Known as the “Oracle of Omaha,” Berkshire Hathaway (ticker: BRK.A, BRK.B) CEO Warren Buffett might be the world’s most famous living investor. When his company buys a stock, both Wall Street and Main Street investors pay attention, as he is known for sniffing out value and making money on bargains over the long term.
Over the weekend, when the company reported its latest quarterly financial results, the biggest part of the story wasn’t revenue and earnings. Rather it was the news that Berkshire Hathaway bought back more than $9 billion of its own shares. That marked a new record, beating out the second quarter’s then-record buyback of more than $5 billion in company stock.
There are two main reasons for the buybacks. The first is that Buffett hasn’t been finding a lot of deals he wants to make. The second is that he apparently thinks Berkshire Hathaway’s shares are a good deal. Buffett is “telling you his stock is undervalued,” says Daniel Beckerman, CEO of Beckerman Institutional.
With one of the world’s top investors apparently thinking shares of his own company are the best place to deploy capital, investors might be wondering whether they, too, might want to buy the company’s shares for the first time or bulk up on positions they already hold. Here are some things to consider when thinking about buying Berkshire Hathaway stock:
— 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
One way to look at the Omaha, Nebraska-based Berkshire is as a company operating with two focuses. One part owns and operates businesses in the financial services industry (particularly insurance) and the freight transportation, real estate brokerage, energy, utilities and diversified manufacturing industries. The other part invests in stocks, including huge positions in household names like Apple ( AAPL), Coca-Cola Co. ( KO) and American Express ( AXP).
Berkshire, which was technically founded in 1839 as a textile manufacturing company, has roughly 390,000 employees and a reputation for being disciplined about its investments under Buffett. Buffett, who is in his 90s, has acknowledged the need for new blood at Berkshire and has installed two senior portfolio managers, Ted Weschler and Todd Combs, to steer the investment management side of the company.
Investors think of Berkshire as a value stock, Beckerman says. The company’s Class B shares — that at roughly $220 apiece offer much more affordable ownership of the company than its Class A shares, which cost more than $335,000 — were down about 3% year to date through mid-Monday compared with a gain of more than 11% for the S&P 500. The information technology sector, which is packed with growth stocks, has been a big contributor to the rise of the overall stock market.
Pros to Buying Berkshire Hathaway Stock
“It’s an opportunity for a retail investor to buy a stock of a company that owns a broad variety of operating companies that touch virtually every corner of the domestic economy,” says Edward Jones analyst James Shanahan.
While investors can also get broad exposure to the economy with an S&P 500 index fund, Berkshire offers advantages over funds, he says. Berkshire offers a highly selective portfolio. The companies it owns are allowed to function autonomously, are well-funded and aren’t exposed to the same short-term quarterly pressures that drive all too many decisions at stand-alone public companies. Berkshire can move money around between companies to redeploy cash where it’s most needed. Berkshire Hathaway’s shares also don’t have the fees associated with funds, and they’re more tax-efficient.
For someone building wealth in a taxable account, Robert Johnson, longtime Berkshire Hathaway shareholder and CEO of Economic Index Associates, says that the firm’s lack of a dividend is an advantage because there are no annual tax consequences. “Besides, wouldn’t you rather have Mr. Buffett and his colleagues invest the earnings rather than you?” he says.
Although much has been made about succession planning with both Buffett and Berkshire’s vice chairman Charlie Munger being nonagenarians, Johnson says the company will be in good hands after they’re no longer at the helm because of “a deep and rich managerial talent pool.”
While some people may complain that Berkshire Hathaway has too much cash on hand — it does have $145.7 billion in cash and short-term investments through the third quarter — Johnson says that this is actually an advantage given the caliber of the people making decisions about how best to use that cash.
Cons to Buying Berkshire Hathaway Stock
Because Berkshire is so diverse, it isn’t likely to be among the top performers (or the bottom performers) in the market over the short term, Johnson says. It will probably underperform during raging bull markets, he says. “It’s not fast money, not the place to play for Tesla lovers of wide price swings,” he says.
And over the long term, Berkshire’s large size and conservative nature means it probably won’t outperform the S&P 500 by a wide margin in coming decades, he says.
A criticism of Berkshire is that the company didn’t deploy a lot of cash to buy stocks during the pandemic-sparked market downturn when some stocks could have been bought at big discounts, Beckerman says. “To some extent they missed the March boat,” he says.
Berkshire Hathaway’s large cash balance can irk impatient investors who want to see that cash deployed in some way, Shanahan says.
While Buffett’s investing discipline can be an advantage to the company, Shanahan says it can also lead to long periods of time when the stock will underperform. “It seems like he’s stubborn sometimes,” he says. One prominent example of Buffett’s perceived stubbornness is Berkshire’s tendency to generally avoid tech stocks — one of the hottest parts of the stock market in recent decades. Berkshire has been slowly, and perhaps wisely, adapting that strategy recently.
Bottom Line: Is Berkshire Hathaway a Buy?
For investors who believe the outperformance of growth stocks won’t last forever and the pendulum will swing back toward value stocks, Berkshire may be attractively priced right now.
Its price-to-book ratio of 1.3, as of Monday morning, was roughly in the middle of its range over the past 13 years, according to GuruFocus.com. And its underperformance of the market means that Berkshire’s shares aren’t likely to have the same threat of being overvalued as, say, some tech-related stocks.
Shanahan has a buy rating on Berkshire. He says buybacks are a good strategy when a company’s stock price is cheap.
Like Warren Buffett’s investing model of buying something worth holding on to for a long time, investors who want to buy Berkshire shares may be rewarded in the long run.
“Berkshire Hathaway is an example of a company in which the investor can practice buy-and-hold investing,” Johnson says.
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Should You Buy Berkshire Hathaway (BRK.A, BRK.B) Stock? originally appeared on usnews.com