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By MDCigan
August 23, 2006

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This post is NOT an in-depth fundamental analysis or valuation on Berkshire Hathaway. There is plenty of very good analysis of that over on the Berkshire board by guys like gdefelice, rclosch, etc.

Frankly, it is more of me just documenting this for the public record, and also an attempt to view Berkshire beyond more then just the valuation lens.

Recently, I sold all my small and mid-cap mutual funds so I've been thinking about where to put some of that cash. I decided to increase my weighting in Berkshire Hathaway which is now a 30% position in portfolios and placed those trades this past Friday (the bulk of the position was acquired last fall during the sell-off).

In my view, Berkshire is attractive from just about every possible angle you could view it.

IMO, Berkshire looks good from a top-down/macro/asset allocation perspective. My tactical asset allocation model has large-caps as more attractive then small-caps from both a valuation and momentum perspective (the S&P 500 has now outperformed the Russell 2000 over the past 3 and 6 months indicating a potential shift in momentum). Obviously, Berkshire is a large-cap so it is positive from that perspective.

Berkshire is also attractive in that it is a "defensive" stock. It is beyond the scope of this post, but I believe the probability that this cyclical bull market is nearing its end is increasing, and that the probability of a bear market occurring is high. Berkshire outperformed during the previous bear market of 2000-2002 and did particularly well during the horrendous year of 2002. Its huge cash position supports the notion that it should outperform in a bear market. I see it as a way to have your cake and eat it too. It is a de facto partial cash position without having to explicitly go to or raise cash levels.


1. There are numerous calculations to suggest that Berkshire is selling below its intrinsic value.

2. The current price to book ratio is still below the historical average and industry peers despite the fact that growth in book value per share is accelerating (1st half of 2006 was impressive). Historically, share price growth has tracked book value growth pretty well. From current levels, expansion in the P/B ratio seems significantly more likely then continued contraction of the past few years.

3. Excellent business and earnings momentum. 2nd quarter results were very strong.

Technicals- This is what a picture-perfect stock looks like from a technical perspective

1. Upside breakout - New 52 week and all-time highs. There should be a lack of selling pressure on the stock.

2. Clear uptrend since the bottom of last fall. Just about every long-term technical indicator is bullish.

3. Strong relative price performance - The stock has outperformed the S&P 500 over the past 3 months, 6 months, and 1 year.

Sentiment and institutional factors -

1. Sell-side analysts and many institutions are still pessimistic, which from a contrarian perspective, is bullish. Potential future upgrades from the lemmings provide fuel for further upside price movement. Berkshire is under-owned in mutual fund portfolios. Their buying could drive the price upward if they begin to react to any upgrades or continued strong price performance.

2. Smart money/Strong performing mutual funds have substantial stakes in Berkshire. Fairholme has approximately 17% of its fund in Berkshire.

The primary negative is EVENT risk. Berkshire has tons of that. What if Buffett dies? How would the market react to that? What if this Hurricane season turns out horrendous and causes losses in the insurance segment? What if there are any further major scandals regarding insurance? In my view, all of these potential risks are completely overwhelmed by the positive factors.

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