By Kopin Tan
It Pays to Be a Joiner
BERKSHIRE HATHAWAY'S STOCK ROSE LATE FRIDAY amid heavy volume, thanks to buying by index funds ahead of Berkshire's long-awaited addition this week to the Standard & Poor's 500 index.
Berkshire's Class B /zigman2/quotes/200060694/composite BRK.B +0.07% shares finished the regular New York Stock Exchange session at 76.90, up 21 cents, after trading most of the day around 76. The stock (ticker: BRK/B) then moved almost a point lower on heavy trading after the close. Total Friday volume spiked to well over 300 million, by far the most since Berkshire split its B shares 50-for-1 last month.
The S&P decision to put Berkshire into the index has been a boon for the stock, which badly trailed the overall market last year. Since the decision on Jan. 26, the shares have risen nearly $9, from 68 -- up $3.33 last week. As a result, the company needed to issue less stock to holders of Burlington Northern than had been anticipated just a month ago. The deal closed Friday, with Berkshire buying the railroad for $34 billion, or $100 a share -- about $10 billion in stock and the rest in cash for the stock that Berkshire didn't already own.
BERKSHIRE WATCHERS HAD ESTIMATED that index funds needed to buy about 165 million shares, a demand filled by opportunistic investors and others who bought Berkshire in the prior 2½ weeks and likely turned a profit because Berkshire finished Friday at its highest level of the year. Berkshire enters the S&P 500 with a roughly 1% weighting. It'll be interesting to see how the stock trades on Feb. 16, now that the index-buying presumably is largely finished.
Ultimately, Berkshire's addition to the S&P 500 could lift the stock by attracting investment managers who had little incentive in the past to hold it. Now that Berkshire is in the index, active managers risk trailing their benchmark if they don't own the stock and the shares beat the S&P 500. There is now low institutional ownership of Berkshire.
Berkshire's Class A shares, which ended Friday at $115,810, now are up 16% so far in 2010, making Berkshire one of the best-performing big stocks in the market. The shares now trade at around 1.4 times our estimate of Berkshire's year-end 2009 book value of about $84,000. Earlier this year, Barron's wrote that the stock looked inexpensive at around $100,000.
Some thought that the index funds' buying of Berkshire late Friday might depress the S&P 500 as the funds sold shares in the other 499 companies to make room for Berkshire. But the index actually moved higher by about 3 points in the final half hour, to end at 1075.
-- Andrew Bary