What would a stock tip directly from the Warren Buffett be worth to you? Ten days ago, that's exactly what he gave me -- and all of us. How did I come about this valuable information? The same way you did: he announced it publicly. Despite this, investors appear steadfast about ignoring this opportunity. Are you willing to seize it?
The stock is Buffett's own company, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). My guess is that you're now thinking two things. No. 1, it's boring. No. 2, the opportunity has already vanished. The news is out that Buffett is willing to repurchase Berkshire shares, and it's already baked into the price.
Think again.
I can't argue with the first point: Berkshire is boring. What of it? Investors who find that quality objectionable need to ask themselves if they are in this game for excitement or to make money. The second point, on the other hand, is flat wrong. The value is still there and it has been every day since the announcement. This isn't guesswork; I'm convinced that's the case and I'm basing my assessment on Buffett's own words.
What exactly did Buffett say?
In the press release announcing the new buyback program, Berkshire management was explicit concerning their belief that the shares are significantly undervalued:
Our Board of Directors has authorized Berkshire Hathaway to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-current book value of the shares. In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise.
As soon as the press release was issued, 1.1 times book value ($72.40 per B share) should immediately have become a hard floor on the share price. Instead, that benchmark figure roughly acted as a ceiling on the price!
|
Date |
Price-to-Book Value Multiple (intraday high) |
|---|---|
| Announcement date: Monday, Sept. 26 |
1.10 |
| Tuesday, Sept. 27 |
1.13 |
| Wednesday, Sept. 28 |
1.10 |
| Thursday, Sept. 29 |
1.11 |
| Friday, Sept. 30 |
1.10 |
| Monday, Oct. 3 |
1.10 |
| Tuesday, Oct. 4 |
1.12 |
| Wednesday, Oct. 5 |
1.12 |
Source: S&P Capital IQ.
Let me sum up the table in a single sentence: No matter what price you paid for the shares since the buyback announcement, Buffett has explicitly said they are worth "considerably more."
If not now, when?
I've been pitching Berkshire shares hard since the beginning of August. Over the next 10 years, I think they'll smash the S&P500 (INDEX: ^GSPC). Let me qualify what I mean by "smash": The margin of outperformance will exceed five percentage points on an annualized basis. I can't offer any stronger evidence for their undervaluation than a direct endorsement from Warren Buffett. If you're not interested in owning the shares today, you may as well decide now that you will never own them.
Of course, perhaps you already have a full (or even overweight) position in Berkshire Hathaway. If that's the case, let me give you a few other ideas. Indeed, Berkshire is only the most prominent case of wonderful businesses selling at a meaningful discount to their intrinsic value. Here are a few other examples:
Oracle (Nasdaq: ORCL) is one of the world's largest enterprise software companies, with a massive installed base, including every Fortune 100 company. Once Oracle gets in, they become part of the fabric of their customers' operations and are very difficult to dislodge. You can own a piece of this business today for less than 12 times estimated earnings for the next 12 months.
- Add Oracle to My Watchlist.
M&T Bank (NYSE: MTB) is a superbly run regional bank -- Berkshire owns shares in its portfolio. The shares are trading at an insignificant premium to book value and less than 10 times forward earnings. All of this also applies to national lender Wells Fargo (NYSE: WFC). I believe both stocks are undervalued; nevertheless, I would hold off on buying them now as there will almost certainly be better opportunities to pick up bank stocks cheaply as the European crisis unfolds. You should be tracking them, though.
- Add M&T Bank to My Watchlist.
- Add Wells Fargo to My Watchlist.
Everyone knows that Microsoft (Nasdaq: MSFT) is good for the glue factory, correct? I beg to differ: In the past 12 months ending June 30, this "nag" managed to grow operating income by 11%. That's not the same growth as in the glory days, but the company still has a fair few good years in front of it, and those prospects more than justify a forward earnings multiple below 9.
- Add Microsoft to My Watchlist.
If you invest in individual stocks and you have cash on hand that you won't be needing over the next several years, this is a good environment in which to add top-flight businesses to your portfolio at better than reasonable prices. Berkshire Hathaway should be at the top of your shopping list. Investors who are able to see beyond the mid-term difficulties affecting our economy will very likely reap the rewards. Those who aren't will eventually come to regret it, particularly since the broad market will probably underperform historical returns over the next five to 10 years.
- Add all of the companies mentioned in this article to My Watchlist.
More ideas? The Motley Fool's best analysts have identified great companies that let you decide how to spend your profits in our special free report, " 13 High-Yielding Stocks to Buy Today ."
