To say the COVID-19 pandemic has caused some market turbulence this year would be a big understatement, and the volatility hasn't subsided yet. Still, the stock market is performing quite well, all things considered. In fact, many investors are surprised to learn that the S&P 500 is slightly up for the year.
Not all stocks have fared so well. Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) has been a particular disappointment. The company has a long history of outperforming the market during turbulent times, but that hasn't been the case in 2020, and the stock is down nearly 10% year to date. What should investors expect going forward?
Berkshire Hathaway in the COVID-19 pandemic
First off, Berkshire's businesses are generally designed to perform well in any economic climate. For example, GEICO sells a product that people need no matter what, and many of Berkshire's other operating businesses are quite recession-resistant as well.
Berkshire has likely underperformed because investors are questioning if Warren Buffett and his team are still fit to navigate today's market. For example, Buffett sold Berkshire's airline stocks after the market crash chopped billions off their value. To the extreme disappointment of many Berkshire shareholders -- myself included -- Buffett didn't deploy any of Berkshire's massive cash stockpile during the March panic.
Recently, Buffett seems to have become a bit more comfortable putting money to work, as the third quarter of 2020 has been one of Berkshire's more active in recent memory. Still, investors likely were disappointed that the legendary investor didn't take advantage of the bear market.
What will move Berkshire's stock price?
There are many factors that could significantly influence Berkshire's stock price over the next year. Predicting the future is impossible, especially for a company with more than 60 subsidiary businesses and dozens of stock investments like Berkshire. Still, some factors are likely to be major influencers. Here are three:
- Capital deployment: As mentioned in the last section, Berkshire has been more aggressive with putting money to work in the second half of 2020 than it's been in years. However, the company still has well over $100 billion in cash on the sidelines. If Berkshire can continue to find attractive opportunities to put money to work, it could help boost its earnings power and help push the stock price higher.
- Vaccine or treatment availability: At this point, it's clear that the U.S. economy isn't going to truly get back to normal until there's a widely available coronavirus vaccine. Some experts predict this will happen early in 2021, while others say it could be 2022 before everyone who needs a vaccine will be able to get one. This is likely to be a major factor that determines Berkshire Hathaway's stock performance (as well as that of the rest of the market) over the next year.
- Stock performance: Investors are often surprised to learn that Berkshire's operating businesses account for less than half of the company's market value -- the cash hoard and stock portfolio make up the majority. Therefore, Berkshire's performance over the next year and beyond will be highly dependent on how its stock investments do, especially its largest positions. For example, if Apple (NASDAQ:AAPL) -- Berkshire's largest investment -- were to rise or fall by 20%, it would change Berkshire's intrinsic value by more than $20 billion by itself.
The bottom line on Berkshire for the next year and beyond
The next year or so should be very interesting for Berkshire Hathaway and the stock market as a whole, but nobody can predict where its stock price will end up. Having said that, Berkshire remains a great long-term compounding machine, and it's important to pay attention to factors that will allow the company to make more money over the long run, like buying more businesses and stocks.