The Best Stocks for 2010: Berkshire Hathaway

It's true: We talk about Warren Buffett a lot. Probably too much. We treat him like he walks on water. We pretend he makes Mother Teresa look like a jerk, Einstein like a dimwit, Soros like a lout. I'll be the first to admit the investment community can go overboard when it comes to worshiping the dear Oracle.

But what doesn't get talked about enough is Buffet's creation, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) . So rather than shoving a million Buffettisms down your throat (or pointing out that the old man can't stop talking about sex), I'll give you three reasons why you might want to consider investing in Berkshire Hathaway.

1. It's cheap
Berkshire's a big, rambling conglomerate made up of both investment securities and wholly owned businesses. Some of the largest are insurance subsidiaries where net income can be quite sporadic, so valuing this beast can be daunting.

Since Berkshire's a long-term oriented acquirer of assets where the goal is often price appreciation, not necessarily income, the most common valuation metric used is the price-to-book-ratio. This yields a more meaningful measure of value than, say, the P/E ratio.

The good news is that Berkshire trades at one of the lowest price-to-book values in years. Have a look:

Year

Average Price-to-Book Value

1994

2.06

1995

2.60

1996

2.50

1997

2.18

1998

2.47

1999

1.99

2000

1.53

2001

1.78

2002

1.84

2003

1.68

2004

1.74

2005

1.54

2006

1.53

2007

1.61

2008

1.58

Current

1.29*

Average

1.87

Source: Capital IQ, a division of Standard & Poor's.
*As of Dec. 24, 2009.

That alone convinces me shares are a buy today.

Some might scoff, wondering why an insurance conglomerate deserves any premium to book value. That brings me to point number two.

2. Diversification
It's true that your average insurance company doesn't deserve much, if any, premium to book value. Berkshire's different. Though it's heavy in insurance -- particularly reinsurance -- the diversification of its business lines are immense. Some of its wholly owned subsidiaries include:

  • Ben Bridge Jeweler
  • NetJets
  • The Pampered Chef
  • See's Candies
  • Business Wire
  • Iscar (metal cutting tools)
  • Clayton Homes
  • Benjamin Moore (paint)
  • Fruit of the Loom
  • MidAmerican Energy (utilities)
  • Burlington Northern Santa Fe (railroad, acquisition pending)

Plus, there's the $57 billion (as of Sept. 30) common stock portfolio that holds names like Coca-Cola (NYSE: KO  ) , Procter & Gamble (NYSE: PG  ) , Wells Fargo (NYSE: WFC  ) , and Johnson & Johnson (NYSE: JNJ  ) among others. Other hard-to-value assets like the Goldman Sachs warrants Berkshire scored (for free) last fall are worth billions, too.

All of these are great businesses with real potential to grow above an average market return over the long haul. This is a quality franchise. Berkshire absolutely deserves a premium to book value, even without the "Buffett premium."

3. Panic overblown
Berkshire shares are down 30% since the end of 2007, probably because it was overvalued to begin with. But two other areas of concern have made investors anxious lately: derivatives that could cost the company billions, and Buffett's mortality.

In years past, Berkshire sold equity puts on global stock market indices. After markets crashed last year, it looked like the company could be on the hook for tens of billions of dollars in losses over the next decade or so. Scary, chilling, daunting ... I know.

But those threats have been nearly eliminated now that a) Buffett renegotiated the contracts at lower strike prices in exchange for nearer expiration dates, and b) global stock indices have rebounded 50%-60%. Even if markets crash anew, the renegotiated terms of the contracts mean the odds Berkshire will actually end up in the green are quite good.

Now on to Buffett's mortality. Yes, he's an old man and could very well pass in the coming years. Sad, but true. But how much will this impact Berkshire's long-term value? Far less than most think.

Berkshire is entirely decentralized, with managers of individual subsidiaries in charge of their own businesses. Buffett simply uses their profits to buy more stuff. True, he's the best at buying "stuff," and Berkshire sans Buffett won't have the growth potential it had in the past. But it won't destroy the earnings machine he's already created. This is an enduring engine that doesn't need Buffett, just as Wal-Mart (NYSE: WMT  ) didn't need Sam Walton after he died. As co-chairman Charlie Munger recently noted, "The best days of Berkshire are ahead. This company will make a big contribution to its surrounding civilization."

Which is the best stock for 2010? See all 13 candidates here.

Fool contributor Morgan Housel owns shares of Berkshire, Procter & Gamble, and Johnson & Johnson. Berkshire Hathaway is a Motley Fool Stock Advisor selection. Berkshire Hathaway, Coca-Cola, and Wal-Mart Stores are Motley Fool Inside Value recommendations. Johnson & Johnson, Coca-Cola, and Procter & Gamble are Motley Fool Income Investor recommendations. The Fool owns shares of Berkshire Hathaway and Procter & Gamble and has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 01, 2010, at 11:15 AM, grantrobertb wrote:

    Food for thought: Has anyone thought about the idea that Warren Buffett's interest in Burlington Northern might have more to do with Natural Gas than the Railroad itself?

    http://www.answers.com/topic/burlington-resources-inc

  • Report this Comment On January 04, 2010, at 4:19 PM, tesshiva wrote:

    As I understand the link you provided (interesting, by the way, thanks!) Conoco owns Burlington Resources (since '06), the long-ago spin-off of non-railroad assets of Burlington Northern. Any stake Burlington Northern had was distributed to their shareholders long ago. Otherwise, you would have an interesting point to make!

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