This weekend, Berkshire Hathaway (NYSE:BRK.B, NYSE:BRK.A) will announce its latest quarterly report and the profits are expected to be huge. According to Barclays (NYSE:BCS) Jay Gelb, the earnings are forecasted to hit $18.8 billion, compared to $4.1 billion in the same period a year. This would actually be the highest profit for any company in history. So might this perk up BRK.B stock, which has been kind of lackluster this year?
Well, not necessarily. Consider that the earnings will have much to do with non-cash accounting changes. Besides, Berkshire Hathaway is fairly stable, so there is usually not much volatility when it comes to earnings.
OK then, so what are some of the other areas to focus on for the quarter? Let’s take look:
When it comes to BRK.B stock, the critical piece is the insurance business (the firm is the No. 2 player in the property and casualty industry, in terms of premiums), and there is mostly good news on this front. True, the quarter saw the massive Hurricane Florence. But in terms of the exposure to insurance, it was manageable.
According to the analysis from AIR Worldwide, the costs are projected to range from $1.7 billion to $4.6 billion. Keep in mind that a large portion of the population in the impacted areas did not have flood coverage. There was also not as much damage from wind.
If anything, the most important tailwind for the insurance business is the rise in interest rates. Note that Berkshire racks up substantial premiums, which are a source of stable income. It also helps that the company has been increasing premiums.
BRK.B Stock and the Fintech Revolution
In this year’s shareholder letter, Warren Buffet noted: “Payments are a huge deal worldwide.”
So given this, it should be no surprise that he is making some notable investments in the fintech category. For the past few months, they have come to about $600 million — going into Paytm, a mobile payments service based in India, and StoneCo (NASDAQ:STNE), which is a Brazilian payments processor.
Granted, for Buffett, these are relatively small deals (his cash position is about $111 billion). But the investments are definitely a change in strategy as he generally focuses on much larger companies. Yet if he wants to grow Berkshire Hathaway, which is not easy because of its scale, there needs to be more aggressive bets on emerging categories.
Still, it has been a mixed bag for Berkshire Hathaway stock and its portfolio … this has been the case with many investors this year.
Look at Apple (NASDAQ:AAPL), which is the biggest holding. Unfortunately, the company had an uninspiring quarter, with the shares off 6% early trading. Although, it’s important to keep in mind that AAPL stock is still up about 30% for the year.
But other holdings have not been as strong. Wells Fargo (NYSE:WFC) is off 10% for the year and Bank of America (NYSE:BAC) is down nearly 5%. Even with rising interest rates, the banking sector has been in a funk.
And yes, Berkshire Hathaway has considerable exposure to consumer staples stocks as well. While they have historically been quite stable, the sector has recently come under pressure because of changes in consumer tastes and inflation. One of Berkshire Hathaway’s biggest holdings, Kraft Heinz (NASDAQ:KHC), is down about 25% for the year.
But despite all this, Berkshire Hathaway portfolio’s may be undervalued. This is the position of JPMorgan’s (NYSE:JPM) Sarah DeWitt. When accounting for undistributed earnings, the multiple on BRK.B stock is really at 13.6. To put this into perspective, the historical multiple is at about 17X and this is why she has a $250 price target on the stock, which assumes about 22% upside from current levels.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.