The Hot Corner...

January 27, 2010

Mr. Buffet's Move May Add Some Value, If Not True Value.

I had a client call the other day with two questions pertaining to his Berkshire Hathaway holding. First off, how did the stock price drop from the $3,000 a share level to the $70 a share level in one day? His first inclination was correct and I confirmed it for him - the stock split 50 to 1.

His follow up question is natural as well - How will this affect the stock price in the future? Typically, our stance would be that a stock split may cause for a short term increase but subsequently level off to its true value. With Mr. Buffet's stock, things may be different.

We have been investors in Berkshire Hathaway for many years buying it when we think it's undervalued. Currently, we hold plenty of the stock but still feel it to be pretty undervalued. Irrespective of that, the buzz around the stock split may cause the stock to rise for a few reasons.

Most notably, for many small investors a share price in the $70+ range is much more manageable than $3,000 a share. While the stock value does not change, the per share price does introduce the stock to many more investors. Due to Mr. Buffet's legion of followers, this somewhat artificial bump in price may be around for a while.

The other main reason for a suspected rise in the stock price is the reason behind the stock split. Mr. Buffet recently purchased the remaining shares of a company in which Berkshire already held a large share. To complete the purchase they used shares of stock.

On the back of the split, the rumor is Berkshire is a likely candidate to be added to the S&P 500 Index. If this occurs, all the financial institutions that provide an S&P 500 Index fund will need to buy Berkshire's stock. This will provide an instant bump to the stock price.

Over the long run, Mr. Buffet's stock is a great investment with or without the stock split. But, for once, a stock split's impact on its stock is not lost on the stock market. Since the stock split: Berkshire stock up 9.29%; S&P 500 Index down 4.41%. We'll see if this momentum holds up!