Berkshire Hathaway (ticker: BRK.B, BRK.A) is the Taj Mahal of company stocks, long known for its sky-high Class A share price and its iconic — and refreshingly unassuming — chairman, president and CEO, Warren Buffett.
The Omaha, Nebraska-based company operates in the financial services sector (particularly insurance) and the freight transportation, real estate brokerage, energy, utilities and diversified manufacturing sectors. The company, founded in 1839, now boasts around 390,000 employees.
Many staffers are likely wondering what a post-Buffett Berkshire Hathaway would look like. Buffett is still at the helm of Berkshire Hathaway, and seems as vibrant and on the ball as ever.
The Oracle of Omaha turns 90 at the end of August, and Buffett himself has acknowledged the need for new blood at Berkshire Hathaway. To that end, he has installed two senior portfolio managers, Ted Weschler and Todd Combs, to steer the investment management side of the company going forward.
Buffett is bullish on that move, calling the rise of both Weschler and Combs “one of the best moves” the company has ever made. Together, they’ve built a broadly diversified investment portfolio of subsidiary companies across myriad industries, as well as stock holdings in dozens of companies — all under the sturdy roof of Berkshire Hathaway.
Can the good times last? Stock market experts seem to think so, but there may be some clouds on the horizon for Berkshire Hathaway. After the company reported second-quarter earnings in early August, you may be wondering if it’s a good time to buy shares. Here are a few points to consider before you invest:
— Berkshire Hathaway at a glance.
— Pros to buying.
— Cons to buying.
— The bottom line: Is Berkshire Hathaway a buy?
Berkshire Hathaway Stock at a Glance
Berkshire Hathaway’s Class A stock price exceeded $315,000 per share in August, while Class B shares represent a more achievable goal for Berkshire investors, and currently trading around $210.
The company’s stock has dropped about 8% year to date, reflecting sudden declines in demand within two of Berkshire Hathaway’s most important industries — utilities and insurance. Meanwhile, lower revenues in transportation and railroad operations could tamp down the company’s stock price going forward.
But Berkshire Hathaway is, as always, flush with cash. The company reported a record $146.6 billion in cash in the second quarter, providing the Oracle of Omaha and his deputies with all the funding they need to make judicious investments. They’ve already invested heavily in Dominion Energy’s ( D) natural gas pipeline and bought a larger stake in Bank of America ( BAC) this year, even as the company has shed investments in four major airlines — Delta Air Lines ( DAL), American Airlines ( AAL), United Airlines ( UAL) and Southwest Airlines ( LUV).
Berkshire Hathaway and Warren Buffett are known for their long-term, buy-and-hold investing style, but the pandemic has clearly shaken things up at the company. So does this mean Buffett has more opportunities than ever before to make investments, or does a market-wide shakeup mean Berkshire’s sturdy foundations are beginning to crumble?
Pros to Buying Berkshire Hathaway Stock
Perhaps the greatest reason to consider investing in Berkshire Hathaway is its history.
Despite its performance over the last year, Berkshire Hathaway stock is downright elite when it comes to long-term returns. Compounded annual gains from 1965 to 2018 amounted to 20.5% a year, more than double the 9.7% compounded annual growth rate of the S&P 500 over the same period.
It’s no secret why Berkshire Hathaway stock has performed so well for so long. Under Buffett, the company has employed a long-term, buy-and-hold investment strategy that focuses on buying stakes in companies with solid fundamentals and strong brands. This has allowed Berkshire Hathaway to endure market volatility better than most. In a year that has brought incredible volatility, that should be deeply reassuring for investors.
In the second quarter, Berkshire Hathaway reported a massive 86.5% increase in earnings year over year. The $26.3 billion the company reported in net earnings was driven by $34.5 billion in investment gains, reflecting the strength of Berkshire Hathaway’s investment portfolio.
The diversity of the portfolio provides investors with another “pro.” Berkshire Hathaway holds stakes or outright owns some of the biggest brands in the market, including Wells Fargo & Co. ( WFC), Kraft Heinz Co. ( KHC) and Bank of America, to name a few. Though some of the company’s holdings underperformed this quarter, specifically in the railroad and manufacturing industries, the variety of investments in the portfolio has helped Berkshire Hathaway weather the storm, with insurance underwriting at Geico providing plenty of profits to cover losses elsewhere.
But the biggest win for Berkshire Hathaway this quarter came from a company that doesn’t seem to fit Buffett’s investing style: Apple ( AAPL). Buffett has long avoided major investments in tech companies, preferring instead to follow the advice of Jack Bogle and invest in what he knows. Yet around 45% of Berkshire Hathaway’s investment portfolio is dedicated to Apple, where Berkshire Hathaway is now its second-largest shareholder. With Apple shares nearly doubling since hitting lows in March, Buffett is probably thanking his lucky stars (and his portfolio managers) for trying something new.
This brings us to the final pro for investing in Berkshire Hathaway: smart capital allocation. Though Berkshire Hathaway hasn’t made a major acquisition since 2016, the winds of change have swept through the market. Volatility has created value that Buffett and his portfolio managers will likely take full advantage of this year. To that end, Berkshire Hathaway reached an agreement with Dominion Energy in July to acquire all of Dominion’s natural gas transmission and storage business for approximately $4 billion.
The acquisition takes advantage of the extreme upheaval of the energy industry in 2020, and given the volatility plaguing every industry, it seems likely that Berkshire Hathaway is keeping a close eye on other companies where value has been unlocked.
Meanwhile, Buffett apparently sees some value closer to home; the venerable investor has begun buying back shares of Berkshire Hathaway in previously unforeseen amounts. Berkshire Hathaway bought back more than $5 billion of its own shares in the second quarter, and analysts estimate that buybacks have continued into the current quarter as well — indicating that the company is undervalued according to Buffett.
And when Warren Buffett sees value in a company, it’s usually there.
Cons to Buying Berkshire Hathaway Stock
At 89, Buffett won’t be able to drive Berkshire Hathaway forward forever.
“At that point, is Buffett’s eventual retirement already baked into the price of Berkshire, as people recognize this as inevitable?” asks Sam G. Huszczo, a financial planner at SGH Wealth Management in Detroit. “This could be seen as a reason that Berkshire hasn’t performed as well as of late because investors find it hard to commit to the ship whose captain will soon retire.”
In all likelihood, when Buffett does retire, people will panic, Huszczo says, “No matter how prepared you are for a death in the family, it’s never really easy to handle.”
It also creates huge levels of uncertainty. Buffett hasn’t named a successor; although, he has hinted at the likes of Greg Abel and Ajit Jain perhaps heading the holding company. Without knowing who is taking over, it’s hard to know what investors are buying when they purchase BRK.
Weighing the pros and cons of buying Berkshire stock should also include a candid assessment of your investment goals and interests. “BRK stock is great for value investors with long-term horizons, but not so much for aggressive traders seeking high returns,” says John Kilhefner, deputy managing editor at InvestorPlace.
Regardless, BRK certainly won’t be on the list of growth investors anytime soon; its massive size severely limits its rate of growth, and it currently has more than $146 billion in cash that’s languishing, sitting in extremely low-interest-bearing instruments like Treasury bills.
This brings up the final “con” for Berkshire Hathaway. As the market goes, so too goes Berkshire. The company’s large portfolio means it’s involved in a wide swathe of industries across the market. If the overall market tanks, then so does Berkshire — as was seen in Berkshire Hathaway’s first-quarter earnings report when it lost a record $50 billion. 2020 has brought untold volatility to the stock market, with problems arising in the manufacturing, retail, energy and railroad industries — all of which Berkshire has a hand in.
This volatility forced even the usually unshakable Buffett to give up his entire investment in each of the four major airlines, for which he received a great deal of criticism — especially after shares of the airlines recovered a good chunk of their losses only a few months later. Meanwhile, Berkshire Hathaway took a whopping $9.8 billion impairment charge for Precision Castparts, maker of aerospace components — nearly a third of what Berkshire paid to acquire the company in 2016.
While the situation in the airline and aerospace industries are particularly dire this year, 2020 has proven nothing if not unpredictable. Given the wide range of Berkshire Hathaway’s investments, it seems more likely than not that other industries in which the company investments will suffer as well, and Berkshire Hathaway’s shareholders will pay the price.
Bottom Line: Is Berkshire Hathaway a Buy?
Even without Buffett at the helm, Berkshire Hathaway will carry on the same leadership position in the markets, Kilhefner says.
“Buffett himself once said that he prefers to invest in companies that are so wonderful an idiot can run them because some day one will. Buffett has also created Berkshire in that ‘wonderful’ model, but rest assured that the person who Buffett has selected to succeed him will be no fool,” Kilhefner says. “They just may be the right person to make the calls that Buffett refused to, or could no longer see, in his advanced age.”
Warren Buffett has made his fortune from investing in what he knows and sticking to his investments for the long term. This year has proven that even he isn’t completely immune to short-term volatility, as seen with Berkshire Hathaway’s dumping of all of its airline holdings. Yet in the long run, the company is poised to take advantage of the volatility in today’s market, with huge cash holdings, effective portfolio managers and strong brands underpinning the company’s portfolio.
Berkshire Hathaway has beaten the market 37 out of the last 55 years thanks to the solid investment principles Buffett has instilled. It’s those very same principles that will likely allow the company — and its shareholders — to continue to profit after he’s gone.
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Should You Buy Berkshire Hathaway (BRK.B, BRK.A) Stock? originally appeared on usnews.com