Warren Buffett's Berkshire Moves Away From Stock Picking

Last week, the billionaire investor's firm offered to buy bankrupt power-transmission firm Energy Future Holdings Corp. for $9 billion in cash. Should the deal go through, Berkshire would be expanding its reliance on running stable and highly regulated industries to deliver growth.

Mr. Buffett rose to fame as a stock picker and continues to invest tens of billions in equities and other securities for Berkshire's portfolio.

But today, those investments are "de-emphasized," as Berkshire earns significantly more income from its operating businesses, Mr. Buffett said in his February letter to shareholders. Berkshire has undergone a "gradual shift from a company obtaining most of its gains from investment activities to one that grows in value by owning businesses," he wrote.

The conglomerate's shift toward regulated businesses began in 1999, when Berkshire announced an agreement to buy its first utility business, and accelerated with the 2009 agreement to acquire railroad Burlington Northern Santa Fe. Regulated businesses can yield steady returns, while stock investments are more volatile but can produce bigger wins. Berkshire also operates less-regulated businesses including retailers and manufacturers.

The energy and railroad businesses accounted for 24% of Berkshire's 2016 net earnings, up from 8% a decade ago.

"The franchise has pivoted away from equity investments toward acquisitions," said James Shanahan, senior equity-research analyst at Edward Jones. "The bigger the utility business gets, I think the more important it becomes that the leader of Berkshire Hathaway has a strong understanding of the operations of utility businesses."

As Berkshire has grown into a behemoth, Mr. Buffett has turned to acquiring regulated businesses that require consistent maintenance. The downside is these businesses require continuing capital investments, but that helps use up some of Berkshire's massive cash pile. The utility businesses also earn tax credits for their investments in renewable energy, which Mr. Buffett can apply to the rest of the company's balance sheet.

Mr. Buffett told shareholders at the company's annual meeting in May that the next CEO's main job would be capital allocation. Even if the Oncor deal closes, Berkshire has about $50 billion in cash available to spend, according to CFRA Research.

Source: Bloomberg Pro Terminal

Trader Bozhidar Arabadzhiev

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