The options that Warren Buffett's Berkshire Hathaway holds on General Electric common stock are still underwater, but they're creeping ever-closer to the surface.
GE closed today at $18.53, not far from its 52-week high of $18.94. The stock has now more than tripled since its lows reached during the March 2009 market bottom (or at least it looks an awfully lot like a bottom).
Despite that rally, GE is still trading a few bucks from the $22.25 strike price at which Berkshire holds options to buy $3 billion worth of common stock, and it's less than half the price from October 2007.
Berkshire plowed $3 billion into GE preferred stock in September 2008 at the height of the financial panic. Berkshire received a 10 percent annual dividend and the stock options.
Buffett then watched the stock plummet below $6 a share six months later. In later interviews he's said that he wishes he had waited until that bottom to pounce on the investments he made for Berkshire.
Another investment Buffett made for Berkshire around the same time as the GE deal has worked out much better. Berkshire invested $5 billion into Goldman Sachs preferred stock with much the same terms as the GE purchase. In that case Berkshire received about 43.5 million options to buy Goldman common at $115 a share.
With Goldman now trading at about $173 a share, Berkshire has a paper profit on the options of about $2.5 billion. Buffett has indicated he doesn't plan to exercise the options anytime soon, apparently believing Goldman's stock has room to run.
Though Buffett is not flawless, it would be a bold bet to suggest that the GE options won't eventually be profitable for Berkshire.
The recent rise in GE's stock price seems tied to the same factors driving a rebound in bank stocks and REITs. Investors believe the economy is beginning to recover, suggesting commercial real estate operating cash flows will improve, commercial foreclosures won't be as much of a problem as some fear and fewer loans will go sour. GE Capital has a huge loan portfolio and a big presence in commercial real estate. The company's stock declines were tied mainly to GE Capital, and its rebound seems due to the same factors.
GE has made it a priority to shrink the size its financial unit going forward, and it also is selling the NBC Universal division to Comcast to focus on its core industrial businesses. Buffett has frequently praised the efforts of CEO Jeff Immelt and expressed confidence in management. The company plans to start increasing its dividend in 2011 after slashing it to cope with the financial crisis. Despite those cuts, GE still yields a respectable 2.2 percent.
Buffett isn't the only great investor who has high hopes for GE's continued rebound. Fairfax Financial CEO Prem Watsa is a believer, and George Soros was buying stock during the fourth quarter.
Of course GE isn't the same deal it was at $6 a share, and Buffett's underwater stock options aren't reason enough to buy the stock. But judging from his track record, it's a pretty good reason to give the company a look despite the recent rally.
Disclosure: Long GE
GE closed today at $18.53, not far from its 52-week high of $18.94. The stock has now more than tripled since its lows reached during the March 2009 market bottom (or at least it looks an awfully lot like a bottom).
Despite that rally, GE is still trading a few bucks from the $22.25 strike price at which Berkshire holds options to buy $3 billion worth of common stock, and it's less than half the price from October 2007.
Berkshire plowed $3 billion into GE preferred stock in September 2008 at the height of the financial panic. Berkshire received a 10 percent annual dividend and the stock options.
Buffett then watched the stock plummet below $6 a share six months later. In later interviews he's said that he wishes he had waited until that bottom to pounce on the investments he made for Berkshire.
Another investment Buffett made for Berkshire around the same time as the GE deal has worked out much better. Berkshire invested $5 billion into Goldman Sachs preferred stock with much the same terms as the GE purchase. In that case Berkshire received about 43.5 million options to buy Goldman common at $115 a share.
With Goldman now trading at about $173 a share, Berkshire has a paper profit on the options of about $2.5 billion. Buffett has indicated he doesn't plan to exercise the options anytime soon, apparently believing Goldman's stock has room to run.
Though Buffett is not flawless, it would be a bold bet to suggest that the GE options won't eventually be profitable for Berkshire.
The recent rise in GE's stock price seems tied to the same factors driving a rebound in bank stocks and REITs. Investors believe the economy is beginning to recover, suggesting commercial real estate operating cash flows will improve, commercial foreclosures won't be as much of a problem as some fear and fewer loans will go sour. GE Capital has a huge loan portfolio and a big presence in commercial real estate. The company's stock declines were tied mainly to GE Capital, and its rebound seems due to the same factors.
GE has made it a priority to shrink the size its financial unit going forward, and it also is selling the NBC Universal division to Comcast to focus on its core industrial businesses. Buffett has frequently praised the efforts of CEO Jeff Immelt and expressed confidence in management. The company plans to start increasing its dividend in 2011 after slashing it to cope with the financial crisis. Despite those cuts, GE still yields a respectable 2.2 percent.
Buffett isn't the only great investor who has high hopes for GE's continued rebound. Fairfax Financial CEO Prem Watsa is a believer, and George Soros was buying stock during the fourth quarter.
Of course GE isn't the same deal it was at $6 a share, and Buffett's underwater stock options aren't reason enough to buy the stock. But judging from his track record, it's a pretty good reason to give the company a look despite the recent rally.
Disclosure: Long GE
