Many people consider Warren Buffett the most famous investor of all time. The remarkable decades-long performance of his holding company, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%), is a big reason why.
The stock traded at roughly $19 when Buffett took control in 1965. Today, those Class A shares trade at $559,000, an amazing 29,421-fold return on your initial investment over the past six decades. Don't worry: Investors can also purchase Class B shares for $367 apiece.
But should investors buy Berkshire at a time when the stock is at all-time highs? There are many moving parts inside Buffett's Wall Street empire, so valuing the shares can be tricky. Check out the data below to decide whether the stock is a buy, sell, or hold today.
All that goes into Berkshire Hathaway
Most companies have a core focus on one business model. A conglomerate can own various brands but often operates within an industry. For example, Procter & Gamble owns dozens of brands related to household goods.
Berkshire Hathaway is a holding company. It owns a mix of businesses across many industries. The profits accumulate on Berkshire Hathaway's balance sheet, and Buffett and his team then use those funds to grow the company, make new investments, and the like.
So, what's inside Berkshire Hathaway today? The company reports in a few primary segments. First, you have insurance and "other." This is headlined by GEICO insurance, followed by various businesses and brands, including Dairy Queen, Duracell, See's Candies, and more.
Berkshire also owns railways, oil and gas pipelines, renewable energy projects, and utilities, which it reports under a different unit called railroad, utilities, and energy.
Lastly, it holds a portfolio of stakes in a few dozen publicly traded companies, which are the parts of Berkshire most investors probably follow the closest. The portfolio's total value is roughly $370 billion, including prominent positions in Apple, Bank of America, American Express, and Coca-Cola.
Valuing Berkshire's stock
Concentrating on the company's bottom-line earnings might be investors' biggest mistake when evaluating Berkshire Hathaway. The energy businesses, railways, and utilities require occasional large investments to maintain or upgrade them. And the share prices in the company's portfolio can go up or down over time. These two factors can easily skew its reported earnings.
Instead of earnings, consider valuing the stock on Berkshire's book value. A company's book value is its assets minus liabilities. In other words, what do you have left over after you pay everyone you owe? Ideally, a business grows and accumulates assets faster than it does debt.
People might ask why Berkshire Hathaway has $157 billion in cash on its balance sheet and doesn't pay dividends to shareholders. The answer, from Buffett himself, is that he believes Berkshire's profits can be spent in better ways.
That means investments, acquisitions, and things that add to Berkshire's assets. Once a dividend is paid, that cash leaves the business forever. That willingness to keep profits inside Berkshire and continue putting them to work is the secret ingredient for the stock's massive returns.
Is Berkshire Hathaway a buy, sell, or hold?
If you compare Berkshire Hathaway's share price to its book value over the past several decades, you'll see that the stock trades at its historical average today:
BRK.B price-to-book value; data by YCharts.
Comparing how well Berkshire Hathaway generates profits can help put the stock's valuation into perspective and aid your investment decision. Below is its return on equity, measured as a three-year median over time. Notice how it has climbed beyond its historical average in recent years?
One might argue that the stock is valued at its long-term norms, but the business has been generating higher returns. In that case, there's a solid argument to buy and hold the stock today.
BRK.B return on equity (3-year median), data by YCharts.
Don't underestimate Berkshire's flexibility. With $157 billion in cash on its balance sheet, Buffett and team have a war chest to create long-term value in the business. The stock isn't flashy, but investors can buy and hold this proven winner and let it continue building wealth.
