I know, I know, I shouldn't be shocked that Warren Buffett has done something brilliant again, but this purchase of NV Energy (NVE) last night for $5.6 billion is staggeringly smart.
Let me count the ways.
First, Buffett is the ultimate long-term thinker. He doesn't care about an interest rate back up that knocks down the utilities. He knows that in the end companies are companies not stocks and the rotational weakness that drove NVE Energy down is an opportunity, not a hazard. The stock had just dropped 10% because the parent of Nevada's largest power company had fallen victim to being bumped from the runway of the Wall Street fashion show and it was just too juicy a discount for this amazing investor to ignore.
Second, Nevada used to be the fastest-growing state in the Union, but it was hit hard by the housing crisis. We just got distressed home sales numbers today and the prices for these homes, which had been in the dumpster, are now soaring. Plus, the power use in the state never dropped, even as the price of homes did drop. Now that gamblers and home buyers are flocking back to the state I expect power use to soar, at exactly the time that NV Energy has already spent the money to build new plants and already gotten the rate increases it needed to fund these projects. Buffett's timing on the bottom in Nevada is impeccable.
Third, California is always short of power and it's so difficult to put up power plants in the biggest state in the country. But Nevada adjoins California and the location of NV Energy's plants allows it to wheel power to the most expensive power state in the nation. The company's big expansion of new natural-gas-fired power plants is paid for. The wheeled power fees are all gravy.
Fourth, NV Energy has a BBB- balance sheet. It's paying 6% for borrowed money. I bet that rate can be cut in half because it can now glom onto Berkshire's pristine balance sheet.
Fifth, NVEnergy has made a real commitment to renewables, something Buffett favors, and its goal is to have 25% of its power coming from renewables in 2025. Berkshire can accelerate that dramatically, especially given that Nevada's the ideal state for both solar and wind farm development. Sunny, windy, what's not to like?
Put simply, this purchase is just one more demonstration that the Oracle of Omaha knows the best way to make money is to bet against Wall Street and with the companies themselves. NV Energy's sudden out-of-favor status made no sense given the fact that not all utilities are the same. Some are in better shape for growth. But they all trade in lock-step because on Wall Street all utilities companies are created equally.
It's not true. Buffett knows it. He's pouncing when others are fretting. Congratulations, once again, to the best investor alive. Nice buy!