Rising Star Buy: Berkshire Hathaway

This article is part of our Rising Star Portfolio series. Click here to follow Jason on Twitter.

Part of the fun of managing my own real-money portfolio has been looking for undiscovered stocks. So far, I think I've found a few. Today, though, there's a more obvious opportunity I just simply can't pass up.

You've probably heard of a little company known as Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) and its obscure, little-heralded CEO, Warren Buffett. With the market moving sideways, it's been tough to find compelling companies at attractive valuations. Right now, Buffett's baby is just too cheap for me to pass up.

You know this already
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.

Stalwarts that play a part in our everyday lives, like Coca-Cola (NYSE: KO  ) , Wells Fargo (NYSE: WFC  ) , Johnson & Johnson (NYSE: JNJ  ) , and newly added MasterCard (NYSE: MA  ) , number among the names in Berkshire's portfolio. Businesses like GEICO, Burlington Northern, Dairy Queen, and MidAmerican Energy reflect the investing acumen of a legend's work.

What's the big idea?
It's cheap: Buffett's proxy of value for Berkshire is book value. From 1994 to 2010, Berkshire traded at an average price-to-book multiple of about 1.8. Today, it's trading for a little more than 1.1 times book value, which gives me reason to believe that today's price is not only fair, but also fairly inexpensive, considering the quality we're getting.

It's Buffett: Perhaps the greatest argument for an investment in Berkshire is the opportunity to ride the coattails of a legend. Since 1965, Buffett has grown Berkshire's book value at a compound annual rate of 20.2%. Sure, we're not likely to see that kind of growth going forward, but I still expect the company to perform well over the long haul.

It's timeless: Buffett has worked hard to create a culture of success that will stand the test of time. Sooner or later, the time will come for Buffett to step down. While I'll be sad to see that happen, I'll also feel comfortable knowing that the company has the values and people in place to stay successful.

Are there really any risks?
On the whole, I consider Berkshire one of the least risky investments around. That's partly because of the man himself, and partly thanks to the wonderfully diverse collection of companies and investments he has created. Of course, the economy presents short-term risks; we aren't out of the woods yet. But in looking at the bigger picture, I see no real reasons for concern. And despite occasional missteps like "Sokolgate," I believe that Buffett has learned immensely from his life's mistakes.

Cool like a Dairy Queen Blizzard
I proposed to my wife over a Dairy Queen Blizzard back in the summer of 2001. Every time I see the shares of Berkshire (which owns Dairy Queen) in my personal portfolio, I get a little grin.

Berkshire may not be the undiscovered gem that I'm constantly looking out for. In fact, it may very well be the most talked-about stock in our Foolish universe. However, while I may be many things, I'm not blind -- I know a good value when I see one. As such, I'm giving Berkshire a 6% ($1,000) position in my portfolio starting tomorrow. I have no doubt it'll give me a lot to smile about for years to come.

Stock Advisor analyst Jason Moser owns shares of Berkshire Hathaway. The Motley Fool owns shares of Coca-Cola, Johnson & Johnson, Wells Fargo, and Berkshire Hathaway, and has created a ratio put spread position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Coca-Cola, and Berkshire Hathaway, as well as creating a diagonal call position on Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (28)

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  • Report this Comment On June 16, 2011, at 5:49 PM, grigory99 wrote:

    "It's timeless: Buffett has worked hard to create a culture of success that will stand the test of time."

    I've got two words for you, bud: David Sokol.

  • Report this Comment On June 16, 2011, at 7:21 PM, TMFJMo wrote:

    I will say that I as much as anyone else was turned off by that whole thing. I did make mention of it though in the article, and when put into the context of the entire timeline of what Buffett and Munger have done over the years I don't think that Sokol's poor behavior is indicative of a bigger problem at Berkshire. Of course we always want to look out for things like that, but I'm not going to let something like that eliminate Berkshire Hathaway from consideration.

    Foolish best,

    Jason

  • Report this Comment On June 16, 2011, at 7:43 PM, grigory99 wrote:

    "I'm not going to let something like that eliminate Berkshire Hathaway from consideration"

    Neither am I, but it does downgrade the company from its allegedly perfect status to merely "above average." The Sokol affair revealed a number of potential vulnerabilities: Buffett isn't a great judge of character, there were no strict insider-trading guidelines for Berkshire's top executives, the board of directors (staffed by Buffett's relatives and old friends) failed to do their job properly and is not objective, etc.

  • Report this Comment On June 17, 2011, at 4:09 PM, TheDumbMoney wrote:

    "...from its allegedly perfect status...."

    Short memory. See below:

    http://nytimes.com/1991/08/19/news/19iht-resi.html

    Nobody says Berkshire is perfect, except for those who are saying it only so in the next sentence they can purport to highlight for us poor benighted fools how imperfect it is.

  • Report this Comment On June 19, 2011, at 6:02 PM, epeon wrote:

    My problem with BRKB has always been the fact that it does not pay a dividend. It is difficult to find both a good stock and to time it correctly. Often you can find a good stock but it does nothing for a long period of time before it moves. I always want to collect a dividend while I wait.

    For example, right now you can buy ARLP for under $70/share and collect a 5% dividend. This is a good stock and it will go to $90 over the next year or two. But, in the meantime, collect 5%.

    BRKB is running on Buffet's reputation. And, Buffet does make mistakes. So, I say, get a dividend while you wait.

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