Berkshire Beckons

This article is part of our Rising Stars Portfolio series.

I was shocked to see Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) pop up on my trash-can-diving screen last week. Before plopping the Un Portfolio's cash into Warren Buffett's conglomerate I decided to get a quick rundown of the Berkshire story from Motley Fool Stock Advisor analyst Jason Moser (TMFJMo) -- who not so coincidentally owns shares himself and for his Rising Star portfolio.

Bryan Hinmon: Jason, Berkshire is trading just off of its 52-week low. Why?

Jason Moser: I think there are a number of reasons. Berkshire can be seen as more or less a proxy for the economy in general given its vast reach, so I believe that general economic malaise is partly to blame. There are also concerns over succession issues and what that will look like post-Buffett. Certainly the recently dubbed "Sokolgate" brought that even more into play.

It's also worth noting that the recent natural disasters in Japan, New Zealand, and Australia have added $1.7 billion (yep, with a b) to aggregate provisions for losses in insurance operations so far this year. Given that these are estimates and still substantially unpaid ... well we all know how much Mr. Market likes uncertainty (hint: he doesn't). What this all adds up to I believe is a genuine opportunity to buy into a first-class operation at an excellent price and Berkshire's instilled discipline in underwriting and investing that will bring the shares back in time.

Hinmon: So we could just be seeing a confluence of events weighing on shares -- sort of like death by a thousand paper cuts. What gets Berkshire out of this funk?

Moser: Frankly, Berkshire is built to survive such funks. Its businesses complement one another, and when one struggles several others can pick up the load.

Hinmon: What did you purchase when you bought Berkshire Hathaway for your Rising Star Portfolio?

Moser: Discipline and great businesses.

Berkshire has been built to more or less take advantage of opportunities as they come up -- which is typically when others are freaking out. Doing this takes discipline and a culture that embraces the long term. Owning Berkshire and its great group of managers gets me opportunistic investments during turbulent times.

I also get the consistency that comes from a stable of great businesses. As I phrased it in my buy article:

Berkshire is more than just a company. Its combination of insurance operations, wholly owned businesses, and publicly traded investments gives us a formidable collection of reliable income generators and quality holdings, which should continue to create value for shareholders for years to come.

Buffett and his team historically look only for exceptional businesses at exceptional prices and the stock has absolutely pummeled the market since 1965; this is no accident. While it may not be realistic to expect better than 20% compound annual returns going forward, given the brainpower and the balance sheet behind it all, I do think it's realistic to expect the market-beating returns to continue for many years to come.

Hinmon: What is something that troubles you about your investment that others may not have on their radar?

Moser: Well it's tough for me to believe that there is something I know that you don't, especially when it comes to Berkshire. But when I think about Berkshire Hathaway, I think about what its greatest threats and opportunities may be. And one thing that I think falls into both categories here is technology. Buffett has more or less stayed away from technology because he considers it just too far outside his circle of competence. Today though it is quite obvious that technology plays a bigger part in our lives than ever before, and I don't expect this to change ... ever. If Berkshire Hathaway continues to pass on technology investments going forward, it could end up putting the company in a precarious position; one where it could be extremely tough to play catch-up.

Hinmon: Jason, you know I like unknown and unloved companies. Berkshire isn't getting much love right now, but is there a similar investment in your sights right now that might be flying below most peoples' radars?

Moser: White Mountains Insurance Group (NYSE: WTM  ) is trading below book value and has reasonably diverse insurance operations. The company's four segments (OneBeacon (NYSE: OB  ) , White Mountains Re, Esurance, and White Mountains Advisors) are reminiscent of Berkshire's insurance businesses, but White Mountains invests its investment portfolio differently. The company keeps its investments predominantly in fixed income, which takes out a little of the juice but eliminates some of the "genius risk" that Berkshire has with regard to Buffett eventually stepping down.

Hinmon: Very interesting.

Berkshire Hathaway's remarkable long-term performance and current beaten-down share price warrant serious attention. It's pretty clear that you see ample reward in exchange for the risks you pointed out, and I'm hard-pressed to argue, given that Berkshire is trading at a 33% discount to its 10-year average price-to-book ratio. Thanks for sharing your insights.

Further Foolish actions for you to take:

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money free stock picks. See all of our Rising Star analysts (and their portfolios).

Bryan does not own shares of any company mentioned. Jason owns shares of Berkshire Hathaway. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Berkshire Hathaway and White Mountains Insurance. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (11)

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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 June 29, 2011, at 4:44 PM, whyaduck1128 wrote:

    I know why Berkshire has been declining lately. It's because I bought some a few months ago. When I buy MF recommendations, this tends to happen. If I sell it, the coast will be clear and the stock will resume its progress.

    (The above is written only half tongue-in-cheek)

  • Report this Comment On June 29, 2011, at 6:59 PM, jekoslosky wrote:

    I've added to my Berkshire shares twice now below 80. It looks like a bargain too good to pass up for me.

    It's now about 10 percent of my portfolio, here: http://bit.ly/iUPcpf

    If it fails to move soon, I will consider adding more.

  • Report this Comment On June 29, 2011, at 7:24 PM, Apacheman15 wrote:

    Berkshire represents about 35% of my total investment portfolio. Many would say this is waaaaaay to much to own in one stock. I look at Berkshire as a mutual fund since it is really a diversified collection of great and proven companies. An outperforming mutual fund with no expenses at that. And it is severely beaten down right now. If I didn't have such a large position in it, I would buy more. The beauty of this stock is that it always does MUCH better than the S&P in falling markets. It is this preservation of capital that makes this stock one to own for everyone.

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