Shankul Bhandare
Warren Buffett built Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) using the principles of value investing. A key tenet of value investing is that stocks purchased at favorable valuations (based on specific metrics) will eventually outperform the overall market while offering lower downside risk compared to other investments.
This strategy has greatly benefited Berkshire and its investors. Since Buffett took over in 1965, the company has delivered an average compound annual gain of 19.8% for shareholders, significantly higher than the S&P 500’s average total return of 10.2% over the same period. This impressive performance is due to Buffett’s knack for identifying excellent companies trading at attractive valuations.
In his latest letter to shareholders, Buffett highlighted another stock poised to outperform the average American company, suggesting it could be a valuable addition for investors.
A Portfolio of Exceptional Businesses
In his 2023 letter to shareholders, Warren Buffett highlighted several of Berkshire Hathaway’s prominent stock holdings.
Since early 2022, Buffett has steadily acquired shares of Occidental Petroleum (NYSE: OXY), building a substantial position that now represents 28.8% of the company’s outstanding shares. Berkshire also holds about $8 billion in preferred shares, received for financing Occidental’s acquisition of Anadarko in 2019. Buffett lauded Occidental’s management and indicated plans to hold the stock indefinitely.
Buffett also emphasized the enduring value of longtime holdings American Express (NYSE: AXP) and Coca-Cola (NYSE: KO). Despite not purchasing additional shares of either company in over 20 years, they remain two of Berkshire’s largest holdings due to their strong international brands and essential products and services.
While Buffett briefly mentioned Berkshire’s significant stake in Apple (NASDAQ: AAPL), he referred to it as “a better business than any we own” during last year’s shareholder meeting. Although he has sold some shares recently to capitalize on a favorable tax environment, Buffett assured shareholders that Apple is expected to remain the largest holding in Berkshire’s equity portfolio for the foreseeable future.
Berkshire Hathaway: A Strong Bet According to Warren Buffett
All the companies mentioned above might appear attractive at their current share prices, boasting strong competitive positions and solid earnings prospects. However, none of them is the stock Warren Buffett suggests has superior return potential with less downside risk. In fact, the company Buffett highlights in his letter to shareholders is Berkshire Hathaway itself.
Buffett notes, “After 59 years of assemblage, the company now owns either a portion or 100% of various businesses that, on a weighted basis, have somewhat better prospects than exist at most large American companies.”
Berkshire Hathaway is not just a collection of great companies and wholly-owned subsidiaries. It is also well-positioned to avoid financial ruin, thanks to its significant holding of short-term Treasury bonds. Over the past few years, Berkshire’s position in these bonds has grown rapidly, with Buffett expecting it to reach $200 billion by the end of the second quarter. This substantial cash equivalent position allows Berkshire to operate with materially less risk of permanent capital loss.
While holding large amounts of cash might seem like a drag on Buffett’s portfolio, these Treasury bills are yielding over 5%, providing a solid ballast to Berkshire’s equity portfolio and core operations. This financial strategy serves as an insurance policy for Berkshire, allowing Buffett and his portfolio managers to seize market opportunities as they arise, much like the $10 billion investment in Occidental Petroleum in 2019 and a similar deal with Bank of America.
Berkshire Hathaway is more than just a conglomerate of great businesses and a large cash pile. The stock also trades at a fair price, aligning with Buffett’s expectation of outperforming the market. Shares currently trade at about 19.6 times forward earnings. When factoring in Berkshire’s cash position, its equity portfolio, the strength of its core operations, and ongoing share repurchases, this valuation appears fair. The price-to-book value ratio of 1.6 aligns well with other insurance companies and financial stocks.
Despite the significant increase in share price since Buffett’s letter to shareholders earlier this year, investors can still anticipate better-than-average results from Berkshire stock moving forward.
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