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.
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