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 eyeing a 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.
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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 Names 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.
The firm did not disclose any fresh details on the precise timing of Berkshire’s leadership turnover during its latest earnings report.
Buffett Buys Berkshire Stock
Berkshire Hathaway revealed in its latest earnings report that it had snapped up bought $6 billion worth of BRKB stock in Q2. This comes after it bought $6.6 billion more of its shares in the first quarter and 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 has accrued more exposure to consumer stocks according to a key regulatory filing for the second quarter of 2021
Berkshire increased its positions in grocery chain Kroger (KR) by 21% and high-end furniture retailer RH (RH) by 2%. It also upped its stake in insurance brokerage Aon (AON) by 7% after buying if for the first time in Q1.
Buffett also sold more shares in drug giants, trimming Merck (MRK) holdings by 49%, Bristol-Myers Squibb (BMY) by 15%, and AbbVie (ABBV) ) by 10%. The investment guru opened those positions in Q3 2020. However he also opened a stake on Merck spinoff Organon (OGN).
His firm closed its position in biotech Biogen (BIIB), slashed its stake in top U.S. auto giant General Motors (GM) by 10% and trimmed its Chevron (CVX) stake was cut by 2%.
His biggest positions in terms of market value are in Apple (AAPL), Bank of America (BAC) and Coca-Cola (KO).
The value of Berkshire’s overall stock portfolio swelled 8.7% to $293.8 billion by the end of Q2 from $270.4 billion in Q1, as the S&P 500 and Nasdaq hit fresh highs to close out the quarter.
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 the news.
Berkshire will also receive a warrant that allows it to snap 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 Impact Eases
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, were hit hard by the coronavirus shutdowns and massive economic contraction.
Berkshire owns BNSF Railway Company, the largest freight railroad network in North America. Rail operators such as Union Pacific (UNP) and CSX (CSX) saw business suffer during the pandemic.
In Q2 BNSF reported a 28% earnings gain to $2.22 billion. That came after rival Union Pacific (UNP)posted a 50% jump in Q2 operating income in July, saying it moved increasing volumes as pandemic headwinds eased.
Other wholly owned businesses such as Dairy Queen and multilevel marketing company Pampered Chef, which struggled during coronavirus restrictions, are seeing performance improve.
However insurance operations, including Geico, reported lower profit as claims increased significantly amid increased driving and other activity.
In Q2 the firm said pandemic risks still remain, and that they could impact future results.
“Risks and uncertainties resulting from the pandemic that may affect our future earnings, cash flows and financial condition include the ability to vaccinate a significant number of people in the U.S. and throughout the world as well as the long-term effect from the pandemic on the demand for certain of our products and services,” the firm said in a statement.
Warren Buffett’s Big Gas Bill
Warren Buffett has been criticized for the size of his cash pile. But last year 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 snapped up 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.
Energy has been doing well so far in 2021. For example, the Vanguard Energy ETF (VDE) is up about 26% since the start of the year.
BRKB Stock Technical Analysis
Berkshire Hathaway stock is forming a cup-with-handle base. It is closing in on an ideal buy point of 291.92, according to MarketSmith analysis.
BRKB stock retook its 50-day moving average after earnings, an encouraging sign.
After a period where the stock struggled for momentum, the fact the relative strength line is moving higher again is another positive. This gauges a stock’s performance compared to the broader S&P 500.
Investors will be keen to see some sustained progress on this score.
BRKB stock is still marginally outperforming in 2021. So far this year, it is up around 23%, which is a bit better than the S&P 500’s return of just over 18%.
Its IBD Composite Rating has been improving of late, and now sits at 86 out of 99. This means it is outperforming 86% of stocks tracked overall.
Earnings are improving, with EPS accelerating for the past three quarters. Earnings grew by an average of 24% over the past three quarters. 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 29% 2021, though they expect this to moderate to 5% 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 surged 29% in Q2, rising to $2.93. This was well clear of analyst views for EPS of $2.51. Operating earnings, which excludes its investment portfolio, climbed 21% to $6.69 billion. This topped Wall Street estimates for a 10% gain. Its industrial businesses shone brightest.
The conglomerate’s total revenue came in at $69.1 billion last quarter, which was also more than analysts expected.
The firm’s continued to wheel and deal on the stock market, with net stock sales of $1.1 billion. Berkshire’s stock holdings contributed to a 6.8% gain in total Q2 earnings to $28 billion.
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
Amid the dearth of big acquisitions, Berkshire’s cash pile remained elevated, dipping to $144.1 billion in Q2 from a near-high of $145.4 billion in the prior quarter. 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 305 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 an Aug. 14 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 12%-16% in 2021 and by 8%-10% in 2022 (before the impact of acquisitions), as Berkshire’s economically sensitive businesses 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.
Berkshire stock is forming a new base, and is close to reaching a new buy point. Investors keen on the stock should add it to their watchlist so they are ready to pounce if it manages to pass this new entry.
While its Composite Rating is not quite ideal, it has been improving. Berkshire Hathaway stock is worth watching for investors seeking to add a well established stock with a diversified portfolio of businesses to their portfolio.
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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