"Sell Buffett," says a headline on the most recent edition of Barron's magazine. The highly regarded financial publication suggests that, given Berkshire Hathaway's (NYSE: BRK-A ) (NYSE: BRK-B ) impressive run this year, the company has now become overvalued.
Since Aug. 1 of this year, Berkshire's class A shares are up 26%; they now fetch about $138,000 per share. Berkshire commands a market value of some $215 billion overall, making it one of the largest companies by market cap in the U.S and the world.
1979 all over again?
One common belief in financial circles is that financial headlines are wonderful contrarian indicators. If they say right, you go left, and if they tell you it's time to sell stocks, you ought to be buying. The most famous example of this occurred in August 1979, when BusinessWeek published its now-infamous "The Death of Equities" issue. The typically upbeat BusinessWeek had suddenly turned bearish on the future of stock investing, saying:
The masses long ago switched from stocks to investments having higher yields and more protection from inflation. Now the pension funds -- the market's last hope--have won permission to quit stocks and bonds for real estate, futures, gold, and even diamonds. The death of equities looks like an almost permanent condition -- reversible someday, but not soon. (Emphasis added.)
Wow. The death of equities is a permanent condition, and diamonds are a better investment? It's obviously very easy now, with some 30 years' worth of hindsight, to see how wrong this prediction actually was. In fact, shortly after this publication, the United States experienced the most amazing bull market in its history. When the article was published, the Dow was trading below 1,000, hovering around 875. Before the tech bubble burst, the Dow pierced 10,000, representing a more than 1,000% return.
Does all this suggest that Berkshire is now ready to rocket up by, say, 100%? Not quite. Yet Berkshire is finally getting its due. The stock price is finally beginning to catch up with the intrinsic value of the business. Apparently, investors needed to feel the pain of billions of dollars of write-offs from Citigroup (NYSE: C ) , Merrill Lynch (NYSE: MER ) , and UBS (NYSE: UBS ) to appreciate the impeccable quality of Berkshire. While those companies are busy trying to raise cash, Berkshire sits on a $39 billion pile, with Buffett allocating the capital. Its insurance businesses are pouring profits, and Berkshire has the ability to underwrite policies that others cannot.
Berkshire represents the ultimate flight-to-safety stock, and investors have obviously noticed over the past year. Yet it is also demonstrating signs of amazing growth for a $200-billion-plus company. The company reported strong third-quarter figures on the heels of strong underwriting profits and a multibillion-dollar gain from the sale of its stake in Chinese oil company PetroChina (NYSE: PTR ) . Over the long term, it's not unreasonable to assume that the stock could appreciate by 10% to 12% a year. And this is for a company I think is just as safe as cash -- safer, when you factor in the declining dollar. After all, on page 2 of the company's 2006 annual report, you see that book value has appreciated by some 21.4 percent annually for 41 years.
Price is what you pay; value is what you get
Still, even for a company like Berkshire, stock price can still get ahead of intrinsic value. For what's it worth, Barron's was adamantly bullish on Berkshire back in 2003, and they were certainly right. And obviously, at $138,000 a share, Berkshire is nowhere near the compelling investment it was at $100,000 or even $120,000. At the recent Value Investing Congress, I heard Whitney Tilson argue that Berkshire is currently worth around $167,000 and climbing. I have read other reports that suggest $200,000 is a reasonable price in the next year or two. Barron's feels $130,000 is a more reasonable figure.
In the short term, the market is a voting machine. In the long term, it is a weighing machine. Over the long term, we have seen amazingly consistent growth in Berkshire's book value. Following the typical Monday-morning-Barron's effect, Berkshire is down, but investors with idle cash looking for an excellent home might have another opportunity. Even with a company like Berkshire, it still holds true that price is what you pay and value is what you get.
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