Warren Buffett has performed enough investing jujitsu to create Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), a holding company that returned 20% to shareholders over the last 30 years, compared to a 10% return for the S&P. But he has bungled a few investments along the way, particularly his activities with Moody’s Inc., a ratings agency. An overview of his trades with Moody’s is both educational, and consoling, for less gifted investors.
Moody's Corporation (MCO, Financial) is the parent company of Moody's Investors Service, a provider of credit ratings, research and analysis covering debt instruments and securities in the global capital markets, Moody's KMV, a provider of credit risk processing and credit risk management products for banks and investors in credit-sensitive assets serving the world's largest financial institutions, Moody's Economy. Moody’s Corp. has a market cap of $9.72 billion; its shares were traded at around $37.67 with a P/E ratio of 18.4 and P/S ratio of 4.8. The dividend yield of Moody’s Corp. stock is 1.3%. Moody’s Corp. had an annual average earnings growth of 10.4% over the past 10 years.
Buffett received shares of Moody’s when it spun off of Dun & Bradstreet, a stock he owned but has since sold. He held 48 million shares of Moody’s in 2000 for $499 million. Though Buffett originally bought 15% of the company, share buybacks the company made raised his stake to 20%.
Buffett never sold a share as the price increased steadily all the way to 2007, when it peaked at about $80 per share. Even the though the housing crisis was developing, Buffett did not sell any shares, sticking with his “buy and hold forever” strategy. In a hearing of the Financial Crisis Inquiry Commission, Buffett testified that he had never visited Moody’s, but that “their business model is extraordinary.”
The tactic might have worked had he followed through on it. Instead, when the stock hit its lowest levels, he began to sell. In third quarter 2009, he sold 8,780,688 shares at an average price of $25.14 per share. In the fourth quarter he sold almost as much for an average of $24.36 per share. It is during these times that Buffett would have benefited from buying more stock.
Moody’s downgraded several of Berkshire Hathaway’s triple-A ratings in April 2009 after Berkshire reported relatively poor annual results.
In 2010, Moody’s and other ratings agencies were under suspicion by the Financial Crisis Inquiry Commission for giving top investment grades to mortgage-related bonds, which they downgraded after the housing collapse to junk status. In a hearing, Moody’s employees came out censuring the company’s ethics and priorities.
During this time, however, the company’s stock began to rise and its financials were faring well. Its revenue increased 13% from $1.8 billion in 2009 to $2.03 billion in 2010, and its diluted earnings per share grew 27% from $1.69 in 2009 to $2.15 in 2010. The company’s gross profit margin has declined since 2007 when it was 100%, to 70.2% in 2010.
Regardless, Buffett continued to sell shares even as the stock price was reviving. He sold 1,030,734 shares in the first quarter 2010 for $27.82 per share, 1,910,120 shares in the third quarter 2010 for $22.96 per share, and 458,506 shares in the fourth quarter 2010 for $26.89 per share. In the first quarter 2011, the stock rose to $30.63 per share, and he did not sell any.
In the last year, Moody’s stock has risen 80.15% and as of Friday is $37.07 per share. But Buffett has already sold approximately half of his stake.
If Buffett sold his remaining stock today, combined with his past profits, he would have a profit of approximately $1 billion. If he had kept his entire original stake and sold it today, he would have made a profit of approximately $1.3 billion. Had he sold his entire original stake at its peak, he would have made approximately $3.3 billion. (These are rough estimates and exclude dividends.) With a missed profit of $2.3 billion, Buffett called the investment his “billion-dollar mistake.”
Moody's Corporation (MCO, Financial) is the parent company of Moody's Investors Service, a provider of credit ratings, research and analysis covering debt instruments and securities in the global capital markets, Moody's KMV, a provider of credit risk processing and credit risk management products for banks and investors in credit-sensitive assets serving the world's largest financial institutions, Moody's Economy. Moody’s Corp. has a market cap of $9.72 billion; its shares were traded at around $37.67 with a P/E ratio of 18.4 and P/S ratio of 4.8. The dividend yield of Moody’s Corp. stock is 1.3%. Moody’s Corp. had an annual average earnings growth of 10.4% over the past 10 years.
Buffett received shares of Moody’s when it spun off of Dun & Bradstreet, a stock he owned but has since sold. He held 48 million shares of Moody’s in 2000 for $499 million. Though Buffett originally bought 15% of the company, share buybacks the company made raised his stake to 20%.
Buffett never sold a share as the price increased steadily all the way to 2007, when it peaked at about $80 per share. Even the though the housing crisis was developing, Buffett did not sell any shares, sticking with his “buy and hold forever” strategy. In a hearing of the Financial Crisis Inquiry Commission, Buffett testified that he had never visited Moody’s, but that “their business model is extraordinary.”
The tactic might have worked had he followed through on it. Instead, when the stock hit its lowest levels, he began to sell. In third quarter 2009, he sold 8,780,688 shares at an average price of $25.14 per share. In the fourth quarter he sold almost as much for an average of $24.36 per share. It is during these times that Buffett would have benefited from buying more stock.
Moody’s downgraded several of Berkshire Hathaway’s triple-A ratings in April 2009 after Berkshire reported relatively poor annual results.
In 2010, Moody’s and other ratings agencies were under suspicion by the Financial Crisis Inquiry Commission for giving top investment grades to mortgage-related bonds, which they downgraded after the housing collapse to junk status. In a hearing, Moody’s employees came out censuring the company’s ethics and priorities.
During this time, however, the company’s stock began to rise and its financials were faring well. Its revenue increased 13% from $1.8 billion in 2009 to $2.03 billion in 2010, and its diluted earnings per share grew 27% from $1.69 in 2009 to $2.15 in 2010. The company’s gross profit margin has declined since 2007 when it was 100%, to 70.2% in 2010.
Regardless, Buffett continued to sell shares even as the stock price was reviving. He sold 1,030,734 shares in the first quarter 2010 for $27.82 per share, 1,910,120 shares in the third quarter 2010 for $22.96 per share, and 458,506 shares in the fourth quarter 2010 for $26.89 per share. In the first quarter 2011, the stock rose to $30.63 per share, and he did not sell any.
In the last year, Moody’s stock has risen 80.15% and as of Friday is $37.07 per share. But Buffett has already sold approximately half of his stake.
If Buffett sold his remaining stock today, combined with his past profits, he would have a profit of approximately $1 billion. If he had kept his entire original stake and sold it today, he would have made a profit of approximately $1.3 billion. Had he sold his entire original stake at its peak, he would have made approximately $3.3 billion. (These are rough estimates and exclude dividends.) With a missed profit of $2.3 billion, Buffett called the investment his “billion-dollar mistake.”
