Berkshire Hathaway (BRK.A 0.07%) (BRK.B 0.56%) is the largest financial company by market cap at more than $1 trillion, according to research from The Motley Fool. Its stock has been massively successful, rising nearly 170% over the past five years.
But when longtime Berkshire Hathaway CEO and iconic investor Warren Buffett announced recently that he will step away from leading the company at the end of this year, some investors were left wondering if Berkshire is still worth buying without the Oracle of Omaha at the helm. While change can be scary, here's why Berkshire Hathaway stock is still worth buying.
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1. The company is well-diversified
The resilience of many companies is built on how well-diversified they are. This can come from product diversification or by catering to different types of customers, but the important part is for companies to be able to benefit from some parts of their business even while others are slowing down.
Berkshire easily fits this description because the company is a conglomerate of more than 60 businesses, ranging from insurance companies (including GEICO) to energy businesses, industrial companies, and consumer goods makers. Of course, the company's huge stock portfolio of more than 30 stocks also adds to the financial diversification with its investments of nearly $279 billion.
By spreading its ownership across so many different types of businesses and investing in a diverse field of stocks, investors can be sure that no matter what's happening with the broader economy or specific industries, Berkshire isn't overexposed to risk.
2. It has nearly $348 billion in cash
There are multiple reasons why having such a large cash hoard is important. First, this cash pile means that if difficult economic times are around the corner, Berkshire will easily be able to weather the storm. It also opens up the opportunity for the company to buy other companies it sees as a good value, or buy stocks that it views as undervalued.
What's more, Berkshire has been a longtime purchaser of its own stock. A large cash reserve means the company has enough money for continued share buybacks, which boost shareholder value.
In short, Berkshire's $348 billion in cash and cash equivalents gives the company massive flexibility. If it needs to buy a distressed company at a discount price, it can. If it wants to boost its buybacks, it can do that as well. And if the market takes a downturn and stocks are on sale, then Berkshire can move quickly to expand its portfolio even further.
3. Its stock is relatively inexpensive
You might assume that a company with a market cap of $1 trillion and share price gains of 170% over the past half-decade would be expensive. But Berkshire's price-to-earnings ratio is just 13 right now, far cheaper than the S&P 500's average of about 28.
This means you can buy Berkshire's shares at a relative discount to the broader market, despite the company's strong financial position and impressive share price gains in the recent past. There's hardly a better deal out there for a company that's massively profitable and well-diversified.
But what about Buffett leaving?
I understand the concern some potential Berkshire investors have with Buffett stepping away from the CEO role. But two things are important to note here. The first is that Buffett is stepping away because of his age -- he's 94 -- and not because of a failure in management. That's important to point out, because Buffett and his management have been able to plan for this transition, instead of being forced into a major change due to mismanagement.
Second, and just as important, is the fact that because Berkshire is a conglomerate of businesses, little will change in the day-to-day operation of the more than 60 businesses in its portfolio. They all have their own CEOs and management teams and will continue to operate as usual once Buffett steps down at the end of this year.
Longtime Berkshire executive Greg Abel will take over the CEO role, and many believe that he'll keep the company's focus on value businesses. With Abel inheriting a large stock portfolio, strong financial position, and well-diversified business, Berkshire is in a fantastic place to weather the transition well.
