Warren Buffett’s unusual new bet

From Justin Brill, Editor, Stansberry Digest:

Buffett’s Berkshire Hathaway reported it owned 8 million shares – worth nearly $1 billion – of Stansberry’s Investment Advisory portfolio holding Monsanto (MON) as of December 31.

As Digest readers may recall, Monsanto agreed to be purchased by German conglomerate Bayer AP last year for $66 billion, or $128 a share. Yet the deal is still awaiting regulatory approval. And MON shares are still trading for less than $109 per share – more than 15% less than the agreed-upon price – indicating the market is skeptical the deal will be approved.

What’s notable in this case is that Berkshire bought this entire stake in the fourth quarter of 2016… after the deal was made. As Bloomberg merger-and-acquisitions columnist Brooke Sutherland noted on Tuesday, this suggests Buffett and/or Berkshire execs are making a big bet the deal will go through…

The quickest and cleanest way for Berkshire to realize a return on its investment would be for that takeover premium to be fully realized with a deal that’s approved by both shareholders and regulators – especially because Berkshire’s dumping of its stake in tractor maker Deere & Co. signals it’s not too keen on the agriculture industry as a stand-alone investment.

It’s a merger arbitrage play, essentially, on a deal that’s far from a slam dunk… We don’t know for sure if it was Buffett himself or one of his stock-picking deputies who made the investment. Either way, he no doubt gave his blessing. When the Oracle of Omaha turns arb, perhaps it’s time to follow suit.

Depending on when Berkshire made its purchases, it could earn up to 30% – or more than $250 million – if the deal is approved. As of today’s close, Stansberry’s Investment Advisory subscribers are up more than 15% on the trade.

Buffett’s firm also “doubled down” on some existing positions…

Berkshire reported it had increased its positions in the four biggest U.S. airlines by nearly seven times. It disclosed total stakes of more than $2.1 billion each in American Airlines (AAL), Delta Air Lines (DAL), Southwest Airlines (LUV), and United Continental (UAL).

Longtime readers may recall this is a significant departure for Buffett, who long considered airlines to be among the worst businesses in the world. As he wrote in Berkshire’s 2007 annual letter to investors…

The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.

The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.

And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt. Twice.

Berkshire also nearly quadrupled its position in consumer-electronics giant Apple (AAPL) to 57.4 million shares, up from 15.2 million shares in the third quarter of last year.

Assuming Berkshire hasn’t sold shares this quarter, the position – worth nearly $8 billion at today’s share price – would make Buffett a top-10 shareholder in the world’s most valuable company.

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