Warren Buffett's Berkshire Hathaway got the wrong end of a bet on future stock market prices in the third quarter, hurting profits and masking the substantial strength in his recently acquired railroad.
The billionaire investor's Burlington Northern Santa Fe railroad had heavy demand in the quarter to transport a range of commercial and agricultural products, reflecting the growing strength in the manufacturing sector.
Buffett called his purchase of the railroad "an all-in wager on the economic future of the United States," and its contribution to results lent credence to his strategy.
But the sore spot in the quarter was a loss on a portfolio of options tied to a basket of major stock indexes. Despite his distaste for derivative instruments, Buffett has insisted these bets would pay off, given their long time-frame and high upfront fees.
But they generated a loss of $700 million in the quarter, compared to a profit of $220 million a year ago.
Long-time Berkshire investors said the results were "reasonable" but they still took pause from the fall in profits in the quarter.
"I think (a) concern obviously is some of the derivative adjustments that are happening, and it's hard to say why that's the case," said Michael Yoshikami, president of YCMNET Advisors in Walnut Creek, California, which invests $1 billion and owns Berkshire stock.
Berkshire is better known for its stock portfolio than its derivatives, with Buffett's imprint on some of America's top companies in a range of industries.
He was a net seller of shares in the quarter to the tune of about $1.2 billion. Berkshire's quarterly report Friday showed it trimmed holdings in Procter & Gamble Co but added nearly $500 million to its position in Wells Fargo, among other moves.
At the same time, cash and equivalents rose 23 percent in the quarter to $34.46 billion.
"I don't think it means he's gearing up (for a deal), I think it's more reflective of the investment strategy. This is really just a cash cow," YCMNET's Yoshikami said. He said Berkshire is, for him, two companies — one to generate cash flow and one to make venture investments.
Those kinds of investment decisions have largely been driven by Buffett, who turned 80 in August.
Frequently called the "Oracle of Omaha," he has run Nebraska-based Berkshire since 1965. The conglomerate owns about 80 businesses and a huge portfolio of stocks valued in the tens of billions of dollars.
As he ages, Buffett's succession has been a concern for Berkshire investors. He eased their fears somewhat by naming hedge fund manager Todd Combs as one of his firm's asset managers on Oct. 25. The little known Combs will oversee a significant portion of Berkshire's holdings.
Berkshire, whose interests range from insurance to railroads, posted a net profit of $2.99 billion or $1,814 per Class A share. A year earlier it earned $3.24 billion or $2,087 per share.
On an operating basis, excluding investment gains and losses, the company posted earnings of $2.79 billion, or $1,692 per share, compared with $2.06 billion, or $1325 per share a year ago.
Analysts, on average, had expected earnings of $1,676.67 per Class A share, according to Thomson Reuters I/B/E/S.
The company said operating earnings rose 36 percent in the quarter on contributions from BNSF and a return to profitability at corporate jet service NetJets.
Berkshire's book value per Class A share, which is the preferred performance metric for Buffett and other value investors, rose 7.5 percent to $90,823 as of Sept. 30.
Of all its lines of business, insurance is Berkshire's largest and best known. Berkshire said Geico posted growth in premiums but higher losses and loss expenses. In particular, it saw a rise in claims for glass damage in cars.
© 2014 Thomson/Reuters. All rights reserved.