When a stock starts breaking through its year-long price ceiling, it can be easy to come down with a classic case of acrophobia -- fear of heights -- but Foolish investors know that you've got to consider a lot more than a stock's price and price action when making investment decisions. In Berkshire's case specifically, I think there's reason to believe that the gains are still in the relatively early innings and that investors can expect to see more of the same.
There are a lot of reasons to think this is the case -- among them, for instance, the potential of a cyclical improvement in the insurance market that would bolster Berkshire's bottom line. But one potential stock driver that continues to jump out at me is the stock's valuation.
|Year||Price-to-Book Value Multiple|
And what is the valuation right now? 1.3. Yes, that's right, Berkshire Hathaway is currently trading at the same price-to-book value multiple that it did in the midst of the financial crisis.
The company made waves late last year by announcing that it's willing to buy back stock when it's trading at a multiple of 1.2 or lower -- a number that, in my opinion, Buffett is suggesting is not the "right" price for Berkshire, but rather a "can't miss" price.
How high could Berkshire's stock trade? Assuming, of course, that the underlying business is performing -- and we'll get another data point on that when it announces fourth-quarter earnings -- I don't think it's unreasonable to think it could get back to a 1.5-times-book multiple. That would allow for significant upside over and above the growth in book value that Berkshire is able to notch in the meantime.
Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.