When it comes to investment opportunities, Berkshire Hathaway (BRK.A, BRK.B) occupies a very exclusive club. On Dec. 17 of last year, Berkshire’s Class A shares closed at an unreal record high of $229,300. Long sitting on the throne as the most expensive stock in the U.S. markets, renowned chief executive officer Warren Buffett has never split the A-shares, instead choosing to create a BRK.B stock class.
It’s no wonder that the dominant success of Berkshire — which includes diverse names such as Geico Auto Insurance, Heinz, and RC Willey Home Furnishings — has attracted millions of investors seeking a well-rounded portfolio under a single umbrella.
Furthermore, Buffett has an unusual but highly effective policy of letting well-run companies operate as-is without unnecessary interference.
But does all this actually translate to Berkshire earnings success and positive returns for BRK.B stock? The picture is somewhat mixed and a bit surprising given the company’s consistently strong fundamentals.
Berkshire Earnings History
Over the past 13 Berkshire earnings reports, there were eight hits and five misses against Wall Street forecasts. However, of the times when Berkshire earnings exceeded its target, BRK.B stock has moved up an average of nearly 3% two weeks after the release date. On the other hand, the five misses have resulted in an average loss of 1.52% over the same time frame.
While investors may be tempted to believe in the allegedly consistent relationship between Berkshire earnings and the trajectory of BRK.B stock, this is a relatively recent phenomenon. For example, Berkshire earnings for Q4 FY2010 outperformed on both revenue and net income targets, yet half a month after the results were released, BRK.B stock was down a steep 3.52%.
The wild twists and turns over the past 15 years has made predicting BRK.B stock’s profitability potential a virtual coin toss. Of the 57 earnings reports disclosed since May 12, 2000, 28 have resulted in BRK.B stock moving higher in two weeks time, averaging gains of 2.83%, while 29 led to the opposite direction, with average losses totaling 3.27%. Both on a probability and returns scale, the bears have an ever-slight advantage.
What explains this counterintuitive series of statistics? It’s clear from the data that the global economic crisis of 2008 was a game changer for BRK.B stock. About half a month after the release of Q3 FY2008 financial results, BRK.B stock found itself down an unprecedented 21%. The immense magnitude of this singular disaster has mathematically wreaked havoc on long-term statistical averages.
But setting aside this dark-horse event extracts further insights. Of the 34 Berkshire earnings reports between Q1 FY2000 and Q2 FY2008, 19 have led to quick profits averaging 3% two weeks after the release date. This eight-year period had a definite bullish slant, buoyed by overall strength in the domestic stock markets.
On the other side of the fence, the 22 Berkshire earnings reports between Q4 FY2008 and Q1 FY2015 have been irrefutably bearish from a short-term trader’s perspective. Only 9 reports, or 41%, have resulted in BRK.B stock moving in a positive direction in the markets two weeks later. The average gains for the bulls is also down from the pre-2008 crisis period — 2.54% versus the aforementioned 3%.
Bottom Line for BRK.B Stock
With the imminent release of the Q2 FY2015 Berkshire earnings report, here are three main takeaways from the above analysis:
- Near the release of financial reports, BRK.B stock tends to move in waves of overall bullishness or bearishness.
- Despite these sentiment waves, BRK.B stock is relatively close to equilibrium between bulls and bears. Thus, the 62% “success rate” for the bulls over the past 13 earnings reports is probably due for a correction based on prior statistical trends.
- Average short-term profitability was notably higher for BRK.B stock traders prior to the 2008 crisis than it has been after it.
In spite of its status as a financial stalwart, Berkshire Hathaway isn’t necessarily a sure-fire trading opportunity. However, by understanding the nuances of BRK.B stock, a trader stands a better chance of success.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
