There's been a lot of consternation regarding Warren Buffett's conglomerate Berkshire Hathaway (BRK.A) (BRK.B) lately. While I don't necessarily agree with all the criticism, it's not wholly unfounded. During the huge March sell-off, Berkshire, known for its contrarian value bets, didn't buy much of anything. In fact, Berkshire was a net seller of equities amid the rout, exiting Berkshire's airline stocks and selling more of its bank stocks than it bought. As for the technology stocks that have rallied hard since the March 23 bottom? Berkshire didn't buy any of those.
Berkshire's recent paralysis, on top of several years of relative underperformance versus the stock market, has led even some longtime Berkshire shareholders, and one fellow Fool.com contributor, to lose faith in the Oracle of Omaha.
However, it's precisely when many are throwing in the towel on Berkshire that it may be a great time to buy. And at least one Berkshire insider did just that on Monday, buying up millions in Berkshire stock in the open market.
Meryl Witmer buys $2.2 million
Berkshire board member Meryl Witmer bought $2.2 million in Berkshire stock on Monday, May 18, purchasing eight A shares for $261,000 each and 1,000 B shares at $173.30 for her family trusts. $2.2 million is a fairly large investment for an individual -- or, at least enough to make a statement, even if that person is wealthy.
Witmer is the general partner of Eagle Capital Partners, a value-based investment firm, and is also on the board of the University of Virginia Investment Company, which manages the UVA endowment and other long-term funds managed by university. She was nominated to Berkshire's board back in 2013, expanding it to 13 people at the time (there are now 14). According Eagle Capital's recent 13-F, Berkshire is also the third-largest holding in Eagle Capital's portfolio.
Should you follow Witmer into Berkshire?
No doubt, Berkshire has underperformed the market in the recent past. In fact, its stock currently sits below where it was trading in December of 2018, when fellow board member and head of insurance operations Ajit Jain bought a whopping $20 million in Berkshire stock.
But just because Berkshire has gone down in price, does that mean the stock is a buy today?
By any measure, Berkshire is cheap
While Berkshire has been a net seller in its equity portfolio in the first quarter, it did continue to repurchase Berkshire shares, indicating that management believes Berkshire is undervalued. Of course, those repurchases may have come before the coronavirus outbreak hit the world economy in early March. So, it's unclear what management thinks today.
Still, using just about any traditional valuation metric, Berkshire's shares look extremely cheap. Its price-to-book ratio stands at just over 1.1 today -- below the 1.2 times book value Buffett had previously used as a ceiling for share repurchases; however, even Buffett had relaxed that criteria in 2018 and has purchased shares at higher valuations since then.
Berkshire also seems extremely cheap on an earnings basis, taking 2019 operating earnings as a baseline. Berkshire made about $29 billion in operating earnings last year, outside of unrealized investment gains. Granted, that was before COVID-19 hit, so Berkshire's operating earnings will probably go down a bit this year. Still, it probably won't be disastrous.
At the end of the first quarter, Berkshire's stock portfolio was worth $180.8 billion, and it had $133.3 billion in cash against $37.5 billion in debt. So, call it $95.8 billion in net cash. At today's market cap of $419 billion, Berkshire's market cap is just $142.8 billion when taking out the value of the equity portfolio and cash. That's less than five times 2019 operating earnings. And keep in mind, since the market has rallied, the equity portfolio is now likely higher than it was on March 31, making Berkshire's valuation, ex-cash and investments, even cheaper.
While Berkshire's operating earnings from internal businesses will no doubt take a hit this year, that's still a really cheap multiple for a collection of high-quality utilities, railroads, industrial, manufacturing, and retail businesses with great economics and access to whatever capital they need.
A value stock
Long a value investor, Buffett's conglomerate now appears a value stock itself. While it's unpredictable whether the market may rerate Berkshire Hathaway to a better valuation anytime soon, especially as we enter a recession, it's not surprising to see a seasoned value investor buying up Berkshire shares at today's beaten-down levels.