Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) and Warren Buffett are synonymous with each other, with the latter heralded as the GOAT in terms of investing. Starting out as a textiles company, Berkshire Hathaway has since developed into a conglomerate holding company valued at over $461 billion thanks to the prowess and guidance of Buffett.
Earlier this year, Coronavirus took its toll on the stock market and Berkshire Hathaway was no exception. Within a one month span, the company’s stock price plummeted over 29% from $229.33 to $162.13.
Whilst other companies have restored their losses, with many enjoying even higher prices than pre-Coronavirus, Berkshire Hathaway’s stock price is far from fully recovered.
Since the end of March, its stock price fluctuated, flirting with the $200 mark but dropping upon reaching it. At the time of writing, the stock price is sitting around the $185 mark.
$185 is certainly a significant improvement from its February lows but is still discounted from its pre-Coronavirus days.
This therefore begs the question: do investors still have a buying opportunity?
The immediate attraction to Berkshire Hathaway is undoubtedly its connection to Buffett. Any investor worth their salt is heavily inspired by the Oracle of Omaha and his profound success in the field is unmatched.
Logic would thereby dictate that Buffett, who comprehensively understands the components of a successful business, will implement his knowledge into running his own investment-focused company. Such logic holds water and Berkshire’s consistent growth further cements this.
Taking a deeper look into its portfolio, Berkshire’s growth is self-evident. Berkshire owns over 60 subsidiary companies, with many being solid household names. Duracell, See’s Candies, Dairy Queen and GEICO are just a few of the household names that Berkshire owns outright.
Source: Berkshire Hathaway
Additionally, the conglomerate has significant shares worth over $221 billion in over 45 publicly listed companies.
The strength of Berkshire Hathaway is thereby dependent on the success or failures of the companies owned by the conglomerate. Like every healthy portfolio, Berkshire’s is well diversified. Dissecting each company would turn this article into a dissertation, but highlights include Apple (AAPL), Amazon (AMZN), Bank of America (BAC) and of course Coca-Cola (KO).
Not only are these companies valuable assets in terms of value growth, but many also provide a substantial source of income. For example, having accumulated over $97 billion worth of Apple stock, Berkshire Hathaway enjoys a consistent dividend worth billions alone. The conglomerate’s dividend this year is estimated at over $4.7 billion.
This isn’t just theory either, by taking a look at Berkshire’s financials, the proof is in the pudding.
Prior to the Coronavirus pandemic, Berkshire delivered consistent revenue growth year on year for the past five years. The company has also historically achieved an average yield of 17.1% since 1985.
Source: Berkshire Hathaway
At a time such as the Coronavirus pandemic, such a gargantuan amount of cash not only acts as an impervious life raft for the company but also serves as a source of funds for the conglomerate to acquire COVID-19-discounted companies. Yes, we are currently in somewhat of an overvalued market, but the team at Berkshire will seek out the golden sheep lurking among the herd.
If a second wave of Coronavirus strikes and stock prices plummet once again, Berkshire will be in a position to snap up valuable companies at discounted prices. Its team will differentiate between irreversibly distressed companies and unjustly distressed stock prices. If we don’t have a second wave, Berkshire’s cash pile and thus value, will continue to increase. It’s a win-win here.
In terms of valuation, Berkshire’s current price of around the $185 mark is still the lowest it has been since 2017. At any price under $200, Berkshire is sitting at a discounted level.
As the companies held by the conglomerate continue to grow, Berkshire itself will grow along with it, increasing its cash and perhaps increasing its portfolio. Consequently, Berkshire’s stock price will increase in parallel.
But Buffett could be the downfall of Berkshire
Because of Buffett’s legacy with Berkshire, bears often fear what Berkshire will look like without Buffett. At the age of 89, Buffett understandably could exit Berkshire any day now. His partner in crime and Vice Chairman Charlie Munger is also 96, with many fearing his exit as well.
However, whilst we should not underestimate how integral Buffett and Munger were to the growth of Berkshire, the company’s current position is debatably less reliant on them.
To state that Buffett’s ability to build a company successfully without building a brilliant team would be foolish. Buffett’s success lies in his long-term vision and his ability to understand the mechanics of a successful business. In bringing this knowledge to his own company, Buffett ensured that a strong management was established to drive the company down the right road.
Looking at a Berkshire without Buffett and Munger, both have faith in their successors.
“We started with no assets,” Munger said of Buffett and himself. “[The management] started with an empire. Of course they’ll do better than we did.”
“Maybe they won’t move the needle percentage-wise as much but they’re going to succeed hugely. Don’t you worry about it.”
Buffett added, “they’ve got the talents, they’ve got great companies, they’ve got loads of money to work with.”
Speaking specifically about Vice Chair Greg Abel, Buffett said, “he’s the best. He’s a very nice guy that gets things done and understands business exceptionally well.”
These words of reassurance don’t lack sincerity either. Greg Abel, Ajit Jain and Marc Hamburg were approved to run the company personally by Buffett and Munger. To question Buffett’s integrity in selecting his successors would be akin to questioning his entire business acumen.
Even after Buffett and Munger depart from Berkshire, the conglomerate’s portfolio in itself will steer the company into monumental growth.
The world is currently in limbo. As lockdowns begin to ease, Coronavirus cases seem to be increasing again. A second lockdown is certainly on the cards and only time will tell which path governments will take their countries down. The stock market is at mercy to the fate of the pandemic and it would be foolish to predict exactly what shape economies will be in by the end of the year.
However, long-term investors who are looking much further beyond 2020 should see the pandemic as a buying opportunity. Berkshire Hathaway, which has failed to reach its pre-Coronavirus highs, is currently being offered at an attractive discount. A year from now, three years from now, five years from now, you’ll regret not picking up a piece of the Oracle.
After all, why invest in an ETF when you can have Warren Buffett mange your portfolio instead?
Disclosure: I am/we are long BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.