stakes in Bank of America
(CVX), American Express
(AXP) and Coca-Cola
So is Berkshire’s portfolio, dare we say it, a little too boring? After all, if you want exposure to the big blue chips he owns, you could just buy an S&P 500 index fund.
Buffett, in fact, has promoted that idea to investors many times, arguing that most individual stock pickers will not be able to beat the market. The 92-year-old Buffett, who has a net worth of more than $100 billion according to Forbes, even said that he wants the trustee in charge of his will to put 90% of his wife’s inheritance in index funds.
Still, investors pay extremely close attention to Buffett every time he speaks. So traders will be poring over every word in his annual shareholder letter, which will be released the morning of Saturday, February 25, along with Berkshire’s latest earnings report.
Thoughts on inflation?
Don’t expect any major surprises. Buffett will probably continue to extol the virtues of a long-term, patient approach to investing and give a bullish outlook for the US economy. And to his credit, that usually pays dividends: Berkshire stock was up 3% last year in a down market.
But market watchers are looking to see what Buffett says about the current inflationary scourge that has had a big impact on consumers and investors. He has lived through a couple of bouts of high inflation, after all.
“I would like to hear Buffett address what’s going on with interest rates and inflation up as much they are,” said Steve Check, president of Check Capital Management, an investment firm that owns Berkshire shares. “He talked a lot about how concerned he was in the 1970s and 1980s.”
Buffett has made numerous comments about inflation over the past few decades. And he was particularly nervous during the late 1970s and early 1980s, when soaring oil prices created an inflationary shock that severely hurt the economy.
“High rates of inflation create a tax on capital that makes much corporate investment unwise,” Buffett said in his 1980 shareholder letter to Berkshire investors. Buffett also described inflation as a gigantic parasitic “tapeworm” for businesses in 1981.
Buffett may also need to address how top-heavy and concentrated his portfolio has become. Berkshire’s five largest holdings make up about 75% of the company’s stock investments.
“The portfolio is significantly overweight [in] technology, energy, consumer staples, and financials relative to the S&P 500,” said Bill Stone, chief investment officer with The Glenview Trust Company, another Berkshire shareholder, in a report. Stone noted that Berkshire also has big stakes in Kraft Heinz
(KHC) and oil company Occidental Petroleum
Investors also want to hear more about what Buffett plans to do with Berkshire’s massive pile of cash. The company has more than $100 billion on its balance sheet. Are more acquisitions coming?
Buffett has talked for the past few years about how he’s longing to do an “elephant-sized” deal with Berkshire’s cash. Its most recent big deal was last year’s purchase of insurer Alleghany for $11.6 billion.
Still, the recent sluggish performance of Berkshire’s stock is unlikely to deter the faithful Buffett fans, many of whom are expected to make the annual pilgrimage to Omaha on May 6 for the company’s shareholder meeting.
Berkshire vice chairman Charlie Munger will likely be on stage with Buffett. So will Greg Abel, the chairman and CEO of Berkshire Hathaway Energy who Buffett has handpicked to eventually succeed him as Berkshire Hathaway CEO.
Shop ‘til you drop?
Buffett’s faith in the US economy is well founded. American consumers have proven to be remarkably resilient despite rampant inflation. The surprisingly strong retail sales gains for January is further proof of that.
Investors will get several more clues about consumer spending this week when several top retailers report earnings.
Dow components Walmart
(WMT) and Home Depot
(HD) are the highlights. Walmart
(WMT), which has a massive grocery business, should shed some light on how shoppers are coping with surging grocery prices.
Walmart could still benefit from its reputation as a place for bargains, though. That could even attract more affluent shoppers looking to save a buck.
“With inflation remaining elevated in the U.S., we expect Walmart to see continued trade-down benefits…particularly from higher-income customers,” said Arun Sundaram, an analyst at CFRA Research, in a report.
And investors will be looking for clues about the health of the housing market when Home Depot reports. Placer.ai, a research firm that measures foot traffic at top retailers, said in a recent report that consumers are returning to Home Depot and rival Lowe’s at almost pre-pandemic levels — even despite the housing slowdown.
One reason? Current homeowners may decide to spend more on renovations if they now plan to stick in their current house longer instead of looking to sell.
“Although the hot home-buying market is cooling off…foot traffic remains close to pre-pandemic levels due to a shift towards projects aimed at sprucing up a current living space,” said Placer.ai’s Ezra Carmel in a report. “It appears that projects that enhance the prospect of staying in place also have the ability to drive visits.”
Investors will be keeping close tabs on several other retailers set to report earnings this week, including TJX
(TJX) — the owner of TJ Maxx, Marshalls and HomeGoods — as well as online retailers eBay
(W) and China’s Alibaba
The US government is also set to release personal spending figures for January on Friday, another data point that will give a glimpse of consumers’ financial health.
Monday: US stock and bond markets closed for Presidents’ Day
Tuesday: US existing home sales; Eurozone and UK PMI; earnings from Walmart, Home Depot, Medtronic
(FLR), Molson Coors
(TAP), Caesars Entertainment
(CZR), Diamondback Energy
(FANG), Chesapeake Energy
(CHK), Palo Alto Networks
(PANW), Coinbase, La-Z-Boy
(LZB) and Hostess Brands
Wednesday: Weekly crude oil inventories; earnings from Stellantis, Baidu
(BIDU), TJX, Garmin
(GRMN), Overstock, Wingstop
(NVDA), eBay, Etsy and Bumble
Thursday: US weekly jobless claims; US Q4 GDP (second estimate); Eurozone inflation; Turkey interest rate decision; earnings from Alibaba, Netease
(NTES), Keurig Dr Pepper
(KDP), Wayfair, Newmont, Domino’s
(DPZ), Papa John’s
(YETI), Nikola, CNN owner Warner Bros. Discovery, Block
(SQ), Booking Holdings
(BKNG), Live Nation
(INTU) and Beyond Meat
Friday: US personal income and spending; US PCE inflation figures; US new home sales; Japan inflation; Germany Q4 GDP; earnings from CIBC
(SSP) and Cinemark
Saturday: Berkshire Hathaway earnings and Warren Buffett annual shareholder letter