Analysts at investment banks cover a great many stocks, but some big names aren't as widely tracked as you might expect. Such is the case with Warren Buffett's investment vehicle Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B). It's hard to say why, but it's covered by only a handful of prognosticators.
Newly added to those ranks is Sarah Dewitt of JPMorgan Chase's (NYSE:JPM) J.P. Morgan unit. She recently initiated coverage with an "overweight" recommendation, at a price target of $210 for the company's B shares (they currently trade around $183). Let's take a look at the key points of her argument and see whether they hold water.
In J.P. Morgan's initial research note on Berkshire Hathaway, Dewitt describes the company as "a collection of best-in-class businesses with unmatched balance sheet strength."
That's broadly true. Focusing our gaze on Berkshire Hathaway's top three stock holdings by market value -- Kraft Heinz, Wells Fargo, and Apple (NASDAQ:AAPL) -- shows that while all have their weaknesses (and aren't necessarily "best-in-class"), they have plenty of advantages, too.
Kraft Heinz has amassed an enviable collection of wide-moat food assets, while Apple is riding a 10-year-plus streak as the consumer telecom gadget maker. Wells Fargo, despite a series of dumb scandals that have tarnished its reputation, still has a commanding lead in the massive U.S. mortgage market.
High on Dewitt's list of pluses for Berkshire Hathaway is the earnings potential of the insurance and railroad businesses, two of the company's largest segments. Lead insurance asset GEICO has managed to take significant market share through aggressive marketing and competitive pricing during a time of rising premiums in its industry. And Berkshire Hathaway's BNSF, one of America's top rail operators, is leveraging this strong position by investing in rail network improvements. It's also expanding with new routes.
Both developments sound like tasty recipes for growth to me. And they're highly significant, as insurance and rail combined were responsible for nearly 50% of Berkshire Hathaway's earnings last year.
Another contributor to what is bound to be robust growth is Berkshire Hathaway's bulging war chest. Dewitt points out that the company has an eye-watering $66 billion in excess cash (i.e., the amount over the $20 billion it wants to maintain at all times).
That cash is in good hands. Buffett and his team have proven they're never in a rush to plow recklessly into an acquisition. They always seem to find the right assets at the right moment to goose portfolio value. Witness the company's renewed plunge into Apple around New Year's, shortly after which the tech giant delivered Q1 earnings that broke records and sent the stock skyward.
The power of the portfolio
Dewitt didn't wear rose-colored glasses while examining Berkshire Hathaway; she's sober-minded and realistic about the risks it faces. Chief among these is the "key man" problem -- in other words, what happens when the now 87-year-old Buffett exits the scene. She's also concerned that profitability and book value "have meaningful sensitivity" to the broader American economy.
Yet Dewitt believes, as I do, that the advantages of Berkshire Hathaway far outweigh the risks. Post-Buffett, his value investing approach will almost certainly stay in place at the company given how successful it's been.
And that stock portfolio is a thing of beauty. You can probably find any number of funds that hold Apple, Wells Fargo, Kraft Heinz, and other wide-moat companies. However, there are precious few that mix these blue chips in with other investments to produce the sustained outperformance that Berkshire Hathaway has delivered.
Yes, it still leans heavily on Buffett's preferred sectors -- he has always loved financials, and he enjoys riding the rails -- but it's spread out enough to mitigate the impact of an economic shock plus the insurance losses sure to arise from the recent natural disasters. The company has been through market dives before and has come out stronger on the other end.
Ultimately, J.P. Morgan's assessment of Berkshire Hathaway is pretty much on the money. I think it's a good note that supports an accurate recommendation on the stock, which in my mind is unquestionably a buy candidate for any investor.