By Mark Hulbert
Tesla doesn't fit the Berkshire Hathaway formula
"We only swing at pitches we like," Buffett has said.
Tesla Chief Executive Elon Musk suggested over the weekend that Warren Buffett's Berkshire Hathaway should purchase Tesla stock.
"It's an obvious move," Musk posted in a message on X, the social-media service platform he owns.
Buffett likely wouldn't agree. That's because Tesla's shares (TSLA) have far different characteristics than the kind of stocks that Buffett over the years has favored. While this is no guarantee that Berkshire (BRK.A) (BRK.B) wouldn't purchase Tesla stock, it would be highly out of character for Buffett to do so. (Multiple attempts to seek comment from Berkshire Hathaway were unsuccessful.)
We know the kind of stocks Buffett favors because of a study that appeared six years ago in the Financial Analysts Journal. Entitled "Buffett's Alpha," the study was conducted by three principals at AQR Capital Management, each of whom has strong academic credentials: Andrea Frazzini, David Kabiller, and Lasse Pedersen.
These researchers in effect unlocked the secret of Buffett's long-term success. Up until their study appeared, no one had succeeded in devising a set of stock-picking criteria that, in backtesting, would have performed as well as Berkshire Hathaway. Many had concluded that Buffett's success was dependent on his unique insight and could not be duplicated.
In essence, stocks satisfy the criteria to the extent they simultaneously have low price-to-book ratios and betas, and high dividend-payout ratios and growth rates of profits.
Tesla satisfies just one of the requisite criteria for these "cheap, safe, quality stocks": Its profits have grown impressively over the past five years. It fails the other criteria: Its price-to-book ratio is one of the highest in the market - higher than 88% of the other stocks in the S&P 1500 XX:SP1500 index, according to FactSet data; furthermore, Tesla's beta is higher than 94% of the stocks in that index, and it pays no dividend.
Given this, it seems most unlikely that Tesla stock would be the "occasional big opportunity" that Buffett mentioned in this past weekend's Berkshire Hathaway annual meeting as what he's looking for in order to put some of the company's nearly $200 billion cash hoard to work. "We only swing at pitches we like," Buffett said.
Increasing the confidence in this conclusion is the out-of-sample performance of the stock-picking criteria the researchers devised. There are two funds that come close to putting those criteria into practice, and both closely match Berkshire's return: They are the AQR Large Cap Defensive Style Fund AUEIX and the iShares Edge MSCI USA Quality Factor ETF QUAL. Since the researchers' study first began circulating in academic circles (November 2013), Berkshire Hathaway stock has produced a 12.5% annualized return, in contrast to 12.3% annualized for QUAL and 11.3% for AUEIX.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]
More: Berkshire Hathaway has $189 billion in cash. Elon Musk has an idea how Warren Buffett should spend it.
Also read: Berkshire Hathaway annual meeting: Buffett cuts Apple stake, dumps Paramount, hints at Canada investment
-Mark Hulbert
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05-07-24 1255ET
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