This might be the crisis Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) chairman Warren Buffett was waiting for. Investors looking for an easy way to play decimated sectors might see Berkshire Hathaway stock as a steal amid the coronavirus selloff. After all, no one in the world is better-positioned to buy the dip than the Oracle of Omaha.
Berkshire closed 2019 with a stunning $128 billion in cash and the company is looking to make a big splash. Buffett wrote in last year’s shareholder letter that he was looking for an “elephant-sized acquisition,” and the market is perfectly suited to his needs right now.
Previously, high valuations in the market, at least from the perspective of Buffett and partner Charlie Munger, made such an acquisition infeasible. With the S&P 500 now down 22% so far in 2020, Buffett may find his elephant at the price he wants. But that doesn’t mean Berkshire Hathaway stock is a buy in this falling market.
Berkshire Is a Laggard
One core worry with BRK.A stock at the moment is that Berkshire long has underperformed in this bull market. Berkshire Hathaway is doing a bit better than the market so far in 2020, but down 18%, its shareholders haven’t exactly found solace in BRK.A.
During the bull market, however, Berkshire Hathaway stock simply didn’t keep pace. Over the past decade, BRK.A has modestly topped the S&P 500. But add in dividends, and investors would have gained 170% in the index and just 121% in Berkshire’s stock.
To be fair, Berkshire’s wholly-owned operations do suggest its stock probably should underperform in a roaring market. Most notably, the company has enormous insurance businesses — among them auto insurer Geico — that don’t benefit from economic strength to the same extent as other companies.
But there are also a fair share of heavily cyclical businesses under Berkshire’s ownership. Railroad Burlington Northern Santa Fe depends on demand for goods (and, more recently, oil). The outlook for a specialty chemicals play like Lubrizol is uncertain — peers like Dow (NYSE:DOW) and LyondellBasell (NYSE:LYB) have plunged in this market. Precision Castparts, a supplier to an aircraft manufacturing industry, is under significant stress. All told, Berkshire isn’t exactly a defensive stock.
Even in the near-term, Buffett’s insurance operations face potentially higher claims from coronavirus impacts. And so it’s not surprising that it has fallen along with the market as a whole. (It’s worth noting, however, that Geico may benefit. Buffett himself recently noted that its claims were down sharply.)
Nor is it surprising that Berkshire underperformed on the way up. Buffett was notoriously late to tech. And while he now has a massive stake in Apple (NASDAQ:AAPL), he missed out on the huge growth winners of the bull market.
Berkshire Hathaway Is Too Big
To be fair, that doesn’t mean that Buffett and Munger have lost their touch. There’s a core problem with Berkshire that even Buffett himself admitted — more than two decades ago:
“The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that. But you can’t compound $100 million or $1 billion at anything remotely like that rate.”
That’s still a problem. Only today, Berkshire isn’t trying to compound $1 billion. It’s trying to compound well over $300 billion.
According to its Form 10-K filed with the U.S. Securities and Exchange Commission, Berkshire’s equity portfolio was worth $248 billion at the end of 2019. That size alone prevents Berkshire from owning non-controlling stakes in all but the largest companies.
Hunting for an Elephant
But Berkshire’s size also limits the potential accretion even if Buffett and Munger find their elephant. This is a company with a market capitalization still well over $400 billion, even after the recent decline.
Presume that Berkshire can spend all of its $128 billion on a monster acquisition. (Wouldn’t Disney (NYSE:DIS) make some sense?) And presume it can create 10%, or even 20%, in incremental value from that deal.
That’s still, at most, about $25 billion in value created. That doesn’t sound like peanuts. But it’s only a roughly 6% bump to the market value of Berkshire Hathaway stock.
The same problem holds if Berkshire managers — including key lieutenants Todd Combs and Ted Weschler — look to buy this market dip. Again, their universe is constrained.
Investors Can Do Better Than Berkshire Hathaway Stock
As Buffett himself said in 1999, that’s not true for most investors. Individual investors have the entire market in which to invest. And I still believe, as I’ve argued repeatedly during this selloff, that those investors have a huge opportunity ahead.
In fact, the volatility index (VIX) has only been as high as it is now twice before — during the financial crisis in 2008 and back in October 1987 when the Dow lost 22.7% in one day. Investors who bought the bottom (or even those who were too early) saw massive gains in the following years.
I believe that history will repeat. And in that environment, Berkshire Hathaway stock will rise, too. Barron’s estimated on Friday that its equity portfolio is down roughly $50 billion so far this year. When the market rebounds, the portfolio will get those losses back … and BRK.A and BRK.B stock both will rise.
But individual investors have better opportunities out there. I’ve recommended Facebook (NASDAQ:FB) as the victim of an unjustified selloff. Luckin Coffee (NASDAQ:LK) has a massive opportunity in China and a cheaper valuation. Cannabis stocks continue to plunge amid broad market declines, but the long-term growth in that industry should be spectacular.
Individual investors can and should do their own their due diligence. They should find their own opportunities. They’re plentiful. The long-term “megatrends” I’ve long cited — 5G wireless, artificial intelligence, even cryptocurrencies — remain intact.
There are a plethora of stocks to play those trends. Nearly all of them are much cheaper than they were just two months ago.
The problem for Berkshire is that it can’t invest in most of those stocks. Its sheer size means it has to focus almost solely on massive, mature companies. That’s not where the opportunity is right now. And it’s why investors looking to pick stocks in this plunging market can do better than Berkshire Hathaway stock.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.