Berkshire Hathaway (BRK.A 0.98%) (BRK.B 0.98%) stock is down big since Warren Buffett announced that he would be stepping down as chief executive officer (but remain chairman) by the end of the year.
Here's why the sell-off is a buying opportunity for investors looking for an ultra-reliable blue chip stock to hold for years to come.
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Growth stocks are back in style
Berkshire Hathaway stock was on a tear to start the year -- hitting an all-time high on May 2 -- the day before its annual shareholder meeting in Omaha.
But between that meeting and June 30, Berkshire fell 10%, compared to a 9.1% gain in the S&P 500 (^GSPC 0.83%).
That's a significant underperformance in a short period, to which Berkshire investors aren't accustomed. The stock has trounced the S&P 500 over the long term, with a 19.9% compounded annual gain between 1965 and 2024, compared to 10.4% for the index with dividends reinvested.
Part of the reason Berkshire has been lagging the S&P 500 is changing investment sentiment. When tariff turmoil was rippling through markets, some investors gravitated toward companies with business models that could hold up well even if these tensions escalated.
Berkshire is an ultra-safe stock to own regardless of the market cycle. This is because of its portfolio of controlled assets -- from its insurance businesses to ownership of the BNSF railroad, utility giant Berkshire Hathaway Energy, manufacturing assets, services and retailing businesses, and its positions in public companies like Apple, American Express, Coca-Cola, and more. But Berkshire has been extra cautious lately.
In its first-quarter 2025 financial filings, Berkshire revealed a record $348 billion in cash, cash equivalents, and short-term Treasury bills. During the shareholder meeting, Buffett said that Berkshire was holding more Treasury bills than he would like, but stressed the importance of being patient and waiting for excellent investment opportunities. In this vein, Berkshire has become even more of a defensive stock, so it makes sense that investors gravitated toward it when volatility was spiking.
The news that Buffett is stepping down as CEO, combined with investors looking for riskier, higher-potential-reward stocks and less defensive names, may explain why Berkshire has underperformed the S&P 500 by so much over the last two months.
Berkshire is chock-full of compounding potential
As a long-term investor, it's important to filter out the noise of market movements and understand that stock prices can do all sorts of things in the near term that have little to do with a long-term investment thesis.
Earlier this year, Berkshire's stock price was driven by some investors rotating out of mega-cap growth stocks and into value stocks. But now, the opposite is happening, as some value stocks like Berkshire are selling off or underperforming the S&P 500 while mega-cap growth stocks like Nvidia and Microsoft are hitting all-time highs. It's not that Nvidia's and Microsoft's business models have changed between now and a few months ago. Rather, investors are willing to pay a premium price for future earnings growth, because the risk of tariffs slowing that growth has gone down considerably.
Instead of focusing on which stocks are in and out of favor, a better approach is to identify excellent businesses and then decide if the price is reasonable. Buffett's preferred way to value Berkshire is by its operating earnings, which reflect how the businesses it owns are performing, rather than accounting for changes in market values.
Berkshire's operating earnings have compounded over time as it has grown its controlled businesses and made savvy acquisitions. Insurance underwriting and investment income have been massive drivers of operating earnings. Underwriting earnings grow as premiums collected outpace claims paid, and investment income represents the return Berkshire gets on the sum of premiums collected that haven't been paid out in claims.
Given the size and operational excellence of Berkshire's insurance businesses, paired with its other controlled businesses, the company has a clear path toward steadily growing operating earnings over time.
As mentioned, Berkshire also has a massive cash position that it can use to make a strategic acquisition, accelerate growth in a controlled business, or buy shares in stocks at compelling prices.
Another reason to buy and hold Berkshire is the potential for the company to pay dividends under its new CEO, Greg Abel. Buffett has long been against the idea of paying dividends, because he believes that Berkshire can earn a better return for shareholders by reinvesting profits rather than passing them along through dividends. And he's been right, given the long-term performance of Berkshire stock. But if Berkshire continues to hold a ton of cash and not buy back stock, it could make sense for the company to pay a dividend.
Buying Berkshire for the right reasons
When Berkshire was a smaller company, Buffett was able to flex his investing prowess and creativity to have a meaningful effect on the business through moves like acquiring Geico and buying Coca-Cola and American Express at dirt cheap prices. But today, Berkshire is so big that buying hidden-gem, undervalued companies wouldn't affect its stock performance. So Berkshire's big buys over the last 10 years have been opportunities hiding in plain sight -- like Apple. And with Buffett passing the torch to Abel, investors should focus more on Berkshire's operational advantages, rather than treating the company like a stock-picking hedge fund.
All told, Berkshire is a great buy if you like the assets it owns, its cash position, and its competitive advantages.
