There is no doubt that Berkshire Hathaway Inc. (BRK.B) is a stock that most investors want in their portfolio, primarily because, as a shareholder, one is assured that the company is being managed by one of THE best investors of all times, its CEO chairman – Warren Buffett. Moreover, the company has diverse businesses comprising nearly 60 wholly owned subsidiaries engaged in everything from construction, furniture, and insurance to banking, soft drinks, and jewelry. This gives investor exposure to some of the strongest companies around and assures investors of strong returns from Berkshire Hathaway.
Warren Buffett, the doyen of value investing by virtue of his unique skills,has created tremendous value for shareholders over the last 49 years with book value growing from $19 to $134,973, a compounded rate of 19.7% annually.
In 2014, the stock gained 29.4% year to date – more than double the gain of 13.6% in the S&P 500. The stock price of the company boosted by a number of acquisitions both bolt-on and new to the company. These included the buyout of auto dealer Van Tuyl Group, electric transmission company AltaLink, batteries producer Duracell, investment in Burger King and the expansion of Berkshire Hathaway Specialty Insurance business.
Nevertheless, the stock felt the effect of some of Buffett's big stock bets that tanked in 2014. These include the investment in British supermarket chain Tesco Corporation (TESO), shares of which collapsed after suffering accounting issues. Stocks of some of the big U.S. companies held by Buffett such as The Coca-Cola Company (KO) and Exxon Mobil Corporation (XOM) gave weak performances through the latter stages of the bull market. One of the most significant deals which failed to pay off was his investment in International Business Machines Corporation (IBM). It was the first investment of Buffett in technology and now the stock is reeling under pressure due to weak earnings . The stock lost 12% this year. Moreover, the Chinese electric car maker BYD Company Ltd. (BYDDF)—in which Buffett has a significant stake—lost 16% of its value in 2014.
Investing in Berkshire Hathaway is normally seen as a safe bet given the company’s track of mostly beating the market. But investors who want to stay away from the charm of Berkshire Hathaway can take into account the facts stated below. Investors who dared to invest in less famous companies earned returns higher than what Berkshire Hathaway generated during 2014.
Back in 2009, Buffett said “the big minus is that our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue”. Those investments in growth can take years, sometimes even decades, to pay off. Buffett has confessed that it's increasingly hard for the company to outperform the market as it gets larger. During the last reported quarter, the company had cash of $62.4 billion. It is hard to be convinced that Buffett, and Berkshire portfolio managers Ted Weschler and Todd Combs will be able to find enough big deals to take full advantage of the company's ever growing cash generation, in such a way that it may earn a handsome return for shareholders.
Absence of Dividend
Stocks with dividends have always been preferred over stocks sans dividends, which generate current income and bolsters investors’ returns. Academic research has shown the long-term historical trend of dividend stocks beating non-dividend paying stocks. Though Berkshire Hathaway has been one of the financially strongest businesses in history, it has eschewed paying a dividend since the 1960s. Dividend growth stocks trading at a discount to their valuation look more attractive than Berkshire Hathaway here.
Warren Buffett’s Succession
Warren Buffett – the main hand behind the company – is an octogenarian. Investors are cautious about the fact that there is no certainty as to how long he will be able to run the company and provide his investment acumen. Though we would not say that Buffett has always been infallible, since some of his investments have yielded poor results, he is without doubt one of the greatest investors in history. Investors who are afraid of how the company would fare post Buffett, would look for companies offering a more stable and strong management team.
The Buffett mania is widespread. Yet, there are stocks that are undeterred by the iconic investor’s promise of big returns. Below are 3 value stocks with a favorable Zacks Rank that have outperformed Berkshire Hathaway in 2014. These also have a low price to book value(P/B) ratio and low price to earnings (P/E)ratio.
AmTrust Financial Services, Inc. (AFSI), with a Zacks Rank #1 (Strong Buy), clocked a year-to-date return of 70.8%.The stock also has a P/B ratio of 2.2% and P/E ratio of 9.9%. Inorganic growth strategy at the company is reflected in its share price, as it is consistently boosting its global presence through acquisitions. The company recently acquired a wholly owned subsidiary of CorePointe Group LLC — CorePointe Insurance Company. Earlier, it had acquired Comp Options, a subsidiary of Blue Cross & Blue Shield, thereby strengthening its base in Florida, which is one of the major markets for workers' compensation insurance risks. Additionally, it acquired renewal rights to Tower Group International, Ltd’s commercial lines business. These acquisitions play an important role in enhancing the company’s market position and boosting its revenues.
Another company, RLJ Lodging Trust (RLJ), with a Zacks Rank # 2 (Buy), surged 40.8% year to date. The stock also has a trailing P/B ratio of 1.9% and P/E ratio of 14.6%. RLJ owns 150 properties, 148 hotels with approximately 23,300 rooms and two planned hotel conversions located in 21 states and the District of Columbia. The company boasts a deep and experienced senior management team that has worked together for over 10 years while the company has over 150 years of combined lodging and real estate experience. RLJ Lodging has consistently met or exceeded its guidance, with more than three years of solid performance. The company has exposure to strong internal and external growth prospects. RLJ Lodging’s prudent capital allocation, proactive balance sheet management and operational excellence continue to produce attractive returns for its investors. Since its IPO in May 2011, the company has delivered a total return of approximately 103%.
Another notable stock United Insurance Holdings Corp. (UIHC), with a Zacks Rank #2 (Buy), a P/B ratio of 2.3% and a P/E ratio of 10.8%, saw its share price rise by 51.4%. Founded in 1999, the sole focus of the company from inception till 2012 was residential property insurance in Florida. While more than 10 companies became insolvent in the historic 2004-2005 hurricane seasons (including 3 of the 10 largest Florida writers), the company was profitable in both the years. The company has posted strong financial results and has been profitable in 14 out of 15 years since inception. For the first half of 2014, its revenues increased by 45.7% and earnings grew by 136.8%. The company generated return on average equity of over 20% in each of the past two years and recorded trailing twelve months underlying combined ratio of 80.2% which signifies underwriting profitability.
So for all the admirers of Berkshire Hathaway, there are attractive returns generating opportunities elsewhere too. One just needs to have a critical eye and the confidence to bet on lesser-known stocks.
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