In recent years, Berkshire Hathaway (BRK.A 0.75%) (BRK.B 0.78%) CEO Warren Buffett has taken a lot of flak for his investment style. More specifically, Buffett's unwillingness to chase after innovative tech stocks has left his company to underperform the benchmark S&P 500. Some folks have even implied that the Oracle of Omaha has lost his touch.
But a quick look at Berkshire Hathaway's performance under Buffett shows that his steadfastness in long-term investing is exactly what's made his company so successful. Since 1965, Berkshire Hathaway's per-share market value has risen by 2,744,062%. Put another way, a $100 investment back in 1965 would have been worth more than $2.7 million as of the end of 2019. When coupled with the fact that Buffett is up more than $50 billion on his company's stake in Apple, it's somewhere between premature and wrong to suggest he's lost his touch.
Buffett has been gun-shy about putting his company's record cash hoard to work
What has been odd, though, is Buffett's unwillingness to deploy his capital over the last 4.5 years. Although he and his team did spend more than $10 billion over the past couple of weeks by acquiring natural gas transmission and storage assets from Dominion Energy, as well as by purchasing 33.9 million shares of Bank of America stock, Berkshire's cash hoard is still, presumably, near its record high of $137 billion.
The Oracle of Omaha has made a habit over the past five decades of regularly acquiring brand-name businesses with entrenched economic moats. This has resulted in Berkshire Hathaway owning about five dozen companies, including well-known names like insurer GEICO, railroad operator BNSF, and confectioner See's Candies.
However, since the buyout of Precision Castparts in January 2016, Buffett has predominantly sat on his hands. Many investors -- myself included -- have taken this lack of participation as a signal that equities aren't a good value.
But there has been one stock to catch the Oracle of Omaha's eye. It's a stock that Buffett sank close to $1 billion into in 2018, nearly $5 billion into in 2019, and has acquired approximately $1.6 billion of just during the first quarter of 2020. And it's not Apple or Bank of America, if that's what you're thinking.
Instead, the real Apple of Buffett's eye is (drum roll) Berkshire Hathaway.
That's right, Buffett can't stop repurchasing his own stock.
This is the real apple of Buffett's eye
Believe it or not, Buffett and his right-hand man Charlie Munger went approximately five years without repurchasing a single share of Berkshire Hathaway stock between 2013 and 2018. That's because a rule was in place that disallowed buybacks if Berkshire Hathaway's stock was any higher than 20% above its book value. For years, Berkshire was regularly valued between 30% and 60% above its book value, thereby disallowing Buffet and Munger from pulling the trigger on share buybacks.
Then things changed in 2018. A new repurchase program structure was laid out that allowed Buffett and Munger to rebuy Berkshire Hathaway stock as long as two criteria were met:
- There would need to be at least $20 billion in cash and cash equivalents on the company's balance sheet; and
- Buffett and Munger must agree that Berkshire Hathaway's stock is trading at a sizable discount to its intrinsic value.
The best aspects of these new criteria are that they eliminate any sort of time constraints that might be associated with a rigid line-in-the-sand book value metric and they allow two great money managers to do what they do best: buy value when they see it.
Clearly, this dynamic duo has seen opportunity of late. Berkshire Hathaway is currently trading at 25% above its book value, a level that was last consistently seen in 2012.
By repurchasing Class A and B shares, Buffett and his team are driving down the number of outstanding shares of the company. This usually has a positive impact on earnings per share (since there are fewer shares to divide net income into), and it can make a company more fundamentally attractive.
Yes, Berkshire Hathaway is an attractive investment opportunity
But these repurchases are about far more than just helping to pump up Berkshire Hathaway's earnings per share. They're about recognizing the real value that lies in these shares.
Though Buffett's company has underperformed in 2020, it has exceptionally strong tie-ins to the health of the U.S. and global economies. A quick peek under Berkshire's hood shows that a vast majority of the company's investment portfolio is tied up in Apple, bank stocks, and consumer staples. These are all companies/industries/sectors that benefit when the economy is running on all cylinders. Buffett emphatically proclaimed during his company's virtual shareholder meeting in May that investors should "never bet against America." This series of buybacks over the past two years supports that thesis.
To add to this point, Berkshire Hathaway has five dozen owned subsidiaries that also have cyclical tie-ins -- some of which have near-guaranteed cash flow. Berkshire Hathaway rarely invests in the utility sector, but subsidiary Berkshire Hathaway Energy owns quite a few energy-generating and natural gas-transmitting assets. These are businesses you can count on to deliver in virtually any economic environment.
With Berkshire Hathaway valued at levels last seen eight years ago and Buffett still very much in control of the big decision making, it looks to be every bit the value that the Oracle of Omaha perceives it to be.