For quite some time, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) has been a notable underperformer. Last year, shares rose by 11% but the S&P 500 jumped 31.5%. This represented one of the worst relative performances in the long history of Berkshire Hathaway stock.
And of course, things have only gotten worse this year. The company’s legendary CEO, Warren Buffett, talked about this in an interview with Yahoo! Finance: “If you stick around long enough, you’ll see everything in markets. And it may have taken me to 89 years of age to throw this one into the experience, but the markets, if you have to be open second by second, they react to news in a big time way.”
He also said that the markets have suffered “a one-two punch.” Essentially, we’ve been hit by two black swans. One is the coronavirus pandemic and then there is the implosion of the crude market.
The problem is that the portfolio of Berkshire Hathaway has significant exposure to both areas. The firm’s bank stocks – like JPMorgan (NYSE:JPM) and Bank of America (NYSE:BAC) – have plunged because of the drop in interest rates, which will squeeze the net interest margin. Buffett has also been a heavy buyer of airline stocks, such as United Airlines (NASDAQ:UAL) and American Airlines Group (NASDAQ:AAL), which have also suffered dramatic losses.
Oh, and he has also been a big buyer of energy stocks. Just look at his mega deal for Occidental Petroleum (NYSE:OXY), whose shares have been in free fall.
Yes, this shows that even the world’s best investors can make very bad calls. And for the most part, Buffett has been doing this quite a bit lately. While he likes to point out that his focus is on the long-term, the problem is that even during such periods, his performance has been off the mark.
Consider this: for the past 15 years, the average rate of return on Berkshire Hathaway stock is a mere 8.44%.
And while there have been some nice winners – especially the position in Apple (NASDAQ:AAPL) – there have not been enough to make a difference.
The Positives
Berkshire Hathaway still has a rock-solid balance sheet. What’s more, Buffett has been disciplined with taking on debt and the cash balance is a hefty $128 billion.
The company also owns a wide assortment of fairly stable businesses. For example, there is the massive Burlington Northern operation along with other brands like Duracell, See’s Candies and Dairy Queen. Although, the insurance business – which is led by Geico – is the crown jewel. The fact is that Buffett has proven to be a master of this industry, with an uncanny knack to allocate capital and deal with the complicated risks.
But this brings up another nagging issue with Berkshire Hathaway stock: Buffett’s age. He’s 89 right now. And his partner, Charlie Munger, is 94.
It is also far from clear what the succession plan is. So, when Buffett is no longer at the helm, there will likely be disruption and much more uncertainty.
Bottom Line on Berkshire Hathaway Stock
Last year, Buffett bought back about $5 billion in Berkshire Hathaway stock. However, given the market capitalization of $442 billion, this was really a paltry amount. But with the stock price getting cheaper, Buffett may be more inclined for more buybacks.
But this will probably not be enough. Again, the company has heavy positions in categories that will likely take a while to recover. And the other wholly owned businesses are mostly mature and do not provide much growth. So for now, there is little reason to get bullish on Berkshire Hathaway stock.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
