Warren Buffett is widely regarded as one of the greatest investors of all time. One way to share in his success is to invest in his firm, Berkshire Hathaway (BRKB). Berkshire stock is offering up a potential new buy point, but is it a good buy for you now? Let’s take a close look at the fundamental and technical performance of the ultimate Warren Buffett stock.
Berkshire Hathaway is a conglomerate that owns some of America’s most famous firms. It wholly owns the likes of Geico, Duracell, Dairy Queen, Fruit of the Loom and railroad operator BNSF.
Berkshire Hathaway is perhaps more famous for serving as an investment vehicle for Warren Buffett and his top lieutenant, Charlie Munger. Following their value investing philosophy, the company owns huge stakes in American Express (AXP), Coca-Cola (KO) and other heavy hitters.
But the definition of a Warren Buffett stock has evolved in recent years. Warren Buffett became a big investor in airlines such as Delta Air Lines (DAL). But he was left to rue his decision to go against his own long-held views about that industry’s lack of profitability. The move blew up in his face as airline stocks were decimated due to the global coronavirus pandemic.
Under investment managers Todd Combs and Ted Weschler, Berkshire Hathaway has been increasingly sinking money into tech. It’s taken large positions in established giants like Apple (AAPL), as well as younger companies like Brazilian payments company StoneCo (STNE) and new software IPO Snowflake (SNOW). Berkshire also snapped up a stake in Amazon.com (AMZN).
Warren Buffett Anoints Successor
One of the biggest questions around the future of Berkshire Hathaway in recent years was who would take over the mantle of CEO from Buffett.
The Oracle of Omaha has finally gave the answer. He said Greg Abel, who runs the noninsurance businesses, will take over in his stead.
“The directors are in agreement that if something were to happen to me tonight, it would be Greg who’d take over tomorrow morning,” the legendary investor told CNBC.
Berkshire’s Vice Chairman Charlie Munger dropped a massive hint during the company’s annual meeting in Los Angeles, mentioning that “Greg will keep the culture.”
Abel, 58, has been a Berkshire vice chairman since 2018, and had long been viewed by analysts as a possible successor. The Canadian is chairman and CEO of Berkshire Hathaway Energy. He has also been vice chairman of Berkshire’s noninsurance operations since January 2018.
Buffett Snaps Up Berkshire Stock
Berkshire Hathaway revealed in its Q1 earnings report that it had snapped up $6.6 billion more of its shares. It comes after a record $27.4 billion in repurchases last year. This was down from the $9 billion in stock it had purchased in each of the previous two quarters however.
After historically shying away from repurchases, Berkshire Hathaway stock has become one of Buffett’s top purchases. Berkshire’s aggressive share repurchases contrasts with the M&A deals spun by the investor during and after the 2008 financial crash.
While he has historically been reluctant to splurge on stock repurchases, he explained his change of heart in his latest annual letter to shareholders.
“The math of repurchases grinds away slowly, but can be powerful over time,” he wrote. “The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses.”
Berkshire loosened rules for Buffett to buy back shares in 2018. With Berkshire steadfastly cautious on M&A in recent years, investors have been clamoring for more repurchases.
Berkshire Hathaway Tweaks Portfolio
Warren Buffett actively sold stocks in the first quarter while picking up insurance brokerage Aon (AON) for the first time, according to the firm’s latest regulatory filing.
Berkshire slashed its Merck (MRK) stake by 37%, trimmed AbbVie (ABBV) by 10% and Bristol-Myers Squib (BMY) by 6%. It comes after the firm bought the drug stocks for the first time in the third quarter of 2020.
The firm also chopped its stake in Chevron (CVX) by 51% during the quarter. Berkshire opened the position in Q4 2020. It also exited Suncor Energy (SU), which it first bought in the fourth quarter of 2018.
Buffett also cut the firm’s remaining Wells Fargo (WFC) shares by 98%. Berkshire has owned the troubled bank since 1989 but has steadily whittled its position.
Overall, Berkshire was a net seller of stocks last quarter. It ended March with a near-record $145.4 billion in cash and cash equivalents.
Warren Buffett Funds Media Deal
Berkshire Hathaway is a key backer in a deal disclosed Sept. 24 that will see TV station owner E.W. Scripps (SSP) purchase privately held cable network ION Media for $2.65 billion. The latter firm’s flagship, ION Television, is a top 5-ranked U.S. general entertainment network.
Warren Buffett’s firm is snapping up $600 million of Scripps preferred shares to help fund the deal. Scripps stock surged on on the news.
Berkshire will also receive a warrant that allows it to snap up up to 23.1 million more shares at a price of $13. This adds up to an additional investment of $300 million. Scripps’ common shares currently trade at more than 21 each.
Berkshire Hathaway Coronavirus Exposure
As well as its status as an investment vehicle, Berkshire Hathaway is a conglomerate in its own right. It has interests in segments such as railroads, utilities and energy.
Those sectors, along with other “real economy” companies that are Warren Buffett staples, have been hard hit by the coronavirus shutdowns and massive economic contraction. However they should benefit as the economy opens up again.
Berkshire owns Geico, the No. 2 U.S. auto insurer after State Farm. Currently, states such as California are ordering insurers to give partial credits or refunds of premiums in lines such as private passenger automobile insurance.
Berkshire also owns BNSF Railway Company, the largest freight railroad network in North America. Rail operators such as Union Pacific (UNP) and CSX (CSX) have seen business suffer during the pandemic. But rail operators and other transportation companies are seeing business pick up again.
Other wholly owned businesses such as Dairy Queen and multilevel marketing company Pampered Chef also struggled during coronavirus restrictions, though those are easing.
Warren Buffett’s Big Gas Bill
Warren Buffett has been criticized for the size of his cash pile. But last July he made his biggest acquisition in years with a $10 billion deal for Dominion Energy‘s (D) assets.
Berkshire seized the chance to secure Dominion’s gas pipeline network after the utility giant and Duke Energy (DUK) unexpectedly aborted plans to build the Atlantic Coast Pipeline.
Berkshire Hathaway Energy will buy about 7,700 miles of natural gas transmission pipelines and 900 billion cubic feet of gas storage. The all-cash deal includes $4 billion of equity and $5.7 billion of debt. It’s set to close in the fourth quarter.
“We are very proud to be adding such a great portfolio of natural gas assets to our already strong energy business,” Buffett said in a statement.
Energy has been doing well so far in 2021. For example, the Vanguard Energy ETF (VDE) is up almost 40% since the start of the year.
Berkshire Hathaway Stock Technical Analysis
Berkshire Hathaway stock has formed a new flat base with an ideal buy point of 295.18. However it has some way to go before it reaches this buy point, and is currently moving sideways following a downtrend.
BRKB stock has slipped below its 50-day moving average, which is a concern. If it can move back above this it will be a positive sign. So far, it is struggling for momentum.
The stock previously moved past a profit-taking zone after breaking out of another flat base, according to MarketSmith analysis. The entry point here was 235.09.
The relative strength line of Berkshire Hathaway stock has been slipping somewhat of late after a spell of progress that kicked off in mid-March. BRKB stock is outperforming in 2021. So far this year, it is up around 19%, which beats the broader S&P 500’s return of just over 14%. This outperformance is narrowing, however.
Its IBD Composite Rating now sits at 65 out of 99. This is not ideal, but means it is outperforming 65% of stocks tracked overall.
Earnings are improving, with EPS accelerating for the past two quarters. However earnings have only grown by an average of 5% over the past three quarters, with coronavirus pandemic lockdowns having an impact. The CAN SLIM system recommends investors look for companies with average EPS growth of at least 25% over this time period.
Wall Street is becoming more optimistic for Berkshire Hathaway earnings growth going forward. Analysts are projecting annual earnings will rise 24% 2021, before moderating to 7% growth in 2022.
Warren Buffett Recommendation
Berkshire stock had been lagging the S&P 500 index since the end of 2018. Before that, BRKB stock at best moved with the market for a decade. An investor could have bought an index fund or ETF like the SPDR S&P 500 ETF (SPY), and generated similar or higher returns with less stock-specific risk.
“In my view, for most people, the best thing to do is owning the S&P 500 index fund, Buffett himself previously said at a Berkshire annual meeting. “If you bet on America and sustain that position for decades, you’d do far better than buying Treasury securities, or far better than following people. Perhaps with a bias, I don’t believe anyone knows what the market is going to do tomorrow, next week, next month, next year.”
Nevertheless, BRKB stock has been outperforming the S&P 500 so far this year. It could now finally be set for a decent period of outperformance.
Berkshire Hathaway Earnings Improve
Berkshire Hathaway earnings per share popped 27% in Q1, rising to $3.05. This was well clear of analyst views for EPS of $2.57. Its operating profit, which excludes some investment results, came in at $7 billion.
The conglomerate’s total revenue came in at $64.6 billion last quarter, which was also more than analysts expected.
The firm’s wheeling and dealing on the stock market also saw the firm turn in good gains, increasing approximately $4.69 billion last quarter. However the firm stresses that gains and losses in any particular quarter are “usually meaningless.” This fits in with Buffett’s longer-term investment philosophy.
Buffett’s Cash Mountain Still Mighty
Berkshire’s cash pile grew to $145.4 billion in Q1 from $138.3 billion in Q4. It is creeping back up to record level it reached in the third quarter of last year. This has raised expectations that Buffett would make a big acquisition, but he has preferred to sit on the sidelines amid spiraling stock prices.
Having such a large supply of cash protects the Warren Buffett stock during tough times. It also mean Berkshire Hathaway is able to deploy capital when desirable businesses become available for purchase.
The more aggressive buying of Berkshire’s own shares of late contrasts with Buffett’s deals during and after the Great Recession. This indicates he believes that the latest economic downturn and recovery, so far, offer none of the bargains he has historically pounced on.
Analyst Cautious On Berkshire Stock
CFRA analyst Catherine Seifert is rating BRKB stock as a hold with a 295 price target. She pointed out the mixed nature of the firm’s recent earnings report.
“Berkshire’s premium valuation – versus the broader market and the company’s historical averages – is dependent upon its ability to produce revenue growth and operating profit margins that are superior to broader averages, she said in a June 19 research note. “Berkshire’s financial results in 2019 and 2020 did not meet that hurdle, in our view.”
However she believes aspects of its business will improve going forward.
“We see operating revenues rising by 6%-8% in 2021 and by 4%-6% in 2022 (before the impact of acquisitions), as Berkshire’s economically sensitive businesses begin to recover from the effects of the pandemic,” she said.
Difference Between BRKA Stock And BRKB Stock
The most obvious difference between Berkshire Hathaway’s A class and B class shares is the price. While — at over 200 a share — BRKB stock may be considered relatively expensive, BRKA stock is the most expensive on the market, currently trading near $430,000 a share.
Warren Buffett decided to introduce the BRKB shares to allow investors to purchase stock directly. Big demand for Berkshire Hathaway stock forced less-moneyed players to plow cash into unit trusts or mutual funds that mirrored his company’s holdings.
Berkshire Hathaway Today
Berkshire Hathaway operates in four main sectors.
Its insurance group is one of its biggest cash cows. One of the most famous jewels in the crown is Geico. Other parts of this business include multinational property/casualty and life/health reinsurance company General Re and Berkshire Hathaway Reinsurance Group. The latter underwrites excess-of-loss reinsurance and quota-share coverage globally.
Insurance operations are a big reason why Berkshire Hathaway earnings can be lumpy.
Its Regulated Utility Business group includes Berkshire Hathaway Energy, formerly known as MidAmerican Energy. It also includes railway services arm BNSF, North America’s largest freight railroad network.
Meanwhile, the Manufacturing, Service & Retailing group includes Acme Building Brands, Fruit of the Loom and Justin Brands. The likes of Buffalo News, Business Wire, Dairy Queen and NetJets fall under the service subsector. Retailers include See’s Candies, Ben Bridge Jeweler, Helzberg Diamond Shops and Star Furniture.
Finally, the Finance & Financial Products segment includes: Hathaway Credit Corporation, transportation equipment and furniture leasing specialists XTRA and CORT, and BH Finance whose main interest is in proprietary investing strategies.
Is Berkshire Hathaway Stock A Buy Now?
While Berkshire Hathaway stock has been lagging the S&P 500 index since late 2018, it has been outperforming in 2021. This outperformance has been narrowing however.
Berkshire stock has now formed a new base, but it has yet to reach its buy point. Investors keen on the stock could add it to their watchlist, and wait for it to attempt to break past this new entry.
While its Composite Rating is still not up to scratch, it has improved This makes it an option worth watching for investors seeking to add to their portfolio a well established stock with a diversified portfolio of businesses.
However, it is worth remember that, after a late-2018 burst, Berkshire Hathaway earnings growth has been modest and uneven. While Wall Street sees solid EPS growth ahead for Berkshire in 2021 and 2022, it still remains shy of the rates sought by CAN SLIM investors.
Bottom line: Berkshire Hathaway stock is not a buy at the moment. Those interested in buying the ultimate Warren Buffett stock should add it to their watchlist, and wait to see if can pass its new buy point.
Investors looking for true market leaders should check out IBD Stock Lists, including the IBD 50 list of top-performing stocks.
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