To The Moon

$Berkshire Hathaway(BRK.B)$Berkshire was sitting on $144 billion worth of cash as at the end of 2021 as Buffett did not find anything to invest in. He did find Berkshire attractive and has been making share buybacks.

All of a sudden in Mar 2022 alone, Berkshire made two huge purchases - first was a $5 billion stake (and an additional $1 billion subsequently) in Occidental Petroleum and second was a $11.6 billion buyout of the entire Alleghany.

Occidental Petroleum, as the name suggests, is in the oil and gas industry. Berkshire's first contact with Occidental was in 2019 where the former loaned $10 billion to the latter to buy Anadarko. But 2020 was a bad year for the industry and Berkshire sold the shares it received as loan repayment.

Now the tide has turned and commodities are making a comeback given the inflation backdrop and the ongoing Russian-Ukrainian war. Berkshire went ahead to take a significant stake despite Occidental shares are at a 1-year high.

Alleghany is like a mini-Berkshire. Its core business is insurance but it has other businesses such as steel, toy making and funeral services. Buffett probably found affinity in it and he said he has watched the company for over 60 years.

Even though the offer was a 16% premium to the average stock price in the past 30 days, it was still about a PE ratio of 11x. Hardly expensive. Buffett is still shrewd when it comes to valuation.

These investments have been consistent with how Berkshire built its conglomerate through the years - the businesses are similar in a way that they either thrive or at least be resilient to inflation. Was it deliberate? I am not sure. But it sure looks like the best inflation stock you can own.

27% of Berkshire revenue is contributed by its insurance division with GEICO leading the way. Adding Alleghany is pretty synergistic and relevant to Berkshire. Insurance benefits from higher interest rates as their margins expand.

25% of the revenue comes from the manufacturing segment. This contains industrial companies such as Precision Castparts (metal fabrication) and Lubrizol (chemicals). They are pretty resilient even as raw material prices go up - they are able to pass down the costs to the customers since the customers are more desperate to get hold of the goods during a supply crunch.

The service and retailing segment contributes 13% of the revenue and consists of consumer brands such as Dairy Queen and See's Candy. These are again resilient to inflation as the branding is strong enough to pass down costs to consumers without losing demand.

On top of these, Berkshire owns the BNSF Railway (8% revenue) that hauls commodity freights; Berkshire energy division (9% revenue) that supplies natural gas; and last but not least, McLane (18% revenue) is a supply chain operator who distributes grocery and food services to retailers. The first two are beneficiaries of inflation while the last is providing essential services which can be price insensitive.

Most investors focus on Berkshire's investment portfolio (which has Apple) but Berkshire has always preferred to buy an entire business if possible. The conglomerate it has built through the decades is almost prime to reap the rewards in this inflationary period.