Berkshire Hathaway’s Winning Streak: A Conservative Investment Choice
Exploring the financial strength and future of Warren Buffett’s conglomerate.
Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) is recognized as a solid stock option for conservative long-term investors. Under the leadership of Warren Buffett, famously known for his statement that his preferred holding period for a stock is “forever,” the company has maintained a strong presence in the market.
The conglomerate has interests in a variety of sectors including insurance, railroads, utilities, and consumer staples. Additionally, it manages millions of shares across several blue-chip stocks in its well-noted investment portfolio.
In the last five years, Berkshire Hathaway’s stock surged over 120%, surpassing the S&P 500’s 100% gain. Let’s delve into the factors that contributed to this performance and discuss whether now is a good time to buy, sell, or hold the stock.
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Exploring Berkshire Hathaway’s Business Model
Warren Buffett’s journey with Berkshire Hathaway began in 1965 when he took over the struggling textile company. After discontinuing its textile operations, Buffett shifted focus to acquiring insurance and energy companies, broadening its reach into various sectors. Today, it owns renowned brands such as GEICO, BNSF Railway, Dairy Queen, Fruit of the Loom, Duracell, Acme Brick, and See’s Candies.
A significant portion of cash generated by these evergreen companies was invested, leading to a robust investment portfolio valued at nearly $314 billion. This portfolio includes substantial stakes in leading companies like Apple, American Express, Bank of America, and Coca-Cola.
Berkshire Hathaway reports its profitability using “operating earnings,” a measure that excludes capital gains and losses from its investments. The company believes this metric provides a clearer view of its performance, devoid of the market’s short-term fluctuations.
From 2018 to 2023, operating earnings experienced a steady compound annual growth rate (CAGR) of 7%, increasing from $24.8 billion to $37.4 billion, even amid challenges posed by the pandemic, inflation, rising interest rates, and geopolitical conflicts. Last year, operating earnings soared by 21%, supported by the growth in its insurance underwriting and investment entities, which more than compensated for pressures in other areas.
Reasons for Buying or Holding Berkshire Stock
Supporters of Berkshire Hathaway value its diverse businesses, sound financial footing, and Buffett’s direct oversight of investments. Although past performance does not guarantee future results, the stock has outperformed the S&P 500 for over sixty years.
Recent moves by the company include trimming its portfolio and accumulating cash, as lower interest rates pushed the S&P 500 to new heights. Over the past year, Berkshire reduced its positions in Apple, Bank of America, and other top stocks, leading to a record cash reserve of $271.5 billion as of the second quarter of 2024. This growing cash reserve indicates Berkshire’s readiness to make significant investments if market conditions shift.
With a market cap of $982 billion, Berkshire trades at 3.6 times its cash and equivalents and 3.1 times its total investment portfolio’s value. These valuations may help protect against potential market declines.
Reasons to Consider Selling Berkshire Stock
Critics caution that Berkshire might face challenges in the coming years, particularly when Buffett steps down. The 94-year-old billionaire plans to transition leadership to Greg Abel, the current chairman and CEO of Berkshire Energy. Abel’s ability to maintain Berkshire’s growth and investment strategies remains uncertain. Any missteps could hinder future expansion.
Additionally, Berkshire’s core insurance operations could suffer from decreasing interest rates, which may impact profitability from fixed-income investments. Highlighting potential concerns, Ajit Jain, the long-standing insurance chief, sold over half of his shares earlier this year.
From a valuation standpoint, the stock currently trades at 26 times last year’s operating earnings, while it was priced at 21 times operating earnings five years ago.
Evaluating the Right Time for Berkshire Stock Decisions
While there are valid concerns, investors might still favor buying and holding Berkshire’s stock. The company’s diversification, substantial cash reserves for new investments, and Abel’s likely adherence to Buffett’s strategies offer strong reasons for optimism.
Although the stock could experience short-term pullbacks, selling now may mean missing larger gains in the future.
Seizing a New Investment Opportunity
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See 3 “Double Down” stocks »
*Stock Advisor returns as of October 7, 2024
American Express and Bank of America partner with The Ascent, a Motley Fool company. Leo Sun holds positions in Apple and Berkshire Hathaway. Motley Fool also recommends and has holdings in Apple, Bank of America, and Berkshire Hathaway. Please read our disclosure policy for more information.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
