The 'Buffett Effect' has wiped about $35 billion off BYD's market value - as investors fear Warren Buffett will sell more shares of the Chinese EV maker
- Warren Buffett has helped wipe about $35 billion from BYD's market capitalization.
- The "Buffett Effect" has fueled a roughly 25% slump in the Chinese EV maker's stock in recent weeks.
When Warren Buffett reveals he's a shareholder of a public company, its stock price tends to jump, as other investors trust the Berkshire Hathaway CEO's judgment and buy shares as well.
However, the "Buffett Effect" works the other way too: BYD has seen about $35 billion of its market value vaporized in recent weeks amid fears that Berkshire is preparing to sell its stake in the Chinese electric-vehicle maker.
BYD stock has plunged from the Hong Kong dollar equivalent of $42 on July 8, to $31 at Wednesday's close — a roughly 25% drop in under seven weeks.
It initially slumped by 16% in three days after 225 million shares — Berkshire's exact stake — appeared on Hong Kong Stock Exchange's clearing system under the custody of Citibank. That sparked speculation that Buffett's company was headed for the exit.
Moreover, the automaker's stock tumbled by 8% on Wednesday after Berkshire disclosed it sold about $47 million of BYD shares last week, reducing its stake from 220 million shares to 218.7 million.
It seems likely that Berkshire sold 5 million shares beforehand, netting around $180 million, given it held 225 million shares at the end of last year. The stock exchange only requires shareholders to disclose transactions that change their percentage stakes by a whole number.
Under those rules, investors won't be informed of any further sales until Berkshire hits the next threshold.
"Berkshire can sell up to an additional 5% of its shares, or almost 11 million shares, bringing its stake down to 19.0% without being required to report," David Kass, a finance professor at the University of Maryland, told Insider.
BYD shares have retreated by about 9% this year, despite the company growing its first-half revenues by two-thirds year-on-year to $19 billion, and more than doubling its net profits to $500 million.
A wider market downturn has undoubtedly hit the stock, but it's safe to say the prospect of Buffett selling more shares or disposing of his stake completely is also weighing on its performance.
Despite appearances, Buffett and his team may not be skeptical of BYD's prospects at all. They may simply want to pocket some of the profit they've made on the stock, after investing $232 million in 2008 for a stake worth about $7 billion today.