Warren Buffett has done it again.
What's that?
He's just helped Berkshire Hathaway – the company he's spearheaded since 1965 – deliver a whopping US$36 billion quarterly profit.
Berkshire reported its second-quarter results over the weekend.
Here's how the company managed to outperform.
How did Warren Buffett's Berkshire send profits soaring?
Berkshire's second-quarter operating profits came in at just over US$10 billion, marking a new quarterly operating profit record.
Share price gains from Berkshire's stock holdings helped push the company's overall profit to almost US$36 billion.
The company's insurance underwriting earnings were a particularly bright point, up 74% year on year to US$1.25 billion.
Meanwhile, the company's cash holdings have increased to a near-record high of just under US$150 billion.
Why the big increase in cash holdings?
The Oracle of Omaha is well-known for his focus on value investing. So, I reckon it has to do with this Warren Buffett investing nugget, "Never overpay for anything."
A sharp increase in interest rates over the past year has offered a big boost in the profits brought in from Berkshire's cash holdings.
On the other hand, Buffett looks to be hesitant to increase Berkshire's stock holdings at current valuations. Q2 saw the company be a net seller of stocks to the tune of US$8 billion.
"The story here is interest rates, and valuations of stocks," Edward Jones analyst Jim Shanahan said (quoted by Reuters).
According to Shanahan:
The earnings impact of higher interest rates on investment income is offsetting the economic softness caused by those same rates. And it's clear there aren't a lot of attractive investment opportunities out there.
BI analysts Matthew Palazola and Eric Bedell added (quoted by Bloomberg), "CEO Warren Buffett said operating companies' earnings could decline this year but a significant rise in interest income would be an offset."
According to Bedell and Palazola:
Berkshire Hathaway's diverse businesses contribute to long-term earnings power. A slowing economy and inflation are risks but the company largely has shrugged them off to date.
While Warren Buffett opted to have Berkshire sell more stocks than it bought over the quarter, the profits delivered by the stocks the company does own tells me he's holding onto the winners.
As Buffett famously said, "The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders."
