At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Time to buy Buffett?
When the Wall Street wizards at Stifel Nicolaus announced last July that they were "selling Buffett," slapping a "sell" rating on his Berkshire Hathaway
But as it turns out, Stifel was sort of right. Berkshire's class A stock has gained about 10% since Stifel said to sell it -- but the S&P 500 has risen 20% in the same period. If you'd taken Stifel's advice, sold Berkshire last summer, and put the proceeds in a plain-vanilla S&P 500 ETF
Take a bow, throw in the towel
That's why it's so interesting to hear that Stifel has now changed its mind. Buoyed by Buffett's bullish tone in the annual shareholder letter Berkshire issued over the weekend, Stifel announced Monday that it's declaring victory, cashing in its chips, and revoking its "sell" rating on Berkshire stock. While it's not yet convinced that Berkshire is a buy, Stifel doesn't believe that Berkshire's large stakes in Home Depot
To the contrary, Stifel argues that amid the economic recovery," Berkshire's equity holdings could help the parent company's shares going forward. Since most of these stocks have underperformed Berkshire since June, their reversion to the mean would indeed boost Berkshire's fortunes. Meanwhile, Stifel predicts that "recovery-driven earnings growth" among Berkshire's own businesses "should offset declining underwriting results and lower reinvestment yields as borrowers repay crisis-era debts."
In short, the stock has underperformed the market as predicted -- but things are bound to get better for Berkshire, Stifel says.
Right now, Berkshire Hathaway's $13 billion in net earnings give the stock a P/E ratio of 16.6. That price looks a bit optimistic in light of Wall Street projections that Berkshire will only be able to grow its earnings at about 5% per year over the next five years.
I know that Buffett's latest letter told you to ignore his company's net income, and focus instead on operating results and growth in book value. Still, with all due respect to the Oracle, whenever a CEO of a company tells me to "pay no attention" to a certain number behind the curtain, I get an itch to do the opposite.
Indeed, over the past five years, Berkshire's operating earnings have compounded at an annual rate of 11.7%, while tangible book value's grown at only 9.8%. While these rates surpass the pace of Berkshire's projected earnings growth, they also seem insufficient to justify its share price.
What's more, the number I prefer to focus on when valuing a company -- free cash flow -- reveals that Berkshire's even more expensive than its GAAP earnings would suggest. With $11.9 billion generated over the last 12 months -- 8% below reported earnings -- Berkshire currently trades for 18.2 times the amount of cash it generates in a year. Add in the company's $20 billion in net debt, and Berkshire only looks more expensive.
Daring to question the wisdom of investing with the Oracle of Omaha is rarely a popular opinion. Here at the Fool, two of our newsletters have publicly recommended buying Berkshire. I gave props to Stifel for braving the critics last summer, and I don't fault them for quitting while they're ahead this week.
But from where I sit, the situation hasn't changed: Berkshire Hathaway's growth is slowing, and its CEO is retrenching. Meanwhile, the stock price continues to reflect increasingly unwarranted optimism about the company. Berkshire may be the "hold" that Stifel now says it is, or the "sell" I think it still is. Either way, it's not a stock you should buy -- at least, not at this price.
Berkshire Hathaway, Home Depot, and Johnson & Johnson are Motley Fool Inside Value recommendations. Berkshire Hathaway is a Motley Fool Stock Advisor pick. Johnson & Johnson is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Bank of America, Berkshire Hathaway, Johnson & Johnson, and Wells Fargo. Motley Fool Alpha owns shares of Johnson & Johnson.
Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 593 out of more than 170,000 members. 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.