Berkshire Hathaway Stock: Is Warren Buffet's Donation a Signal To Start Selling Berkshire and Microsoft Stock?

by Mark Skousen

Berkshire Hathaway Stock: Is Warren Buffet's Donation a Signal To Start Selling Berkshire and Microsoft Stock?

by Mark Skousen, Chairman, Investment U

Friday, July 7, 2006: Issue #555

The world's two biggest wealth creators, Bill Gates and Warren Buffett, are starting to cash in their investments on Wall Street.

In a blockbuster announcement last week, Bill Gates, age 51, announced that he is gradually stepping down as chairman of Microsoft (Nasdaq: MSFT). At the same time, Warren Buffett, age 75 and the world's second richest man, told us that he was donating the bulk of his Berkshire Hathaway stock (NYSE: BRK-A), valued at $37 billion, to the Gates Foundation.Should you join them by selling Berkshire Hathaway stock as well as Microsoft? First, let's look at the latter

Microsoft Stock Suffers From Insider Selling

The price of Microsoft stock has already suffered by Gates' decision several years ago to steadily sell his shares to fund his foundation, now valued at $30 billion. Check the insider transactions of Microsoft at Yahoo! Finance, and you'll discover that Gates has sold millions of shares worth more than $4 billion in the past year alone.

With profit margins exceeding 31%, quarterly revenue growth of 13%, and quarterly earnings growth of 16%, Microsoft continues to be a highly profitable company. Return on equity (ROE) exceeds an astonishing 30%. Normally, the smart investor would be tempted to buy Microsoft.

And yet, how can any Microsoft shareholder expect to see higher stock prices in the face of such massive selling by Bill Gates, the Gates Foundation and other company officers? Not surprisingly, the stock has floundered and underperformed the S&P 500 Index the past two years.

What Does the Future Hold for Berkshire Hathaway Stock?

Warren Buffett's conglomerate has done better with investors lately. It has a strong profit margin of 10.9%, revenue growth of 29% and earnings growth of 69%. Berkshire is a cash machine, and right now Buffett's investment company is sitting on $42 billion in cash. Yet, despite its good fortune, Berkshire Hathaway stock has also underperformed the market index the past two years.

And now that Warren Buffett is going to be selling his stock (by converting his A shares into B shares) to fund the Gates Foundation, I seriously doubt that investors will see much advance in the stock on Wall Street. In fact, there's already been a huge amount of selling by insiders at Berkshire Hathaway over the past few years.

The following chart shows the recent performance record of Microsoft and Berkshire Hathaway both stocks lagging behind the S&P 500 since September 2004:

Berkshire Hathaway & Microsoft in the Stock Market

Conclusion: Earnings up, stock down!

As the graph shows, Microsoft has been the worst performer so far, despite its outstanding financial condition. The stock has declined from $28 to $23. Part of it is due to its postponement of a new business software package; part is due to heavy insider selling. Remember a cardinal rule of investing: The market is always forward looking, and its judgment is based on the future, not past performance. Right now, investors are not happy with the performance of Microsoft.

Could Berkshire Hathaway stock be going the same way?

Good investing,

Mark

Today's Investment U Crib Sheet

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