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Warren Buffett buys 5% stakes worth $6.21 billion in Japan's five biggest trading firms

Reuters     August 31, 2020

Berkshire Hathaway Inc said it has acquired slightly more than 5% of the shares in five large Japanese companies, marking a departure for Chairman Warren Buffett as he looks outside the United States to bolster his conglomerate. In a statement on Sunday, Buffett's 90th birthday, Berkshire said it acquired its stakes in Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui & Co Ltd and Sumitomo Corp over approximately 12 months.

Berkshire said it intends to hold the investments for the long term, and may boost its stakes to 9.9%. A Berkshire insurance business, National Indemnity Co, is holding the shares. "I am delighted to have Berkshire Hathaway participate in the future of Japan," Buffett said in a statement. "The five major trading companies have many joint ventures throughout the world and are likely to have more... I hope that in the future there may be opportunities of mutual benefit."

Taken together, five 5% stakes were worth 655 billion yen ($6.21 billion) as of Friday's close, Reuters calculation showed based on Refinitiv data. On Monday, shares in the trading houses jumped as much as 11% in early Tokyo trade, outperforming a 1.5% rise in the broader TOPIX .TOPX share price index.

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Marubeni was the biggest gainer among the five, surging 12%. Sumitomo and Mitsubishi rose more than 10% and Mitsui rose 8.2%. Itochu - the only one of the four with a price-to-book ratio above 1 - rose 5.4% to a record high. Shares of companies often rise when Berkshire discloses new investments, reflecting what investors view as Buffett's imprimatur.

The Japanese trading companies in many ways appear to be a typical Buffett investment: four of them trade well below book value, meaning their market capitalizations were below their assets. Several also have hefty amounts of cash on hand. Mitsubishi, for instance, has seen steady growth in its free cash flow per share over the last four years, Refinitiv data showed.

Further and in a likely attraction for Buffett - who famously avoids investing in companies he claims not to understand - the Japanese trading houses are deeply involved in the real economy: steel, shipping, commodities, and in some cases retail.

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U.S. DEPENDENCE

The Japanese investments will help Buffett reduce his Omaha, Nebraska-based conglomerate's dependence on the U.S. economy, which last quarter suffered its deepest contraction in at least 73 years as the coronavirus pandemic took hold. Many of Berkshire's own operating businesses have struggled, and Berkshire this month took a $9.8 billion writedown on its Precision Castparts aircraft parts business.

Berkshire owns more than 90 businesses including the BNSF railroad and Geico car insurer outright. It also invests in dozens of companies including Apple Inc, with a roughly $125 billion stake based on its holdings as of June 30, as well as American Express Co, Bank of America Corp and Coca-Cola Co.

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"Since Buffett's portfolio is becoming heavily skewed to Apple, maybe he was looking for something complete the opposite of Apple," said Hiroki Takashi, chief strategist at Monex in Tokyo. Most of Berkshire's operating businesses are American, though it has acquired a handful of foreign companies including Israel's IMC International Metalworking and German motorcycle apparel retailer Detlev Louis.

Additional investments in Japan could also help Buffett reduce Berkshire's cash pile, which ended June at a record $146.6 billion.


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