We seem to be witnessing some classic bottoming action. Stocks have behaved during the past three sessions. Prices stabilized, then lifted off nicely Tuesday, with the Dow Jones Industrial Average tacking on 123 points, and the S&P 500 and Nasdaq posting even bigger percentage gains.
Now we should see a fairly vigorous rally over the next week or two, taking the S&P back up to resistance in the 1,315 to 1,330 zone. After that, I expect that the market will head back to test — and probably break, by a marginal amount — Monday’s index lows. The final bottom, if the script holds, will likely come sometime during July. Then the blastoff, possibly to new highs for the year before Q3 is out!
Why do I bother making these “road maps”? Because I want you to realize we’re still in a primary bull market for stocks and there’s money to be made.
From decades of experience, I know that many investors – professionals, as well as individuals — get cold feet at the first sign of falling share prices. When they ought to be buying, these folks step back or, worse, join the crowd and sell.
That’s no way to make a fortune in the market. In fact, that’s the way to lose a fortune. And, more than anything else, I want to help you avoid the kind of psychological “faults” that can ruin your long-term financial security.
So please, turn off Jim Cramer (the sound, anyway) for a couple of weeks. Delete the spammy come-ons in your email box. Focus on the fundamentals and do some serious buying.
One name that intrigues me right now is Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B). Berkshire stock touched a new 52-week low Monday, apparently on concern that this year’s unusual string of catastrophes (earthquakes, floods, tornados) will hurt the company’s insurance profits.
I agree that BRK’s insurance units will have to shell out big bucks in connection with these events. However, there’s no doubt in my mind that Berkshire possesses more than ample resources to meet all claims.
What’s more, BRK is much more than an insurance company. As the Lubrizol acquisition reminds us, Berkshire is also an industrial conglomerate with broad exposure to economic growth.
How much is Berkshire worth? At the end of last year, Berkshire’s investment portfolio was valued at approximately $63 per Class B share. The company’s operating businesses chalked up pre-tax earnings of about $4.80 per share.
Taking a 30% tax haircut to the operating profits, we come up with $3.36 per share in net earnings. At a modest P/E of 14, the operating side of the business should fetch about $47.
Combine $47 with the value of the investments ($63), and you get a total intrinsic value of $110. At Tuesday’s close, the stock changed hands for $75.11. So I figure we’ve got about 46% upside to “fair value.”
Frankly, I don’t expect Berkshire stock to appreciate all the way to fair value immediately, or even in the next year. But I think a 15%-20% gain within 12 months is certainly plausible. And remember, if Buffett keeps doing his job well, the intrinsic value of the company will grow over time.
