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.X
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).
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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 $7.6 billion of its own stock.
This comes after it bought $6 billion worth of BRKB stock in Q2 and $6.6 billion more of its shares in the first quarter. Last year the firm spent a record $27.4 billion in repurchases.
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
In the third quarter, Berkshire was a net seller of stocks for the fourth straight quarter, according to its latest quarterly report. The firm's 13F regulatory filing bought Royalty Pharma (RPRX) and Floor & Decor (FND) for the first time in the third quarter, while adding to Chevron (CVX) and cutting stakes in drug stocks.
Warren Buffett snapped up 13.1 million shares of Royalty Pharma, which gives investors exposure to biotech without taking big drug development risks. He also picked up 816,863 shares of home improvement stock Floor & Decor.
Berkshire Hathaway exited Merck (MRK) entirely while also slashing positions in AbbVie (ABBV) and Bristol-Myers Squibb (BMY), which Berkshire first bought in Q3 2020 and reduced in Q2 2021. Buffett also pared stakes in Mastercard (MA) and Visa (V). He grew a stake in Chevron.
Merck, Visa and Chevron are all Dow Jones stocks.
Buffett's stock portfolio remains highly concentrated in a handful of companies. In Q3, 68% of its value was in Apple (AAPL) ($120.4 billion) and Bank of America (BAC) ($31.3 billion). Also, American Express (AXP) ($18.3 billion), and Coca-Cola (KO) ($21.9 billion).
Warren Buffett Funds Media Deal
Berkshire Hathaway was a key backer in a deal disclosed late last year that will saw 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 snapped $600 million of Scripps preferred shares to help fund the deal. The deal closed in January.
Berkshire also received 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.
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.
The firm said in its most recent earnings that its smorgasbord of businesses have benefited as the economy reopens, with demand beginning to return to pre-pandemic levels. Operating earnings from its railroad, utilities and energy segment was up 11% to $3.03 billion in Q3.
"Beginning in the third quarter of 2020, many of our businesses experienced significantly higher sales and earnings relative to the second quarter, reflecting higher customer demand," the firm said in its report. "The extent of the effects over longer terms cannot be reasonably estimated at this time."
Warren Buffett's Big Gas Bill
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 60% since the start of the year.
BRKB Stock Technical Analysis
One positive sign is the fact BRKB stock is now back above its 50-day moving average. The stock has been flirting with the key benchmark in recent months.
The relative strength line has been sliding in recent months. This gauges a stock's performance compared to the broader S&P 500. Its Relative Strength Rating of 53 means it has outperformed just 53% of stocks in terms of price performance over the past 12 months.
BRKB stock has now gained over 22% so far in 2021, which lags the S&P 500's return of around 25%. It had previously been handily outperforming the index. It has seen its stock price inch lower over the past four weeks.
Its IBD Composite Rating has been declining of late, and now sits at 60 out of 99. This means it is outperforming 60% of stocks tracked overall.
Earnings are improving, though growth has slowed. Earnings grew by an average of 26% 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 30% 2021, though they expect this to moderate to 6% growth in 2022.
Nevertheless, Big Money has been standing pat on BRKB stock of late, which is reflected in its Accumulation/Distribution Rating of C-.
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
Berkshire Hathaway earnings per share surged 25% in Q3, rising to $87. Operating earnings, which excludes its investment portfolio, climbed 18% to $$6.882 billion. Higher profit at its railroad, utilities and energy divisions offset a larger insurance underwriting loss.
The conglomerate's total revenue came in at $70.6 billion last quarter, an increase of 12%.
The firm's continued to wheel and deal on the stock market, with net stock sales of $1.95 billion. It's the fourth straight quarter that Warren Buffett has been a net seller of stocks.
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 remains elevated. Berkshire Hathaway cash swelled to $149.2 billion as of Sept. 30. That's up from $144.1 billion at the end of Q2 and $145.4 billion at the end of Q1.
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 means 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.
"Trends were mixed as catastrophes and claim cost inflation produced insurance underwriting losses of $784M versus $213M, while railroad/energy/utility profits rose 11% and BRK's other businesses posted 15% higher operating profits," she said in a Nov. 8 research note. "Per share results got a boost from a 27% rise in YTD buybacks ($20.2B from $15.9B)."
She said the stock is "fairly valued" versus historical levels, and "worth holding."
However she did trim her profit expectation for the firm, reducing her 2021 EPS estimate by seven cents to $11.66.
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?
Berkshire Hathaway stock has been lagging the S&P 500 index since late 2018. After a period of outperformance in 2021, it is now lagging the S&P 500 once again.
Berkshire stock has formed a new base, but it continues to trade under its 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. The market is also currently undergoing a correction, which makes opening new positions risky.
Its Composite Rating is not ideal, and its score has been declining. Nevertheless, 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.
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