Time to Own Berkshire Hathaway Inc. Stock (BRK.B)

Advertisement

Back in August, when Berkshire Hathaway Inc. (BRK.B) was trading above $140, it was fairly priced.

Time to Own Berkshire Hathaway Inc. Stock (BRK.B)

Now, almost six months later and 13% lower, things look different for Berkshire Hathaway stock — a lot different. Because now it is no longer just fairly priced; it’s cheap. And as you might have guessed, this means it’s time to dip your toes and gradually increase exposure to the stock.

Berkshire Hathaway Stock vs the S&P 500

In many ways, BRK.B Stock is a mirror of the U.S. economy. The time when Berkshire Hathaway was an insurance conglomerate is not too far in the past. In fact, much of Berkshire Hathaway’s revenues still come from its insurance subsidies.

However, that’s just one part of the huge Berkshire Hathaway umbrella, which includes companies from far flung sectors.

Berkshire Hathaway stock has a very impressive lineup of wholly or partly owned companies which exist under that huge umbrella. They include BNSF Railroad (the second-largest railway company in America), Kraft Heinz Co (KHC), Philips 66 (PSX), The Coca-Cola Co (KO), Wells Fargo & Co (WFC), International Business Machines Corp. (IBM) and many, many more.

Essentially, Berkshire Hathaway is a massive cash engine. It uses that cash engine to constantly invest in the largest U.S. companies, which means that owning BRK.B stock is like owning a piece of the American economy.

For that matter, it’s a lot like the S&P 500, only better. Companies are more carefully selected and there is a clear emphasis on value rather than size. This, of course, explains why Berkshire Hathaway stock has outperformed the S&P 500 for more than 20 years.

Naturally, the prudent investor might expect BRK.B stock to be priced in terms of premiums, i.e. a price-to-earnings ratio at least as high as the S&P 500. But that is not the case. In fact, as the chart below reveals, BRK.B stock, in terms of P/E, is trading at a discount to the S&P 500. The S&P 500’s estimated P/E ratio is at 19X, as compared to 14X of BRK.B stock.

This means that, once again, investors have returned from fairly valuating BRK.B stock to discounting it. Why? Because they deem it “boring” which, as you may have surmised, is a good signal to start owning BRK.B stock.

BRK.B Stock: Buy It With Prudence

Berkshire Hathaway Stock
Click to Enlarge
Source: Morningstar

Now, one might think that because Berkshire Hathaway stock is selling at a discount means you should grab it as quickly as you can.

Don’t!

While the stock is at a discount, there is one more important thing to consider, and that is earnings. As I previously mentioned, buying Berkshire Hathaway stock is like buying a piece of the economy. With the latest data showing softening momentum in both the global and U.S. economies, there is a chance that BRK.B earnings could miss.

So what can one do to acquire Berkshire Hathaway stock at an attractive price? It’s the method advocated by none other than the Oracle of Omaha himself, Warren Buffett. Buy BRK.B stock using dollar averaging and leave some firepower till after the earnings are released. That way, if the weak economy weighs on BRK.B earnings, you can buy it even cheaper later and improve your returns when the economy heats back up.

The Bottom Line

The fact that Berkshire Hathaway is managed by Warren Buffett doesn’t necessarily justify a premium, but neither does it make sense to discount it. Historically, Berkshire Hathaway Stock pricing has always caught up with the S&P 500.

In this writer’s opinion, there is no reason why that shouldn’t happen again this time around.

As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/time-berkshire-hathaway-stock/.

©2024 InvestorPlace Media, LLC