Where Will Berkshire Hathaway Stock Be in 3 Years?

Berkshire Hathaway's (BRK.A -0.21%) (BRK.B -0.34%) stock has risen more than 50% over the past three years as the S&P 500 rallied less than 30%. That continued Berkshire's long tradition of beating the S&P 500 over the past four decades.

That track record makes Warren Buffett's conglomerate a top choice for investors who simply want a stock they can buy, hold, and forget about. But as the market hovers near its all-time highs, can Berkshire head higher over the next three years?

Image source: The Motley Fool.

Understanding Berkshire Hathaway's business

Warren Buffett initially invested in Berkshire Hathaway, which was a struggling textile maker at the time, in 1962. He took over the entire company in 1965, liquidated its textile business, and transformed its business model by acquiring several insurance companies. Over the following decades, Berkshire Hathaway acquired well-known companies like GEICO, Dairy Queen, Duracell, Fruit of the Loom, Benjamin Moore Paints, and See's Candies.

Berkshire Hathaway still generates most of its cash from its insurance subsidiaries. It then invests a lot of that cash into smaller companies through outright acquisitions or big stock purchases. It currently holds shares of about 50 companies and ETFs in its investment portfolio, and its top positions are Apple (44.5%), Bank of America (10.5%), and American Express (8.8%).

Berkshire Hathaway's scale and diversification can make it a difficult company to analyze. So to simplify things, Buffett prefers to use a proprietary "operating earnings" metric -- which excludes the capital gains or losses on its investment portfolio -- instead of earnings on a generally accepted accounting principles (GAAP) basis. Buffett says that non-GAAP measure filters out the near-term noise from the volatile stock market.

Berkshire Hathaway's total operating earnings increased 26% in 2021, 12% in 2022, and 21% to $37.4 billion in 2023. As the following table illustrates, the accelerating growth of its insurance underwriting and investment businesses countered the macro headwinds for its railroads, utilities, and energy businesses last year.

Data source: Berkshire Hathaway.

The robust growth of Berkshire's insurance businesses boosted its total cash, cash equivalents, and short-term T-bill holdings from $86.8 billion in 2022 to $121.8 billion in 2023. That war chest swelled to $182.3 billion in the first quarter of 2024, which gives it plenty of room to buy more companies or invest in more stocks.

What will happen to Berkshire Hathaway over the next three years?

Berkshire Hathaway's near-term growth mainly hinges on the stability of the insurance market, the broader macro environment, and the performance of its closely watched stock portfolio.

Insurance companies usually generate higher profits when interest rates are elevated, so their operating earnings could decline if the Fed finally cuts rates. But on the flip side, lower interest rates should generate tailwinds for Berkshire's macro-sensitive railroad, utilities, and energy investments and drive a lot of its equity investments higher.

That diversification and resilience makes it an attractive all-weather stock for many long-term investors, but it also makes it tough to accurately predict its near-term growth. Buffett also plans to retire and hand the reins over to Greg Abel, who currently leads Berkshire's non-insurance businesses, in the near future. Abel isn't a stock picker like Buffett, so some investors are probably worried about his ability to maintain Berkshire's winning streak.

Berkshire's stock still looks reasonably valued at 25 times last year's operating earnings, and I believe it could continue to rise and outperform the S&P 500 over the next three years as interest rates decline and the macro environment improves. I'd keep a close eye on Abel's leadership transition, but I doubt he'll make any drastic moves that could suddenly sink Berkshire's evergreen business over the next few years.