Known as the Oracle of Omaha, Berkshire Hathaway (ticker: BRK.B, BRK.A) CEO Warren Buffett might be the world’s most famous living investor. When his company buys a stock, Wall Street and Main Street alike pay attention, and his skill for sniffing out value and making money on bargains over the long term is legendary.
When Berkshire Hathaway reported fourth-quarter results in February 2021, the biggest part of the story wasn’t revenue and earnings. Instead, it was the news that Berkshire Hathaway bought back a staggering $24.7 billion of its own shares over the course of 2020. That marked a new record, easily surpassing the $5 billion Berkshire Hathaway spent on buybacks in 2019.
When one of the world’s top investors believes that shares of his own company are the best place to deploy capital, investors might wonder whether they, too, should 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
Berkshire Hathaway was founded in 1839 as a textile manufacturing company.
Today, it has grown far beyond its humble origins to become the sixth largest company in the U.S. Berkshire Hathaway’s core business is insurance and reinsurance, but the company is much more than that. It’s also a conglomerate that wholly owns a diverse mix of businesses, including Geico, Dairy Queen, Helzberg Diamonds and more. Berkshire Hathaway also invests in stocks and has accrued huge positions in household names such as Apple ( AAPL), Coca-Cola Co. ( KO) and American Express ( AXP).
At roughly $250 apiece, Berkshire Hathaway’s Class B shares offer much more affordable ownership of the company than its Class A shares, which cost more than $375,000. Class B shares are up about 17% in the last 12 months, compared with a gain of more than 27% 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 over the last year, while Buffett has famously eschewed tech stocks and so hasn’t fully capitalized on the market’s rally.
Pros to Buying Berkshire Hathaway Stock
While investors can also get broad exposure to the economy with an S&P 500 index fund, Berkshire offers advantages over funds and ETFs, such as a highly selective portfolio built by one of the greatest investors of all time.
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. As Buffett himself said in his most recent letter to shareholders, “Charlie and I want our conglomerate to own all or part of a diverse group of businesses with good economic characteristics and good managers. Whether Berkshire controls these businesses, however, is unimportant to us.”
Berkshire’s business structure means Buffett and his team 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. And while you won’t get a dividend yield from Berkshire shares, you do get Warren Buffett reinvesting his profits and improving the company’s performance.
Speaking of Buffett, although much has been made about succession planning with both Buffett and Berkshire’s vice chairman Charlie Munger being nonagenarians, there have been no new announcements about who will take up Buffett’s duties when he retires or passes on.
Buffett, who turns 91 this year, 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. But most people expect either of Berkshire’s vice chairmen, Greg Abel or Ajit Jain, to someday take up Buffett’s mantle. Whoever takes the reins will have a lot to live up to, but Buffett has stated time and again that Berkshire Hathaway is bigger than just one man, and that he’s confident in the company’s continued success when he’s gone.
Finally, while some people may complain that Berkshire Hathaway has too much cash on hand — it does have $138 billion in cash and short-term investments through the fourth quarter — Berkshire’s war chest allows Buffett and his team to do what they do best: make smart acquisitions and invest in excellent companies when the time is right.
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. 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. Slow and steady is how Buffett invests, and how Berkshire operates, and how investors will profit.
For better or worse, that investing methodology has meant that Buffett largely avoids investing in tech companies — with the recent exception of Apple. Berkshire’s tendency to stay away from tech stocks means the company has missed out on a big part of the market’s rally this past year. Berkshire has been slowly, and perhaps wisely, adapting that strategy recently, but it’s clear that Buffett will continue to focus elsewhere while he’s in charge.
One recent 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. With so much cash burning a hole in Berkshire’s pockets, investors have to wonder why Buffett didn’t make any moves during the downturn.
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 1.39 is roughly in the middle of its range over the past 10 years, 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.
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.
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Should You Buy Berkshire Hathaway (BRK.A, BRK.B) Stock? originally appeared on usnews.com
Update 03/01/21: This story was published at an earlier date and has been updated with new information.