The stock disappointed investors last year, merely offering a flat performance even as the market surged last fall. However, Berkshire is now on a solid upswing. Shares are up 20% year to date and just printed fresh all-time highs. Additionally, Berkshire shares have easily outpaced the S&P 500 and Nasdaq Composite this year. That made for good timing of Berkshire Hathaway’s annual meeting, which was held virtually on May 1.
The meeting lacked the pomp and circumstance of the usual Berkshire investors’ convention in Omaha, Nebraska. Generally, the Berkshire meeting is value investors‘ heaven. However, even without a live audience, the meeting still broke plenty of news. For one thing, Buffett disclosed his successor as CEO once that time comes. The company also showed notable concern about the stock market in general.
The firm was a net seller of stocks last quarter, aside from its own, which it continued to repurchase. Overall, Buffett struck a cautious tone, reflective on missed opportunities last year and circumspect regarding current market valuations and trends.
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
For the first quarter, Berkshire earned $7 billion in operating profits. That was a solid jump from $5.9 billion in the same quarter of 2020. Most of Berkshire’s major businesses, including insurance, energy, railroads and utilities showed rising earnings. Needless to say, Berkshire is back on track after a bumpy 2020. This quarter highlights why investors are drawn to Berkshire. Its business is broadly diversified and tends to have at least one or two areas doing really well when other things are struggling. Now, for example, its Clayton Homes manufactured housing division is delivering blockbuster results as the housing boom accelerates.
Berkshire also maintained its impeccable balance sheet. Its total cash on hand rose to $145.4 billion. That’s even as Berkshire repurchased more than $6 billion of its own stock this quarter. On the buyback, it’s worth noting that the pace slowed from $3 billion in January to $1.6 billion in March. Buffett is reducing the velocity of the share repurchase program as the price rises, which makes sense.
Pros to Buying Berkshire Hathaway Stock
At its core, Berkshire Hathaway is an insurance business. Buffett has achieved much of his long-term success thanks to running the insurance company, which allows him access to cheap capital in the form of the policy premiums that customers pay for coverage. This is called “float” for short, and it’s Uncle Warren’s favorite form of capital. In some cases, however, this insurance comes at a cost.
This quarter, Berkshire showed some negative effects from underwriting. For example, the big Texas winter weather event, nicknamed “Uri,” caused $460 million in insurance losses for Berkshire. And that’s not all — Berkshire’s life insurance division saw a significant increase in claims from higher death rates, likely related to the pandemic.
Still, it could have been much worse, both in insurance and for Berkshire’s other financial assets. In the annual meeting, Buffett said that at one point the credit market totally froze over. Things quickly changed, though. “The economy was resurrected in an extraordinarily effective way,” Buffett said, describing the Federal Reserve’s emergency moves last March.
Alas, Berkshire didn’t get to take full advantage of the pandemic-induced crash. As Buffett describes it, Berkshire could have invested $50 billion to $75 billion of capital at attractive prices had it acted before the Fed stepped in. That missed opportunity cost Berkshire some major foregone gains. Still, hindsight is always 20/20, and the massive pile of cash the company has at its disposal — combined with the intangible value that its gravitas in the investment community provides — is something arguably no other company on the planet can compete with.
At the annual meeting, Buffett hinted that Greg Abel would become CEO of Berkshire if there was an imminent leadership change. Days after the meeting, Buffett indeed confirmed that Abel will be his successor. This is a key piece of information for Berkshire shareholders. Up until now, analysts had speculated on whether Abel or Ajit Jain would take charge. Jain has long headed Berkshire’s insurance business, while Abel has led Berkshire’s energy operations. The choice between the two represented an option to stick to Berkshire’s insurance roots or embrace its more recent evolution into a large industrial company.
There’s also a hidden opportunity in energy for Berkshire stockholders. Right now, Berkshire screens poorly on environmental, social, and governance (ESG) factors. This means that many mutual funds and exchange-traded funds exclude Berkshire from their holdings, thus depressing the company’s valuation. Once Abel takes over as CEO and Berkshire has less idiosyncratic leadership, it should score better on governance, opening the stock up to more big-money investors.
Meanwhile, Berkshire is actually much greener than you might think at first glance. For example, look at the company’s gigantic energy generation business. Since 2005, Berkshire Hathaway Energy has reduced its coal usage 45%, and its petroleum usage by 82%. To replace those dirtier energy sources, it has boosted renewable energy production by more than 400% over the same period. So far, many investors seem unaware of this fact. However, the company is quietly leading the way in transitioning to cleaner fuels, and it should earn a more generous valuation as socially conscious investors start to buy into the transformation.
Cons to Buying Berkshire Hathaway Stock
Arguably, the biggest drawback to Berkshire stock now is that it will underperform if the market continues to boom. Berkshire shares have performed better in 2021, but they had been underperforming the S&P 500 prior to that — understandably so, given that Buffett has been sitting on an ever-growing pile of cash. Judging by traditional market valuation metrics, Buffett’s caution seems warranted. However, it has clearly caused Berkshire to miss some great opportunities, especially last year.
There is also the risk around succession. The choice to go with Abel will be controversial. Some folks are concerned about having a company with a core insurance element run by an outsider. It’s certainly a risk; however, Buffett has carefully considered this decision and decided that Abel can handle the pressure.
Bottom Line: Is Berkshire Hathaway a Buy?
It’s unclear how much Berkshire will change once there is new leadership. Conglomerates are not popular in today’s market. Plus, there are potential antitrust risks to Berkshire given its massive market share across multiple industries. A plan to break up Berkshire or spin off subsidiaries could cause short-term price volatility.
Regardless, Berkshire delivered a solid quarter and its long-term strategy is credible. Berkshire investors should be reassured; the company is on solid footing going forward, just as it has been for the 50-plus years with Buffett at the helm. Although at its size you shouldn’t expect Berkshire’s returns to meaningfully outperform the S&P 500 on a consistent basis, it’s one of the lowest-risk stocks investors can buy, built to be run conservatively and last for many decades to come.
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Update 05/04/21: This story was published at an earlier date and has been updated with new information.