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2013 Retirement Portfolio Candidates: Berkshire Hathaway

Buffett's investment chariot might be as much as 25% undervalued


Every year, I consider new candidates for my own trading portfolio. I might add new names, add to existing names or pare down what I have. This year, however, I’m rejiggering my retirement portfolio. So, each week I’m going to examine a security that I’ll consider adding to this long-term diversified portfolio.

This week: Berkshire Hathaway (NYSE:BRK.A, BRK.B).

Ever since Warren Buffett made B shares available, the general investing public has been able to climb aboard his holding company. The central tenet of Buffett’s investment style has never really changed: He finds good businesses, buys them at the right price and lets management continue to do the same things that made them so successful in the first place.

What investors get with this approach (that they cannot get anywhere else) is not only consistency of style over decades, but an opportunity to own the best pieces of the American economy, purchased by someone who has a good track record of spotting value. In some cases, it also allows investors to get pieces of a business that was private before being brought into the Berkshire portfolio.

In essence, it’s a mutual fund without the operating expenses.

There also is diversification in Buffett’s holdings. The Wikipedia list of current holdings is pretty extraordinary, and I urge you to spend a lot of time examining these assets. It really is a list that represents all of America. Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG) …

You’ll also note there isn’t much in the way of luxury brands. This is solid middle-class stuff — bricks, furniture, candy, Fetzer wine. Buffett really is buying America. This diversification also provides enormous insulation against economic challenges such as America is facing now, and can offset losses in the insurance segment in the event of a natural disaster.

I haven’t been crazy about some of his recent purchases. His buyout of Media General (NYSE:MEG) shows he still seems to love newspapers, which I believe are a sunset industry, as circulation and advertising are declining rapidly. I think his recent purchase in the solar world — of two SunPower (NASDAQ:SPWR) contracts — was totally foolish, and probably had more to do with backdoor Washington dealings than actual value.

But as I said, the company is too widely diversified to let a couple of bad mistakes affect it too much.

Overall, you’re looking at one of the great American success stories. The company’s financial stability is unrivaled. Buffett has some $47 billion in cash and $156 billion in long-term investments, offset by $62 billion in debt that he pays about 3.4% interest on. The company generates around $12 billion in annual free cash flow. Earnings in the non-insurance businesses have risen 130% since 2004, while insurance-side profits — which prospered in the middle of the last decade — are back at 2004 levels now.

It’s difficult to value Berkshire, though Whitney Tilson did a pretty good job of it last year. He determined that Berkshire’s intrinsic value (based on A shares) was around $180,000, and A shares presently trade at $146,000 — the deepest discount in decades. After adding in organic growth and cash build, he thinks the intrinsic value is closer to $201,000.

Buffett instituted a share buyback — a rare event for him — indicating that he also thinks Berkshire is undervalued.

After examining Berkshire pretty closely the past few weeks, I committed capital in my retirement portfolio for the B-class shares.

I love value stocks, and this is the ultimate value stock.

Previous Candidates

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As of this writing, Lawrence Meyers was long BRK.B. He is president of PDL Capital, Inc., which  brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at and follow his tweets @ichabodscranium.

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