Buffett’s U-Turn on Bell Stock Leaves Followers in Dust
Many of the investing tenets of Warren Buffett, the billionaire and stock-picker extraordinaire who runs Berkshire Hathaway Inc., are legendary: Buy stocks and hold them for the long term, stick with management you know, buy value, avoid stocks in industries you don’t understand--like electronics and other technology.
But now Buffett, 69, has again taught investors another lesson: Be careful about buying a stock simply because Warren Buffett owns it. Because Buffett himself doesn’t always follow those famous tenets if he can personally make a quick buck.
Such was the case with obscure Bell Industries, an El Segundo electronics firm with a cheaply priced stock that, to the surprise of many, was the target of an investment by Buffett last month that briefly sent Bell’s stock soaring.
But Buffett quietly sold his Bell shares about a month later, after an estimated 50% return on his money, for about a $1-million profit. Buffett’s rapid exit helped leave other investors holding a stock that’s since plunged in price. And Bell’s chief executive was left stunned and disappointed, because he found out only by accident about Buffett’s quick sale of Bell’s stock.
The Bell story also contained a crucial distinction that some investors might not have noticed if they blindly followed Buffett into buying Bell’s stock. Buffett made the Bell investment with his own cash, not with money from his operating company, Berkshire Hathaway.
It’s a small but important difference that some investors probably didn’t think about when Buffett’s 5.3% stake in Bell was disclosed in government filings in mid-December. Buffett was in Bell, and so they simply got in, too.
Buffett’s 32% of Berkshire Hathaway is worth an estimated $31 billion, according to Forbes magazine. The value of Berkshire’s class A shares has risen from a few hundred dollars in the 1960s to $53,000 as of Thursday’s close, cementing Buffett’s legend. And Berkshire does follow most of those conservative investment guidelines with stocks it has owned for years, such as Coca-Cola Co., Washington Post, Wells Fargo and Gillette.
Not that Buffett--who is renowned for his folksy wisdom in Berkshire’s annual reports and his fondness for cherry Cokes--has turned into a gunslinging, day-trading market timer. But it’s not unusual for Buffett personally to make small, quick investments with his own cash to generate income, according to people who have tracked his investing habits.
They noted, for instance, that he also made personal investments in several real estate investment trusts, or REITs, because they provided a relatively high dividend yield. Buffett bought stakes in such REITs as Tanger Factory Outlet Centers, which sparked a rally in the REIT sector last spring.
Buffett, who declined comment, has previously said nearly all of his net worth is tied up in Berkshire stock. So when it comes to his personal cash, Buffett routinely will buy stakes in small companies if he is confident of generating a low-risk, sizable return, analysts said.
“Investors assume everything [he buys] is the next Coca-Cola,” said Berkshire analyst Alice Schroeder of PaineWebber Inc. in New York. “But if he feels he can get a reasonable return relative to cash [in a money market fund], he’ll frequently do things like this.”
The Bell filings don’t reveal what Buffett paid for his stake. But Wall Street estimates that he paid roughly $4.63 a share for his 507,000 shares in early December and was likely to have sold them earlier this month for nearly $7 a share--a gain of $1.1 million in a month.
But with Buffett now out of the picture, Bell’s stock has plunged. The stock closed Thursday at $4.06 a share, up 6 cents on the day, in New York Stock Exchange composite trading.
Still, there was a touch of irony to Buffett’s successful Bell play. Because Gillette, Walt Disney and some of Berkshire Hathaway’s other big holdings languished in 1999, Berkshire’s stock dropped 20% last year, and some analysts questioned if Berkshire’s patient style had become too conservative or outdated.
But Buffett has confounded the savviest Wall Street pros before and reaped windfalls. In 1997, he shocked many when Berkshire bought more than $2 billion in zero-coupon bonds. Then in 1998, Berkshire sparked a huge rally in the then-moribund silver market with a billion-dollar investment in the metal.
The trouble is, many less sophisticated investors no doubt follow Buffett’s moves without doing their own research, or without realizing that Buffett could exit at any time. Bell Industries proved that can be a costly mistake, analysts said.
In addition, Bell had a unique situation that was tailored to a quick move by Buffett and might not have been easily seen by less savvy investors.
Until a year ago, Bell mainly was an electronics distributor, but it decided to sell that business and become a “systems integrator”--helping connect computers with companies and other organizations.
Then last October, an investor group called Steel Partners II made a hostile takeover bid for Bell, reportedly of $5.30 a share, which Bell’s board rejected as too low. To help thwart the bid, Bell on Dec. 3 announced plans to pay a special cash dividend of $1.30 a share to all stockholders Dec. 10.
That payout no doubt helped attract Buffett, because it effectively cut the price he paid per Bell share by $1.30, or 28%. Because Buffett bought more than 5% of Bell, he was required to make a public report to government regulators.
That filing sparked a sizzling rally in Bell’s stock, which went from $4.88 a share Dec. 1 to as high as $8.38 Dec. 29. That rally enabled Steel Partners II and other institutional investors to sell some or all of their Bell stock for sizable profits.
Then last week, in a routine call to Buffett, Bell Chief Executive Tracy Edwards found out that Buffett sold his shares too. “I was shocked and disappointed,” in good part “because we really didn’t get a chance to prove something to him” with Bell’s performance, Edwards said.
Buffett told Edwards that he had simply made his targeted profit much sooner than planned, Edwards recalled. “Certainly I think his intent was to hold this [stock] for a longer period of time,” he said.
Edwards also said he knows it’s Buffett’s choice to buy and sell when he pleases, as it is for any investor. But Edwards noted that whether it is Buffett’s money or Berkshire Hathaway’s, “the perception among the public is that they meld together,” and that an investment by either “appears to have the same effect.”
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Bursting Bell’s Bubble
Bell Industries’ stock soared after billionaire Warren Buffett bought a stake in the electronics company, but then Buffett--known as the quintessential buy-and-hold investor--quickly sold the shares and Bell’s stock plummeted. Weekly closes and latest:* Dec. 29: Stock peaks at $8.38 a share
* Dec. 13: Buffett discloses he bought 5.3% of Bell’s stock
* Dec. 3: Bell declares special cash dividend of $1.30 a share
* Jan. 18: Bell CEO discloses that Buffett sold stake
* Thursday: Stock closes at $4.06, up 6 cents
Source: Bloomberg News
