Can Berkshire Hold Its High? 1 Thing to Remember

Berkshire Hathaway  (NYSE: BRK-A  ) (NYSE: BRK-B  ) recently hit a 52-week high. And as we watch the stock continue to climb today, there may be some investors wondering just how far this can continue.

When a stock starts breaking through its year-long price ceiling, it can be easy to come down with a classic case of acrophobia -- fear of heights -- but Foolish investors know that you've got to consider a lot more than a stock's price and price action when making investment decisions. In Berkshire's case specifically, I think there's reason to believe that the gains are still in the relatively early innings and that investors can expect to see more of the same.

There are a lot of reasons to think this is the case -- among them, for instance, the potential of a cyclical improvement in the insurance market that would bolster Berkshire's bottom line. But one potential stock driver that continues to jump out at me is the stock's valuation. 

Year Price-to-Book Value Multiple
2000 1.5
2003 1.7
2006 1.5
2009 1.3

Source: S&P Capital IQ.

And what is the valuation right now? 1.3. Yes, that's right, Berkshire Hathaway is currently trading at the same price-to-book value multiple that it did in the midst of the financial crisis.

The company made waves late last year by announcing that it's willing to buy back stock when it's trading at a multiple of 1.2 or lower -- a number that, in my opinion, Buffett is suggesting is not the "right" price for Berkshire, but rather a "can't miss" price. 

How high could Berkshire's stock trade? Assuming, of course, that the underlying business is performing -- and we'll get another data point on that when it announces fourth-quarter earnings -- I don't think it's unreasonable to think it could get back to a 1.5-times-book multiple. That would allow for significant upside over and above the growth in book value that Berkshire is able to notch in the meantime.

The big picture at Berkshire
Warren Buffett's long track record of success has made him one of the best investors of all time. With the Buffett at the helm, Berkshire Hathaway has grown book value per share at a compounded annual rate of 19.8% for nearly 50 years! Despite an incredible historical track record, investors have to understand the key issues to watch moving forward. To help investors, the Fool's resident Berkshire Hathaway expert Joe Magyer has created this 
premium research report on the company. Inside, you'll receive ongoing updates as key news hits, as well as reasons to both buy and sell the stock. Claim a copy by clicking here now.

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  • Report this Comment On January 24, 2013, at 2:52 PM, PinkFloydRoadie wrote:

    Just how long do you expect Warren to live and be active? Are you prepared for a huge drop when he passed on (or passes out) and people start exiting from the investments.

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