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Rupert Hargreaves
Rupert Hargreaves
Articles (687)  | Author's Website |

Warren Buffett, IBM and Other Hedge Funds

Have other hedge funds been buying IBM as the Oracle of Omaha has been selling?

December 13, 2018 | About:

Earlier this year I wrote on Warren Buffett (Trades, Portfolio)'s IBM (NYSE:IBM) expedition. I set out to try to figure out how much the Oracle of Omaha had lost on his holding in Big Blue from when he first acquired the position in 2011 to when he finally disposed of the last of his holding in 2017.

As the only information available to me was 13F filings, it was always going to be challenging to try to compute an exact profit or loss figure.

How much did Buffett lose?

However, a careful analysis of the figures shows that Buffett disposed of his position at a price of between $174 and $153 per shares in 2017. The lowest the stock traded in the year was $140 with an average price of $153. According to my calculations, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) acquired its position in IBM at an average all-in cost of $173.60 per share, so we can assume that the Oracle of Omaha was forced to sell the bulk of his holdings in the former tech giant at a capital loss.

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The picture changed slightly when including income returned to investors over the period. Between the third quarter of 2011, when Berkshire Hathaway first started buying the shares, and the final quarter of 2017, when the last of the holding was sold, IBM returned a total of $29.20 per share to investors via dividends.

Based on this, and assuming that the average disposal price was $153 per share, I calculate an estimated total return of $182.20 per share over the entire holding period. This works out as a total gain of just under 5% -- not a fantastic return compared to the rest of the market, but a better return than just holding cash.

Good decision

As it turns out, Buffett's decision to sell off his entire position in IBM at a slight capital loss was the right one.

Today shares in the company are changing hands at $121 per share, and while the business has tried to pull itself out of the downward spiral it finds itself in by acquiring cloud computing business Red Hat, analysts remain skeptical that the company can ever to return to its former glory.

Debt has exploded in recent years as the company has spent billions buying back its own shares and distributing cash to investors via a hefty dividend. Instead of returning cash to investors, the company should have spent money trying to broaden its moat and compete against competitors such as and Microsoft, which has aggressively taken market share in recent years. But that's a different conversation for another day.

Are other funds buying?

Which hedge funds still own a position in this company, and are any notable names betting on a recovery?

By my data, there are only four hedge funds of note that have positions in IBM right now. The biggest and most prominent is Sam Peters' ClearBridge Value Trust, which owns 300,000 shares at an average price of $151 per share for a total value of $45.4 million. This position accounts for around 2.3% of the overall $2.2 billion ClearBridge portfolios.

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Thomas Russo's Gardner Russo & Gardner used to own more than 11,000 shares in IBM but has been gradually reducing its position over the past two years. The firm fully sold out in the third quarter. Robert Torray's Torray fund owned 88,000 shares at the end of the third quarter for a total reported value of $13.2 million. This is hardly a substantial position for the fund, accounting for just 3.7% of assets under management.

Robert Olstein (Trades, Portfolio)'s Olstein Capital Management owns just over $8.2 million of shares in Big Blue, which works out at just over 1% of his $747 million portfolio. Apart from these brave investors, hedge funds have only been selling IBM over the past few quarters. If you think hedge fund buying and selling is a contrarian indicator, this could be a good time to buy.

Disclosure: The author owns shares in Berkshire Hathaway.

Read more here: 

Phil Fisher: Growth Stocks vs. Cigar-Butt Stocks

Berkshire Hathaway Has Given Up on IBM, but Recent Acquisition May Resuscitate Big Blue

IBM Acquires Redhat: Now What?

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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