By: T3Live
Recently, Elliot was quoted by TheStreet.com discussing the implications of Berkshire Hathaway (BRK.B) splitting the “B” shares and its implications for the value of the company. This article originally was published on February 5th; however the key points all remain valid today. Here is a passage from that writeup:
Elliot Turner, an analyst and trader at T3 Capital, provided a few examples of how Berkshire Hathaway shares could present unique trading plays, though he stressed it is still too soon to draw concrete conclusions.
For one, Berkshire Hathaway could represent a “flight to safety” play for equity investors. Turner explained that when the markets were being hit really hard, traders noted a sudden flight into Exxon Mobil (XOM) as a defensive measure.
“When the markets were really tanking in January of last year, Exxon kept holding up, and that was a flight to safety trade, a company where there are profits that potential investors know will be there, and won’t be severely threatened relative to everything else,” Turner said, adding that investors can short the market while maintaining long exposure to bellwether stocks to protect capital. “You couldn’t do that in the past with Berkshire because it put the trader in a liquidity trap,” Turner said.
As far as using single stocks for a defensive equities play, Berkshire is a much better option than Exxon, or any other security because of its diversification across banking, insurance and several U.S. cyclical sectors, from housing to consumer spending and transportation. “Considering Berkshire’s diversity and business lines, it should reflect a fundamental valuation of the overall U.S. economy,” Turner said.
Turner thinks Berkshire could be a U.S. market macro play that allows traders to bypass the flaw of the Dow Jones Industrial Average being price-weighting. “One thing I really don’t like about the DJIA is that it is a price-weighted index,” Turner said.
Turner explained that when Alcoa (AA) reported weak earnings and dropped 11%, the DJIA was barely down because IBM (IBM), another DJIA component with a much higher price, was up by a little more than 1%. Alcoa’s 52-week high is $17.60 versus an IBM 52-week high of $134.25.
“Alcoa’s 11% drop and IBM’s 1% gain had an equal effect on the DJIA, and that doesn’t tell me enough about the markets, whereas with Berkshire, there is just such a wide variety of lines of business. They have financials covered, there are holdings across the board in insurance, and commercial banks, retail banks and investment banks,” Turner said. “In this respect, Berkshire’s B shares can given me a more valid reflection of the U.S. market than the Dow.”
Turner said no trading tool will replace the importance of the S&P 500 Index, and the SPDR 500 ETF remains his favorite proxy for the big picture.
