Berkshire Hathaway Stock Has Underperformed Longer Than You Think

Everybody loves Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) mainly because they love and respect Warren Buffett, its Chairman and CEO. But here are the cold hard facts. Berkshire Hathaway stock has significantly underperformed the market average for a long time, up to the past 10 years.

A Berkshire Hathaway (BRK.A, BRK.B) sign sits out front of an office in Lafayette, Indiana.
Source: Jonathan Weiss / Shutterstock.com

Moreover, given this underperformance, it may be time for the company to reward shareholders in some other ways. It could begin paying a regular dividend or at least give shareholders value through spin-offs or carve-outs.

Alternatively, the company could pay out special dividends from the proceeds of asset sales of some of its deadwood assets.

However, I am a realist. The prospects of this happening, at least as long as Warren Buffett is in charge of the company is virtually nil.

He is set in his thinking about not doing this. Nevertheless, I want to explain it a bit, so that at least shareholders can consider it.

Berkshire Hathaway Stock Underperforms

10-9-20 - Berkshire Hathaway stock performance - BRK.A vs SPY
Source: Mark R. Hake, CFA

Let’s compare the stock to a market alternative to most investors, the SPDR S&P 500 ETF (NYSEARCA:SPY). You can see these performance numbers in the chart below. BRK.A is yellow and SPY is green.

BRK.B stock is down nearly 5% for the year-to-date. However, SPY stock is up nearly 8%. That means the market average ETF has done significantly better than Berkshire Hathaway stock.

Moreover, in the past year, BRK.B stock is up just 4.35%, but SPY stock is up 19.08%. That means the market ETF has done over four times better than Berkshire Hathaway stock.

In fact, in the last 5 years, BRK.B is up 62.13%, but SPY is up 72.28%. That means that over the past 5 years, the market ETF stock has done 16.4% better than Berkshire Hathaway stock.

Finally, in the last 10 years, BRK.B stock is up 159.36%, but SPY stock is up 197.63%. That means that over the past 10 years, the market ETF has done 24% better than Berkshire Hathaway stock.

I took these numbers from Seeking Alpha‘s charts on both stock’s performance for those periods.

Berkshire Hathaway Looks Fully Valued

Maybe you think that Berkshire Hathaway stock will rebound and catch up with SPY. That is possible but the problem is that Berkshire Hathaway stock is already trading at over 1.11 times its tangible book value.

By comparison, many insurance stocks are trading well below their tangible book value

That includes the value of its marketable securities portfolio which is marked-to-market. It also leaves a little room for various assets it holds to be revalued upward on an economic basis.

Moreover, according to analysts polled by Seeking Alpha is 40 times this year’s earnings and 18 times next year’s forecast earnings per share. Yahoo! Finance‘s poll of analysts suggest it is trading at 19.8 times next year’s earnings.

Again, most insurance companies are trading well below these valuation levels. In other words, the market has already granted the stock a premium valuation. But it has still lagged the market.

Moreover, TipRanks.com says that the average price target for analysts covering the stock is just $220 per share for BRK.B. That represents a potential gain of just 2% for Berkshire Hathaway stock. Not much under anybody’s standards.

In other words, the stock is fully valued here.

What to Do With Berkshire Hathaway Stock

I recently wrote an article about one of Berkshire Hathaway’s large stock investments, Coca-Cola (NYSE:KO). This stock has seriously underperformed the market as well.

For example, in the last year, the Coca-Cola stock has fallen more than 7%. Moreover, in the past five years, the stock has risen just 22% while the Dow Jones Industrial Average rose 66% in the same period.

In other words, some of Berkshire Hathaway’s investment portfolio selection needs updating. The same may be true with its private holdings. For example, if the company were to “carve-out” a portion of these investments in public listings, while still keeping control, Berkshire Hathaway stock might rise a good deal.

Nevertheless, I know that Warren Buffett would never even consider such a move. He has made it clear over the years that he has a total aversion to ever paying a dividend or considering a carve-out or spin-off of any investments he has made as CEO.

Perhaps when he is no longer the Chairman and CEO, the company’s board might consider addressing the stock’s serious underperformance.

In the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.


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