Generally speaking, I've had a tough time finding attractive stocks to invest in over the past couple of years. To put it mildly, I find many stock valuations to be a bit generous and truly attractive bargains to be difficult to find.
As Warren Buffett says, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." So, I recently added shares of what I consider to be one of the most wonderful businesses you can invest in -- Buffett-led conglomerate Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). Here's why I decided to not only add some shares, but to roughly double my Berkshire investment.
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100-plus investments in a single stock
If I have some cash to invest, I might find myself asking questions like, "should I add to one of my bank stocks?," "do I have enough industrial exposure?," or "I could use more consumer staples stocks in my portfolio, but which one should I buy?"
An investment in Berkshire Hathaway addresses all three of these questions -- and many more. Berkshire owns more than 60 subsidiary businesses, including large operations in insurance, aircraft parts, consumer goods, railroads, and more. Plus, the company has a stock portfolio worth more than $200 billion, with big stakes in Bank of America, Wells Fargo, American Express, Coca-Cola, and other big-name companies.
Berkshire Hathaway is quite literally an investment in more than 100 different businesses in a single stock.
Warren Buffett and his team
I can't think of anyone I'd rather have making investment decisions with my money than Warren Buffett. The Oracle of Omaha's track record of consistent long-term growth in a variety of economic and political climates is simply unmatched.
In addition, Vice Chairman Charlie Munger has been Buffett's right-hand man for decades, and stock-picking lieutenants Todd Combs and Ted Weschler have built solid performance records in their short tenures at the company. In short, I feel 100% confident when I invest in Berkshire Hathaway that investment decisions will not only be made wisely, but with the best interests of shareholders in mind at all times.
$114 billion in cash
Berkshire Hathaway had $114.2 billion in cash and equivalents on its balance sheet at the end of the first quarter. While this has likely declined a bit since Berkshire agreed to invest $10 billion in Occidental Petroleum after the quarter ended, it's fair to assume that Buffett and his team still have a 12-figure war chest as I write this.
Buffett insists on keeping at least $20 billion in cash at all times, so this (conservatively) gives Berkshire $80 billion it could put to work. There has been a shortage of attractive investment opportunities in recent years -- which is why the cash hoard has grown so large -- but as soon as opportunity knocks, Berkshire will be ready.
Berkshire Hathaway's recently modified buyback program gives us insight into what the company's management (specifically Buffett and Munger) think it's really worth.
If you aren't familiar, Berkshire's buyback program was modified in mid-2018 to allow the company to buy back as much stock as it wants as long as Buffett and Munger both agree that it's trading at a substantial discount to its intrinsic value.
Well, Berkshire spent about $1.7 billion on buybacks during the first quarter, and the average price Berkshire paid for each Class B share was over $201. This represented an accelerated buyback rate when compared to the third and fourth quarters of 2018, when the new buyback program was in place (and shares were bought back at averages as high as $208.50), so it's fair to say that both Berkshire leaders feel the stock is significantly undervalued as it approaches $200.
Berkshire performs well in tough times
Finally, while we have no idea when a recession will hit or how bad it will be, it's fair to say that we're overdue for one at this point. With more than 10 years of improving economic fundamentals in the years since the financial crisis, the good times won't last forever, and most experts predict a recession within the next few years.
Also, there are few stocks in the market with the growth potential of Berkshire Hathaway and such a solid track record of outperforming the stock market during down years. In fact, the S&P 500 has finished a year with negative total returns 11 times in the past 50 years, and Berkshire has beaten the market in all but two of those years. This certainly makes sense -- some of its largest businesses (auto insurance, for example) are rather recession-resistant.
So, while I certainly view Berkshire as a stock with the ability to deliver great returns in prosperous times, it also functions as a bit of a recession-protection play.
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Matthew Frankel, CFP, owns shares of American Express, Bank of America, and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.