For about 50 years, Berkshire Hathaway (NYSE:BRK.A, BRK.B), the company of highly esteemed investor Warren Buffett, was one of the best buys on Wall Street. From 1964 to 2014, Berkshire Hathaway stock rose more than 1,800,000%, versus a relatively pedestrian 2,300% gain for the S&P 500. As a result, in the 20th century, those who held Berkshire stock for many years made out like bandits compared to the average stock-market investor.
But things have changed.
Over the past five years, BRK stock has underperformed the S&P 500 by nearly ten percentage points. Further, Berkshire’s underperformance has become even more dramatic over the past year. During that period, the S&P 500 has climbed more than 22%, while Berkshire Hathaway stock is up just 10%.
Berkshire’s core businesses are rather unexciting. Those businesses’ lack of growth has stymied the stock. At the same time, Buffett’s value-investing style is out of sync with today’s market, which, during this period of low interest rates, rewards growth at all costs. Investors are also concerned that Berkshire’s management isn’t making great decisions.
As a result of all these issues, Berkshire’s shares have gone from a big-time winner to an underperformer.
But signs are starting to emerge that this underperformance won’t last. That is, it increasingly looks like this sleeper of a stock will wake up in a big way in 2020, and that it is poised for a few years of significant outperformance.
Boring And Stable
For the past five-plus years, Berkshire Hathaway has been a boring, unexciting conglomerate whose lack of growth has led to a sluggish performance by its stock.
But the same things which make Berkshire Hathaway boring and unexciting also make it stable and defensive. Importantly, more than ten years into a bull market, as geopolitical and valuation risks rise, investors may start to place more value in Berkshire’s core stable and defensive characteristics.
Berkshire has four major businesses. There’s Burlington Northern, a $100 billion-plus railroad giant which is an integral part of the freight transportation network of North America. Berkshire also has a large energy business, Berkshire Hathaway Energy, and owns a large insurance company, Geico. Both of those businesses are supported by enduring, stable demand. There’s also Precision Castparts, an aircraft parts business. Its results are partially correlated to economic strength, but long-term demand for its products is stable.
The profits of all four of these businesses should remain relatively stable for the foreseeable future, assuming the economy remains largely healthy. Meanwhile, profits from the company’s stocks — which are mostly stable, blue-chip names like Apple (NASDAQ:AAPL), Bank of America (NYSE:WFC), Coca-Cola (NYSE:KO), and American Express (NYSE:AXP) — should remain stable, too.
Thus, while Berkshire stock is boring and unexciting, it’s also stable and defensive. Those two attributes may become increasingly attractive to investors if stock-market valuations keep rising in 2020.
Growth Will Return
The company’s stable and defensive attributes alone won’t push Berkshire stock meaningfully higher in 2020. But a slight acceleration of Berkshire’s profit growth could do the trick.
There are four reasons why Berkshire’s sluggish profit growth could perk up over the next few quarters and years.
First, Berkshire appears to be in the early stages of boosting the profit margins of its insurance and railroad businesses. Specifically, activist investor Bill Ackman noted last year that the profit margins of both Burlington Northern and Geico are lower than those of their peers. Shortly thereafter, rumors percolated that Burlington Northern could introduce a new, more efficient system called “precision scheduling railroading” sometime in the future. Meanwhile, Buffett has put his most trusted investment manager, Todd Combs, in charge of Geico.
Second, Berkshire has had great success investing in Apple. Consequently, the firm may buy more technology stocks in 2020. That would be a good thing, since tech stocks should keep outperforming in today’s solid-growth, low-interest-rate environment.
Third, Berkshire could finally make its “elephant” acquisition which many have anticipated for the past several years. With $128 billion in cash, Berkshire has enough resources to acquire multiple, huge companies. But Buffett has held off on doing so for various reasons. Rising shareholder pressure — plus sluggish stock price returns — could force Buffett to make a big-time acquisition in 2020.
Fourth, rising shareholder pressure could also result in more aggressive capital allocation in coming years. That is, today’s slow-as-molasses stock buyback program could get some more juice, while the company may finally introduce a dividend. Both of those catalysts will provide the stock with upward momentum.
The Bottom Line on Berkshire Hathaway Stock
For the past several years, Berkshire stock has been a sleeper that’s lacked profit growth.
But over the next few years, the company’s growth could accelerate for various reasons. If it does, the relatively undervalued Berkshire stock will kick back into gear and return to its traditional, market-beating ways.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
