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Is Berkshire Hathaway Stock a Buy?

By Matthew Frankel, CFP® - Feb 27, 2020 at 7:42AM

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If the stock market keeps falling, here’s why I want to own a piece of Berkshire.

Given the recent volatility in the stock market, it could be a smart idea to find places to put your money that not only are recession-resistant, but that are set up to do well if the market keeps falling. One stock that I own and am seriously considering adding to my position in is Berkshire Hathaway (BRK.A 2.10%)(BRK.B 2.12%).

At first glance, Berkshire might not seem like a great buy. For one thing, the stock significantly underperformed the S&P 500 in 2019 with a gain of 11% versus a total return of 31.5% for the benchmark index. And, for a company whose main business model consists of reinvesting the cash generated by its operating businesses, the lack of recent investment activity is concerning to many investors, as well as to Berkshire's management team.

But there are a couple of big reasons why I think Berkshire could dramatically outperform the market if the current volatility gets worse, or even if a full-scale market crash arrives.

Warren Buffett speaking with reporters.

Image source: The Motley Fool.

A collection of crash-resistant businesses

First off, I'm not worried that Berkshire underperformed the market in 2019. The company often underperforms the S&P 500 when the stock market has a great year, and CEO Warren Buffett has cautioned investors to expect this.

But it's during the so-so years, as well as during turbulent times, when Berkshire's businesses really shine.

At its core, Berkshire's main business is insurance, which is about as recession-resistant as a business can get. Think of the GEICO subsidiary: If a recession comes and people need to cut back on spending, auto insurance is among the last expenses they'd consider eliminating. Other Berkshire businesses have similar dynamics. Just to name a few, subsidiaries like Duracell, BNSF, and Berkshire Hathaway Energy provide goods or services that people and businesses need.

The proof is in the numbers. Since 1965, the first full year Warren Buffett was in charge at Berkshire, the S&P 500 has produced negative returns in 12 separate years. Berkshire Hathaway outperformed the market in 10 of them, and actually produced positive shareholder returns half of the time the market was in the red. And if you're curious, out of the 55 full years with Buffett at the helm, Berkshire has outperformed the S&P 500 in 37 of them, or 67% of the time. Over time, that really adds up: Berkshire's annualized average return is more than double that of the S&P 500.

Berkshire's biggest frustration could turn into its biggest asset

In recent years, Berkshire's stockpile of cash has been a major source of frustration for the company's leaders and shareholders alike. As mentioned, Berkshire's main goal after making sure its operating business needs are met is to acquire more businesses or buy the stocks of other companies.

Buffett likes to keep at least $20 billion in cash on hand, but thanks to the lack of attractive investment opportunities, Berkshire's cash stockpile has grown to $128 billion. In other words, Berkshire has more than $100 billion of cash that it would love to put to work.

While the cash hoard has been frustrating, it could end up being Berkshire's biggest asset if the stock market continues to fall. Think of it this way: Buffett hasn't been impressed with potential acquisition prices, but if the stock market were to drop by 20% or more, he may feel differently.

He has a knack for finding excellent long-term opportunities when the market is down. Just to name one example, the company's Bank of America (BAC 0.95%) investment was acquired in the wake of the financial crisis for about one-fourth of what it's worth today. Just imagine how Berkshire would have done if it had an extra $108 billion to invest at the time of the last market crash. In fact, Berkshire's cash is the No. 1 reason I want to own it if the market keeps dropping.

Buy for less than Buffett did

As a final thought, consider that Berkshire spent more money on stock buybacks during the fourth quarter than it has in any other quarter in its history. And in November and December alone, it spent nearly $1.7 billion on buybacks at an average price of $219.52 per Class B share.

Berkshire's buyback authorization is clear: The company can only repurchase shares when Buffett and Vice Chairman Charlie Munger agree that the stock is trading for a significant discount to its intrinsic value, using a conservative valuation approach.

So, we can deduce that at the average buyback price of $219.52, both leaders believe they are getting a discount. If Berkshire's stock price remains below this level, you could get an even better discount than Warren Buffett did.

 

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$478,669.51 (2.10%) $9,864.47
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$319.11 (2.12%) $6.61
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$37.02 (0.95%) $0.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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