Berkshire Hathaway Inc. is betting the best response to a short seller is to go long.
As Chicago Bridge & Iron Co. plunged 22 percent in the second quarter, Berkshire snapped up additional shares of the engineering-and-construction firm. The purchase came days after a short seller drove down the stock price by saying that CB&I had artificially inflated earnings.
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The slump was rare for a stock selected by one of Chairman Warren Buffett's deputies at Omaha, Nebraska-based Berkshire. The backup portfolio managers, Todd Combs and Ted Weschler, beat the market and their boss's picks in 2012 and 2013. Adding to the CB&I bet follows a strategy that Buffett has used for decades: identifying companies based on long-term prospects and sticking with them through declines.
"This is behavior that I would expect" from Combs or Weschler, said David Kass, a professor at the University of Maryland's Robert H. Smith School of business who has taken groups of students to meet the Berkshire chairman. "It's consistent with Warren Buffett's own thinking."
Berkshire is CB&I's largest shareholder with a stake that climbed to 9.9 percent by June 30. The holding was valued at about $730 million that day, according to a U.S. Securities and Exchange Commission filing last week that didn't say when the stock was bought or what price was paid.
A separate, less closely watched report to state insurance regulators shows that Berkshire bought 1.7 million shares at an average price of $70.34 over a stretch that ended June 20. Some of Berkshire's initial holding in CB&I was acquired in early 2013 for about $55 a share, according data compiled from such filings. Combs and Weschler invest funds for Berkshire insurance subsidiaries and take smaller positions than Buffett, who typically makes stock bets valued at billions of dollars.
The latest purchases defied a call on June 17 by Prescience Point Research Group that CB&I's shares were trading for twice their worth of about $37 apiece. The group argued in a report that the accounting for the 2013 acquisition of Shaw Group Inc. led to CB&I issuing "financial statements divorced from its economic realities."
Shares slumped more than 7 percent that day and continued their slide, touching a low this year of $57.54 on Aug. 7. Short investors sell borrowed securities, with the hope they can profit by repurchasing them later at a lower price. The company closed yesterday at $62.38 in New York trading.
Philip Asherman, the chief executive officer of The Hague- based CB&I, said in a June 17 statement that Prescience Point made "erroneous claims." Last month, the construction company expanded disclosures about the accounting for the Shaw deal in a quarterly report. Prescience Point, Buffett and CB&I didn't respond to messages seeking comment.
CB&I designs and builds liquefied natural gas terminals, petrochemical processing plants, storage tanks and other infrastructure. Buying Shaw expanded its services to the nuclear power industry.
While the short seller's report had caused a "lasting move down" in CB&I's share price, it hasn't changed the underlying opportunity, said Andrew Wittmann, an analyst at Robert W. Baird & Co. The company is poised to benefit as more energy is produced in North America, boosting the need for new infrastructure, he said.
The report "had nothing to do with the market opportunity," Wittmann said in a phone interview. "You could argue that it's completely unchanged."
Meryl Witmer, an investor and Berkshire director, highlighted CB&I's prospects during a Barron's Roundtable in the first quarter of 2013, months before she joined the board of Buffett's company. The stock rallied almost 80 percent in 2013 and extended its gains in the first quarter, closing at $87.15 on March 31. Combs told CNBC in March that Witmer is one of the money managers he most admires.
CB&I was the biggest decliner among U.S. stocks in Berkshire's $119.2 billion equity portfolio during the second quarter. Buffett and his deputies also built stakes in other holdings that fell during the period, including International Business Machines Corp. and VeriSign Inc. Berkshire cut its holding in ConocoPhillips, which rallied 22 percent in the three months ended June 30, SEC filings showed.
Buffett has said that he likes down days in the stock market, because it gives him an opportunity to buy companies at a discount. He has also quipped that his favorite holding period for a stock is "forever," shown a willingness to ride out market swings and taught shareholders to focus on long-term results rather than quarterly earnings.
He owes much of that philosophy to his mentor Benjamin Graham, who taught at Columbia University and is considered one of the fathers of value investing. Buying when shares fall is consistent with Graham's ideas, said Richard Cook, co-founder of Cook & Bynum Capital Management LLC.
"Volatility is the friend of the patient value investor," said Cook, whose company invests in Berkshire. Buffett has created "an environment that allows people to act rationally and ignore the noise."