If you're looking for a CEO you can rely on to grow the value of their business, it's hard to pick anyone more likely to succeed than Warren Buffett. The nonagenarian has been at the helm of Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) since 1965, and its value has risen at a pace that few money managers have achieved even when measured with much shorter timeframes.
At last glance, Berkshire Hathaway boasted a $786 billion market cap, and this figure peaked above $800 million a few times in 2023. Growing enough to cross the $1 trillion threshold in 2024 would require a better-than-average performance, but it is possible.
At the moment, Berkshire's largest holding by a mile is Apple, which became the world's first $1 trillion company in 2018. Alphabet, Amazon, Microsoft, and Nvidia have all achieved market caps that exceed $1 trillion since then. Read on to see why there's a good chance that Berkshire Hathaway can join them in 2024.
From cigar butt to the Trillion Dollar Club
As a young man, Buffett liked to invest in discarded companies he likened to cigar butts on the pavement that could provide a few free puffs to anyone who made the effort. Berkshire Hathaway was a failing textile business and one of those cigar butts that he bought up in 1965 at an average price of $14.86 per share. The A-class shares, which have never split, have been trading for $553,820, which works out to a gain of 3,726,818% for anyone who's held them the whole time.
It was Charlie Munger, Buffett's recently deceased partner, who convinced Buffett to ignore cigar butts and instead invest in the best businesses he could find. Munger argued that truly exceptional businesses would outperform over time. All Berkshire had to do was wait for opportune moments to acquire them at reasonable valuations.
Berkshire's investing prowess hit a higher gear in 1995 when it acquired the Government Employees Insurance Company, which today is better known as GEICO. Insurance businesses generally collect more in monthly premiums than they pay out in claims. Berkshire uses this excess sum, called a float, to invest in businesses it controls, such as Dairy Queen, Duracell, and the Acme Brick Company.
Berkshire also uses its float to acquire shares of businesses it doesn't control. At the moment, Apple is its largest equity holding, at a value of about $181 billion.
One thing investors don't have to worry about with Berkshire Hathaway is a liquidity crunch. The equity portfolio is sitting on $157 billion in cash.
Image source: Getty Images.
Looking to 2024 and beyond
Berkshire's stock price has risen at an average annual rate of 19.9% since 1965. To cross the $1 trillion threshold, its market cap needs to rise about 27.2%, which could happen next year.
It's a long way from guaranteed, but 2024 is already shaping up to be a better-than-average year for the U.S. stock market. Fear of a recession brought about by interest rates that rose rapidly in 2022 and early 2023 has been replaced by optimism.
Citing signs of waning inflation, the Federal Reserve recently left interest rates unchanged for its third meeting in a row. It also signaled three potential rate cuts in 2024.
The value of any asset is equal to the sum of all its future cash flows discounted to the present, and Berkshire owns a lot of income-generating assets. If the Federal Reserve reduces rates faster than expected next year, the perceived value of Berkshire's future cash flows and its stock price could shoot higher and push its market cap over the $1 trillion mark.
A buy now
You can scoop up Berkshire Hathaway's B-class shares, which have split many times, for around $360 at recent prices. That works out to just 20.3 times forward-looking earnings estimates. That's a very reasonable price to pay for a company that grew earnings per share by 344% over the past decade.
There are no guarantees that Berkshire's next decade will be as successful as its past, but its biggest obstacle is its size. Investments that would have moved the needle way forward a decade ago barely register these days.
Overcoming its girth will be a challenge, but we could have said this when it was a $500 billion company, too. Buying the stock now to hold for the long run looks like a smart move.
