The case against Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) stock at the moment is reasonably simple to make. Yes, Warren Buffett and Charlie Munger have added billions of dollars in value to Berkshire Hathaway stock. But their ability to find an edge in an increasingly difficult — and expensive — market is fading. BRK.B stock basically has tracked the market for the last 10 years and actually has slightly underperformed in the process.
In other words, Berkshire Hathaway stock looks an awful lot like a mutual fund, at least considering the returns for the past decade. And skeptics would argue that’s because Berkshire Hathaway, for a number of reasons, no longer has an edge.
That is a real fear; both Buffett and Munger likely would admit that their stock-picking edge has diminished over time. But stock-picking isn’t the only thing that has made Berkshire Hathaway one of the world’s most valuable companies and BRK.A and BRK.B stock such wonderful performers. The company has a valuable edge elsewhere, as proven in a recent deal.
Is BRK.B Stock Really Just a Mutual Fund?
There are reasons why it’s simply tougher for Berkshire Hathaway to beat the market with its equity portfolio. The first issue, as Buffett himself has noted many times, is that Berkshire simply has too much capital. In the most recent shareholder letter, Buffett wrote of looking for an “elephant-sized acquisition.” But multiples in this market — and the premium required in an acquisition — make such a reasonable deal tough to find.
Without a deal, the need to invest as much as $100 billion limits Berkshire’s investable universe significantly. There are only a few dozen companies in which Berkshire Hathaway could take a 5% or 10% stake, as it did decades ago with Coca-Cola (NYSE:KO) and American Express (NYSE:AXP).
The second concern is that the Buffett model may not work in a changing economy. Berkshire Hathaway has been slow to invest in tech, with its sizeable position in Apple (NASDAQ:AAPL) possibly a case of getting in too late, as my InvestorPlace colleague Bret Kenwell pointed out earlier this year.
Meanwhile, the portfolio has heavy investments in areas where the market is suggesting real caution. Coke stock has underperformed, a possible symptom of underlying concerns in the consumer products space. Kraft Heinz (NASDAQ:KHC) has been a disaster. Berkshire is huge into bank stocks, to which the market assigns low multiples, fearing a near-term cyclical peak. The same is true of the surprising move into the airline industry.
All told, the edge in stock-picking here doesn’t seem to be what it once was — looking either at recent years or forward. And so some investors might believe Berkshire Hathaway stock only will match the market, at best.
The Edge for Berkshire Hathaway Stock
That may turn out to be the case. But what makes BRK.B stock particularly interesting is that if the equity portfolio does match the market, that’s more than good enough.
After all, Berkshire still has its portfolio of wholly owned businesses. And it has an edge there: it can value those businesses better than anyone else. If it sees the market underpricing those assets, it can buy back Berkshire Hathaway stock, as Buffett noted in the most recent letter. That creates more value for existing BRK.A and BRK.B shareholders.
But the biggest edge is the company’s ability to finance other big deals. That edge was highlighted by the recent deal to fund the takeover of Anadarko Petroleum (NYSE:APC) by Occidental Petroleum (NYSE:OXY). Berkshire Hathaway is acquiring $10 billion in 8% preferred stock.
It’s a great deal for Berkshire Hathaway — to the point that Occidental shareholders complained about the 8% coupon at their annual meeting. Why would Anadarko raise capital at 8% when it likely could have booked a 6% interest rate in the bond markets?
The answer, per the CEO of Occidental, is that timing was critical. And that’s the edge here. Occidental’s CEO flew into Omaha on Friday and had $10 billion on Monday. No one else in the country can offer that combination of speed and capital. It’s not the first time Berkshire Hathaway has done such a deal, either.
During the financial crisis, it funded both Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS). It made billions off preferred stock and warrants of both companies. In 2008, Buffett executed a deal with General Electric (NYSE:GE) so favorable that Berkshire made more than 50% on its investment even though GE stock wouldn’t bottom until 2009 and started falling again in recent years.
Berkshire Hathaway Stock Going Forward
That ability to raise capital will be an asset for Berkshire Hathaway even after Buffett and Munger have moved on. The float provided by the insurance operations and the “seal of approval” that comes from a Berkshire investment can’t be valued — but they’re real assets.
And they provide an edge for Berkshire stock going forward, even at its enormous current size. Investors are wondering if that edge is enough to offset the very real concerns about how the company can successfully invest its growing coffers. From here, the answer is that it probably will … and that BRK.B stock is a better choice than a standard index or mutual fund.
For some investors, that’s enough. For those who believe they can find their own edge in undercovered, undervalued, or underappreciated stocks, it’s probably not. Berkshire Hathaway stock, thanks to its capital and reputation, probably can continue to beat the markets over time. But like so many things, it’s not going to be quite what it used to be.
As of this writing, Vince Martin has no positions in any securities mentioned.