The last time the U.S. went through a major crisis, Warren Buffett’s holding company, Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B), made a huge profit. Many people believe that history often repeats itself. I think that could be happening in this case, with Berkshire potentially buying extremely cheap stock now and making huge profits later. Moves like this are what Berkshire Hathaway stock worth owning.
Further, Berkshire owns a large auto insurance company, GEICO, and that seems like a great business to be in at this time, Given these points, I recommend buying Berkshire Hathaway stock now.
During America’s financial crisis and its aftermath, Warren Buffett rescued a number of companies by essentially lending them money through purchases of their preferred stock or via bonds.
Among the beneficiaries of Buffett’s generosity from 2008-2011 were Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), and Dow Chemical. According to The Week, Berkshire made a cool $10 billion from its deals during those years. That’s a significant amount of money, even for Berkshire.
The Recent Slump
Things are very different this time around, as the vast majority of big companies aren’t close to being insolvent. Moreover, Berkshire actually recently sold a (relatively) small amount of its shares in two major airlines, signaling that it has little interest in helping travel-oriented companies that are having serious problems.
But I have little doubt that Berkshire has been buying a lot of very cheap stocks during the crisis, and I’m sure that those purchases will greatly raise the value of the firm’s portfolio within a year or two. And before the crisis is over, Berkshire could still find a troubled company or two to bail out with a deal that will ultimately be very profitable for Warren Buffett’s conglomerate.
It seems like a good time to be an auto insurer. The vast majority of the tens of millions of people working from home, plus all of the workers in essential industries, are likely still paying their auto insurance premiums. Even many of the workers who have been laid off and are receiving higher than usual unemployment payments are likely continuing to pay their premiums.
But of course, the number of miles driven has dropped tremendously. As a result, I’m sure the number of car accident claims has also plummeted, greatly reducing one of the insurers’ biggest expenses. GEICO, a large auto insurer owned by Berkshire, is reducing its premiums for cars and motorcycles by 15%, but I think that’s probably a drop in the bucket compared to what it’s saving.
In 2019, GEICO’s underwriting profit came in at $1.5 billion. From 2016 to 2019, Berkshire’s average operating income was about $47.5 billion If GEICO’s profit doubles this year, the increase would amount to over 3% of that $47.5 billion. That’s not very significant, but it would be a bit of a boost for Berkshire.
The Bottom Line on Berkshire Hathaway Stock
From December 2008 to September 2014, Berkshire stock surged about 180%. Although the shares are unlikely to perform that well in the coming years, they should get a meaningful boost from the deals that the company will make during the current crisis.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not hold a position in any of the aforementioned securities.