The Gulf Time Newspaper One of the finest business newspapers in the UAE brought to you by our professional writers and editors.
Bloomberg
Berkshire Hathaway Inc’s new wager on furniture retailer RH has Warren Buffett’s company in a place it rarely finds itself:
invested in a heavily shorted stock.
RH is the most popular short in the home-furnishing retail sector with 37% of the shares available to trade on loan to bears, according to data from financial analytics firm S3 Partners. The disclosure that Berkshire bought 1.2 million shares in the third quarter sent RH soaring to a fresh record. The rally hasn’t shaken the faith of short sellers, who profit when the price of a stock falls.
Short interest in RH has barely changed since Berkshire revealed its purchase.
The retailer formerly known as Restoration Hardware has a couple of traits that undoubtedly appealed to Berkshire. For one, Buffett likes to stick to areas he knows best when selecting stocks. Berkshire counts at least four furniture retailers among its portfolio of companies, including Nebraska Furniture Mart which has a sprawling 80-acre campus in Buffett’s hometown of Omaha, Nebraska.
“They have a certain limited circle of competence and within that circle of competence is furniture stores,†said David Kass, a professor of finance at the University of Maryland’s Robert H Smith School of Business.
Berkshire’s Bet
RH, known for luxe decor like sofas that can cost more than $5,000, also has an appetite to repurchase its own stock. The billionaire investor and his business partner, Charlie Munger, “rejoice†when managers buy back stock and boost Berkshire’s stake, Buffett said in his annual shareholder letter this year. Since 2017, RH has repurchased about 60% of its previously outstanding stock, it said in September.
The relatively small size of Berkshire’s stake in RH, which totalled $206 million at the end of the third quarter compared to Berkshire’s $56 billion bet on Apple Inc, likely indicates it was made by one of Buffett’s two investing deputies, Todd Combs or Ted Weschler, according to Kass. Berkshire didn’t respond to messages seeking comment on which investment manager purchased the stake.
Whoever made the RH bet likely perceived the stock as under-priced at the time of purchase, even if it was high on an absolute basis, according to Kass. And Berkshire hasn’t shied away from buying stocks at relatively high levels.