Buffett's healthcare investment proves to be bad bet
Warren Buffett's Berkshire Hathaway Inc has increasingly invested in healthcare stocks since last year, and the strategy has been a bad bet so far. It won't take long to find out whether the company is doubling down.
GlaxoSmithKline Plc, Europe's largest pharmaceutical company, and Sanofi-Aventis SA, the biggest French drugmaker, have fallen more than 10 percent this year as competition from generic drugs hurt sales. Berkshire added Glaxo to its holdings in 2007 and raised its stake in Sanofi by almost 70-fold.
Health-insurance stocks that Buffett's company was buying last year - UnitedHealth Group Inc, the largest US insurer by market value, and WellPoint Inc, the biggest by number of customers - have done far worse thanks to profit shortfalls.
UnitedHealth has tumbled 44 percent this year, the biggest decline among the 11 companies in the Morgan Stanley Health Care Payer Index, after Berkshire raised its stake almost fivefold in 2007. WellPoint, added in the first quarter of last year, isn't far behind with a 40 percent loss.
Today is the deadline for Berkshire, based in Omaha, Nebraska, to report to the Securities and Exchange Commission on its investments as of March 31. Based on past practice, look for the so-called 13-F filing to arrive after US exchanges close.
Buffett submits details on some of Berkshire's holdings confidentially, so the filing may not name all four companies. He last went this route with a healthcare stock in 2006, when Berkshire started buying shares of Johnson & Johnson.
J&J, the world's largest maker of consumer healthcare products, has been an exception among Berkshire's holdings in the industry. The company's shares are little changed for the year. The Standard & Poor's 500 Index has lost 4.4 percent.
Health care is the year's poorest performer among the S&P 500's 10 main industry groups. Its index has lost 10.4 percent, roughly half a percentage point more than gauges of financial and telephone companies.
Berkshire increased its holdings of financial shares last year by investing in Bank of America Corp and raising stakes in Wells Fargo & Co and US Bancorp. These investments have fared much better this year than the healthcare stocks as a group.
Bank of America, the second-largest US bank, has fallen 9.3 percent - about a point less than the industry index, in other words. Wells Fargo, the biggest on the West Coast, has lost 1.4 percent. US Bancorp, the sixth-largest nationwide, has risen 7.8 percent.
Burlington Northern Santa Fe Corp, which Berkshire has built into its fifth-largest stock investment since the third quarter of 2006, is by far the year's best performer among the newer arrivals. The railroad's shares have advanced 26 percent as increased shipments of farm products lift sales and profit.
Buffett's emphasis on value investing, or buying shares that he considers cheap relative to revenue, earnings and other gauges, suggests Berkshire may prefer healthcare stocks to the likes of Burlington Northern. Look to today's filing to show whether lower prices for the shares made them more appealing.
It would be easy to dismiss Cablevision Systems Corp's $650 million takeover of Newsday, Tribune Co's Long Island newspaper, as simply an ego trip for the Dolan family, which controls the cable-television company. It would also be wrong.
Cablevision has provided local news to the region since 1986, when News 12 Long Island made its debut as a 24-hour news channel. The Bethpage, New York-based company now has six other News 12 networks, whose coverage areas include Connecticut, New Jersey and two New York City boroughs, Brooklyn and the Bronx.
Buying Newsday would open up the kinds of opportunities for print-broadcast cooperation that Rupert Murdoch's News Corp has pursued since taking over Dow Jones & Co in December. This may explain why the company offered more than Murdoch and Mortimer Zuckerman, owner of the New York Daily News, for the paper.
The purchase makes a lot more business sense than many of the Dolans' previous dealings, including the 1998 takeovers of Nobody Beats the Wiz consumer-electronics stores - now out of business - and the Clearview Cinemas theater chain.
EnCana Corp, Canada's largest energy producer by market value, said it expects to spend as much as $300 million to split into oil and natural-gas companies. The expense may be more than justified as the company closes a valuation gap with its peers.
Monday's 6.6 percent gain, the biggest since speculation about a takeover bid from Royal Dutch Shell Plc arose in October 2005, left Calgary-based EnCana's shares at a 17 percent lower price-earnings ratio than the S&P/TSX Energy Index. The index, consisting of 69 stocks, was valued at 19.9 times profit.
Suncor Energy Inc, whose value comes closest to EnCana's within the industry group, closed at a 22 percent premium on a P/E basis. Canadian Oil Sands Trust, the lead investor in the world's largest producer of oil from tar sands, and Canadian Natural Resources Ltd, the developer of another oil-sands field, are more costly than the index as well.
EnCana also costs relatively little by comparison with sales and book value, or the value of assets after subtracting liabilities. These ratios are 2.87 and 3.47 times, respectively.
David Wilson is a Bloomberg News columnist. The opinions expressed are his own.
(China Daily 05/14/2008 page16)
