Warren Buffett’s BYD Stock Sale Reflects His Famous Investing Strategy

Shareholders of BYD, China’s largest electric car maker, should be celebrating.

The company controls 29% of China’s ‘new electric vehicle’ market, which includes both plug-in hybrids and battery-powered cars, far ahead of rivals like Wuling, based in China’s Guangxi province, and Elon Musk’s Tesla. . It sold more cars in the first seven months of 2022 than in 2020 and 2021 combined. It’s the world’s second-biggest seller of electric vehicle batteries, with company executives hoping BYD batteries could soon power Tesla cars. The company’s half-year profit is triple what it reported a year ago.

Yet as of Friday’s market close, BYD stock is down 16.4% for the year and approaching the lows it hit in March, when BYD stock (along with stocks of other electric vehicle companies) fell after Russia’s invasion of Ukraine fueled fears of a nickel shortage. . Metal is an essential component of batteries.

One man is driving the bearish sentiment: Warren Buffett and his decision to start trimming his large stake in the electric car maker.

Buffett’s company, Berkshire Hathaway, according to Hong Kong stock exchange filings, has sold about 3.05 million shares of BYD since Aug. 30, boosting the conglomerate’s stake in the electric carmaker from 20 .49% to 18.87%.

Berkshire’s liquidation encouraged other investors to dump the stock. Shares of Hong Kong-listed BYD have fallen around 15.6% since Berkshire Hathaway first revealed it was cutting its stake in the electric car maker. (BYD shares rallied slightly in Friday trading, ending up 2.5% for the day.)

BYD did not respond to Fortune’s request for comment. Berkshire did not respond to a phone call made to its office outside of U.S. business hours.

Buffett’s sale did not cause analysts to reassess their views on BYD. They expect exceptional demand for electric vehicles in China for years to come, with government subsidies and other policies encouraging Chinese customers to go electric. “The Chinese automotive market is attractive given its size. If investors want to tap the growth potential here, BYD remains a top choice,” Morningstar analyst Vincent Sun told Bloomberg on Aug. 31.

Buffett may still be bullish on BYD’s business and China’s electric car market. His company’s pushback from the automaker fits with his long-standing strategy of value investing, meaning his exit may be the result of BYD’s success, rather than any qualms he might have about his companies. fundamentals.

Buffett’s involvement in BYD

Berkshire Hathaway bought 225 million shares of BYD for $230 million in 2008. That stake, at BYD’s peak share price equivalent of $42.32 on June 23, was worth approximately $9.5 billion, that’s a 40-fold increase.

Buffett’s longtime business partner Charlie Munger convinced the Omaha billionaire to buy a stake in the company after Munger took a liking to BYD founder and current CEO Wang Chuanfu. Munger called Wang “a combination of Thomas Edison and Jack Welch” in a 2009 Fortune interview. After investing in BYD, Buffett became a strong supporter of the company and often made public appearances alongside Wang. In 2009, Buffett said Fortune that the manufacturer’s progress was “extraordinary”.

In July, investors feared that Buffett had downgraded on the company. BYD shares equal to Berkshire’s stake have appeared in Hong Kong’s clearing system, where shares must be registered before they can be traded. BYD shares fell 12% the following day.

Yet Buffett watchers say selling the billionaire’s shares is just a matter of the Berkshire chairman sticking to his famous investment philosophy.

Buffetts invest in value strategy

Buffett has long been a proponent of “value investing,” or buying stocks that are considered undervalued and holding them until the market values ​​them properly.

“Buffett usually holds his instruments for many years; he ends up leaving most of them when he sees them as fully valued or their future prospects have become less attractive,” said David Kass, professor of finance at the University of Maryland. Fortune.

BYD’s meteoric streak means the automaker has moved from a “value stock” to a “growth stock,” said Brendan Ahern, chief investment officer of Krane Funds Advisors. in July, when Berkshire’s BYD stake first appeared in Hong Kong’s clearing system. (Growth stocks are likely to outperform the broader market.) BYD’s forward price-to-earnings ratio has averaged 80 over the past two years and approached 120 at times, Ahern notes. Peer automakers typically have front P/E ratios around 10.

Shares of BYD in Hong Kong have risen more than 2,700% since Berkshire bought out its stake in BYD in 2008, climbing rapidly since the start of 2020. “The share price has recently reflected improved performance and company outlook,” Kass says, and so Buffett might consider the stocks “fully valued.”

“BYD’s valuation, while a successful investment, has reached levels that Berkshire historically would not have had an interest in,” said Cole Smead, chairman of Smead Capital Management..

“Buffett once said that ‘investors must remember that excitement and expense are their enemies.’ The only way to deal with excitement is to sell,” Smead said, referring to a line from Berkshire Hathaway’s 2004 letter to shareholders.

Another factor in Buffett’s sellout is Berkshire’s biggest business. “It’s not just BYD,” Smead said. “It could also be what happens in [Berkshire’s] underlying insurance float that drives them to want to gravitate [to] capital quickly.

In a note released after Berkshire disclosed its first sale of BYD shares, Arun George, an analyst who writes for SmartKarma, an independent investment analysis platform, linked the sale of BYD to an earlier case in which Buffett reduced his stake in a popular investment in China. .

At one point, Berkshire Hathaway owned 11% of publicly traded shares of PetroChina, bought for $488 million. Beginning in July 2007, Berkshire slowly reduced its stake in the state oil company, before pulling out entirely in October. The entire stake was sold for $3.31 billion, nearly seven times the initial investment. In a fox Company interview at the time, Buffett said he sold the stake “based on price.”

“It was 100% a decision based on the assessment,” he said.

And Buffett may now be looking for his next big bet. “Maybe Buffett has identified other investments that are currently more attractive,” Kass says.

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