Is Berkshire Hathaway the Long-Term Stock for You?

Warren Buffett has drawn all sorts of criticism over the last decade. Shares of his conglomerate Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) have trailed the S&P 500's return since the Great Recession of 2008-2009. While Buffett and company have been slow to adjust their investment strategy in a new digital era, the largest purchase the company has been making as of late is Berkshire Hathaway stock itself -- via a record $24.7 billion in share repurchases in 2020.

Given the Biden administration's focus on getting an infrastructure bill passed this year (the initial draft calls for $2.3 trillion in spending over the next decade or so), I think following Buffett's move and betting on Berkshire for the long term looks timely right now. 

Image source: The Motley Fool.

What's in a portfolio?

Berkshire can be broken down into two basic parts: its portfolio of publicly traded stocks, and its subsidiary businesses. The public stock portfolio was valued at $281 billion as of the end of 2020, nearly 40% of it in Apple (AAPL -1.22%). Old industry stalwarts Bank of America (BAC 3.35%), American Express (AXP 6.22%), Coca-Cola (KO 2.14%), and Kraft Heinz (KHC 1.80%) round out the top five holdings, but more modern growth names like Amazon (AMZN -2.56%) are in there too. Investment gains totaled $40.7 billion in 2020, adding another $8.1 billion in dividend and interest income during the year.

But for our discussion here, it's Berkshire's subsidiaries and other private business interests that are of particular note. There's a diverse mix of economic staples, including insurance (GEICO), transportation (BNSF Railroad, Pilot gas stations), utilities and energy (PacifiCorp, BHE Renewables), and manufacturing (Precision Castparts). A general theme dominates the list of Berkshire's operations: old industrial businesses that have been largely out of favor over the last decade as high-tech reshapes the business world. But these companies are doing just fine. Excluding investment gains, net earnings for Berkshire's subsidiaries totaled $22.2 billion last year even though many of them were deeply impacted by COVID-19. 

Data source: Berkshire Hathaway. YOY = year over year. 

An economic rebound play and a bet on infrastructure spending

As the economy starts to recover from the effects of the pandemic, Berkshire is a great stock to get exposure to transportation and industrials. And the passage of an infrastructure bill could create a strong tailwind for these oft overlooked businesses. Technology will benefit too, but hundreds of billions of dollars are earmarked for the construction of affordable housing, electric grid upgrades (including renewable energy projects), and manufacturing and manufacturing job education.  

In addition to Berkshire having direct exposure to all of these areas, a big boost on federal infrastructure spending will necessitate the transport of massive amounts of goods and materials. BNSF Railroad and Berkshire's bet on trucking will be ready to facilitate. Add to this the fact Berkshire Hathaway stock trades near a historic low price-to-book value of just 1.4, and Buffett himself made a big bet on his own stock last year. With economic recovery brewing and America gearing up for big investment in its basic industry, this value may not last forever.  

Granted, Berkshire Hathaway won't be the most exciting business or stock out there. Buffett is famous for avoiding the latest investment trends lest they pan out to be just a temporary fad. Nevertheless, while this is no high-growth enterprise, Berkshire has a lot to offer investors of all kinds over the long term. This is an undervalued stock worth considering for 2021.