By Ron DeLegge, Editor
SAN DIEGO (ETFguide.com) - Warren Buffett is finally spending some of Berkshire Hathaway's cash hoard. And he's buying a railroad company. As the greatest investor of our generation, does his latest acquisition signal a market bottom?
Dissecting the Deal
Buffett's firm, Berkshire Hathaway (NYSE: BRK-A - News), agreed to buy Burlington Northern Santa Fe Corp. (NYSE: BNI - News) for $100 a share valuing the deal at $44 billion.
Over the past year, Burlington's stock price has lagged the performance of its peer benchmark, the Dow Jones Transportation Average (NYSEArca: IYT - News).
How much did Buffett pay?
The analysts surveyed by Bloomberg, say he paid 18.2 times Burlington's 2010 estimated earnings, which is higher than the S&P 500's multiple according to the same analysts. Not very Buffett like, especially considering he rarely pays a premium when putting new capital to work. The only other plausible explanation is that Buffett sees hidden value in Burlington.
A Consummate Contrarian
As a contrarian to the bone, Buffett decided to pull the trigger on a company within an ailing industry sector. Through the November 2nd market close, transportation stocks have lagged the entire U.S. stock market (NYSEArca: VTI - News) by a substantial margin of 15.94%.
The recent activity of rail traffic is depressed. This is a key barometer of economic health.
The Association of American Railroads reported that for the week ending October 10th, 2009, rail traffic declined 17.2% compared to the same week in 2008. The report also shows weak demand for the transportation of goods throughout the entire U.S. On the East coast, carloads were down by 19.7% and in the West they were off by 15.4%.
Interpreting the Deal
As an insurance executive, Buffett knows a thing or two about betting. And over the years most of his bets (at least the important ones) have paid off handsomely. Some, however, did not.
In the early 1990s, Buffett's $358 million investment in U.S. Airways was virtually wiped out. In a letter to shareholders he quipped, 'How do you become a millionaire? First, you become a billionaire then you invest in an airlines company.'
With this latest deal, even Buffett himself admits that the Burlington deal is a gamble.
'It's an all-in wager on the economic future of the United States,' he said.
No doubt, analysts, fund managers and others with a bullish bias have already begun misinterpreting Buffett's $44 billion gamble as a sure sign the worst is over. It's time to break out the champagne!
A bedazzling 80% of economists now believe the worst economic recession of our generation is over. And around 100% of them never saw the recession coming.
Even though Warren Buffett's latest buy may be viewed as an act of genius, it may not necessarily signal that a market bottom has been reached. This was recently covered in 'What's Next- Minor Correction or Major Collapse.'
Regardless, the belief that Warren Buffett can do no wrong is an investment myth that won't die soon. His billions prove that he's always right, right?
It calls to mind the wonderful lyrics in a song from Fiddler on the Roof.
'When you're rich, they think you really know.'