Investment Decision for Berkshire Hathaway: Buy, Dispose, or Maintain Status Quo
Warren Buffett's fortune and renown are built upon his corporation, Berkshire Hathaway (with tickers BRK.A (-1.96%) and BRK.B (-1.99%)). This company's stock has been generously rewarding to those who invested throughout the years. Despite not paying dividends, it has returned an astounding 239,000% since 1980, transforming a $100 investment into $240,000!
It's no surprise that Berkshire Hathaway is now one of the globe's most massive corporations, valued at approximately $1 trillion. This means investors must be mindful of the price they pay for the stock to avoid overpaying, which could hinder investment returns if a high valuation doesn't sustain.
So, is this iconic stock a buy, sell, or hold?
Here's what you need to know.
Berkshire's book value is an investor's guide
Typically, investors assess a stock based on its earnings, but holding companies like Berkshire Hathaway are unique. They have numerous components that make bottom-line earnings less indicative of the company's performance. Berkshire Hathaway owns numerous individual firms, such as GEICO Insurance, railroads, utilities, and consumer brands like Dairy Queen, Duracell, and Fruit of the Loom, amongst others. It also has stakes in publicly listed companies, like Apple, Coca-Cola, and American Express.
Each part of Berkshire Hathaway generates cash flow, which Berkshire then utilizes to generate value for its shareholders. This could be through share buybacks, acquiring businesses, or investing in public companies.
Therefore, tracking Berkshire's performance using its book value may be the most reliable method. As you'll see below, Berkshire has successfully increased its book value over time:
Berkshire stock is costlier than its past averages
Buffett is known for his stringent investment choices. Therefore, it's noteworthy that Berkshire didn't buy back any stock in the third quarter. While this doesn't indicate whether individual investors should buy, it provides context to the figures below.
As shown below, Berkshire has generally traded at 1.4 times its book value over the past decade. At present, the stock is trading at 1.58 times book value, a 13% premium:
The risk of overpaying, even for a stock like Berkshire, is that excessive valuations can plummet when something happens, such as a broader market downturn. Look at how Berkshire's price-to-book value has fallen significantly at times. Therefore, investors should be cautious about paying too much for Berkshire (or any stock).
The stock may not be a buy, but it shouldn't be sold
Given Berkshire's hefty premium valuation and its immense size, it's challenging to label it a buy right now.
However, Berkshire currently enjoys significant financial flexibility. Just as an investor should consider a company's potential to boost its earnings, Berkshire has the opportunity to boost its book value in the coming years. Buffett has gradually reduced Berkshire's investments in overvalued holdings like Apple, accumulating an enormous $325 billion cash and short-term investment reserve. This is sufficient for transformative moves (or moves) even for a large company like Berkshire.
Berkshire must utilize this money effectively to generate value for shareholders, which is no guarantee. However, Berkshire's remarkable track record may warrant faith from investors. That's why the stock should stay in your portfolio if it's already there. It's difficult to sell world-class companies like Berkshire Hathaway, as they usually continue to generate value that boosts their share price and restricts undervaluation to rare instances. In essence, invest in Berkshire Hathaway stock at a fair price, arguably closer to its historical norms.
While the stock may not be priced right for new buyers at present, the stock is an easy hold.
Given the current high premium valuation of Berkshire Hathaway, it might be challenging for new investors to justify buying the stock at its current price. However, for those already holding Berkshire shares, the company's substantial financial flexibility and impressive track record can justify keeping it in their portfolio. With a significant cash reserve and Berkshire's history of boosting book value, there's potential for further growth, making it an easy hold despite the high valuation.
Investors should be cautious while investing in Berkshire Hathaway to avoid overpaying and hinder potential investment returns. Tracking the company's book value over time can provide a more reliable measure of its performance than relying solely on earnings.
