Warren Buffett's Berkshire Hathaway has bucked the trend of socially responsible investing by acquiring 5%-plus stakes in five Japanese trading houses deeply involved in fossil-fuel-linked businesses.
Buffett's contrarian bets sent shares in the five companies -- Itochu, Marubeni, Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp. -- soaring in the Tokyo market on Monday, even though their earnings have been languishing amid low resource prices.
Marubeni and Sumitomo rose 9% from their Friday closings. Berkshire's statement signaling the possibility of boosting the stakes to 9.9% drew buying from surprised investors.
Many are puzzled by Buffett's bullish $6.2 billion investments in the sector. But Hathaway's recent investment decisions suggest this is all part of a broader strategy. Some are hopeful that this will spur other foreign investors to take another look at Japanese stocks.
"Japan's general trading houses have long been shunned by foreign investors because of their unique business model," a source affiliated with Mitsubishi said.
"Investing in five companies in the same industry is quite unusual," said a source at an asset management company.
Japan's major trading houses are huge, highly diversified companies that invest and deal in products ranging from food to textiles to energy, operating at many different points of the supply chain.
But Buffett was making his moves based on a time-tested strategy.
In early July, Berkshire acquired the gas transmission and storage business of Dominion Energy, which decided to unload the assets under pressure from ESG investors.
Instead of embracing environmental, social, and governance investing, Buffett tries to go for undervalued businesses based on their cash flow. Natural gas pipelines and storage facilities generate stable revenues and are protected by high barriers to entry. They are among his favorite investment targets.
The grim outlook for natural resources due to the coronavirus pandemic and the trend of ESG investing are the double whammy hitting Japanese trading houses. For Buffett, they likely presented a buying opportunity.
