Stocks are having another roller coaster week and many investors are nervously wondering as to where the broader markets may be headed next. Should we all indeed “sell in May, go away, and have a nice holiday?”
Although I like Berkshire Hathaway shares for a long-term diversified portfolio, I expect market volatility to continue in May. Therefore, we can expect price choppiness in Berkshire shares. With BRK.B down about 6% so far this month, any further pullbacks in the coming weeks would be a sign to investors to consider buying into the shares.
Value Investing Makes BRK.B Stock a Long-Term Buy
Countless articles and experts praise Berkshire Hathaway’s performance over the past six decades and Mr. Buffett’s amazing value investing prowess. Indeed, the effect of compounded gains for long-term BRK.B shareholders is tremendous. The 10-year gain tops 187% versus a 161% increase in the S&P 500 index.
Throughout his investment career, Warren Buffet, his partner Charlie Munger, and their investment team have purchased businesses with sustainable competitive advantages, or “moats,” preferably at discounted prices, with the aim of generating long-term value.
One other point to note is that Berkshire Hathaway has mostly favored free cash flow (FCF) rich business models. FCF is a powerful metric to analyze the true profitability of a business. It shows if the business is run efficiently to generate enough cash to pay its investors a return.
So far, their strategy has worked extremely well. An initial investment of $1,000 in BRK.A stock in 1962 would have become over $16 million today. (The more-modestly priced BRK.B stock came about in a 1996 split.) Although past returns are no indication or guarantee of future returns, I believe that investors can still expect Berkshire Hathaway management to continue to invest in companies that will deliver growth over the long-term.
BRK.B Stock’s Cash Pile
Most long-term investors do not want to be constantly thinking about the fundamental strength of the stocks in their portfolios. A robust balance sheet is what has attracted investors to Berkshire Hathaway over the decades.
On May 4, BRK.B reported strong first-quarter 2019 earnings that, as always, coincided with the annual meeting, a truly big event for shareholders. Analysts and investors alike also look forward to reading Buffet’s annual letter released for the meeting.
At the end Q1, Berkshire had about $114 billion in cash. This cash pile has expanded in part due to Berkshire’s highly profitable businesses and in part due to the lack of meaningful acquisitions until recently. Investors care a lot about FCF, as it can be used in a discretionary manner. The power of the amount of cash on hand is one of the reasons that the BRK.B stock is so unique.
Berkshire Hathaway and Stock Purchases
Buffet authorizes two types of stock purchases: the companies Berkshire Hathaway buys for its own portfolio and BRK.B stock repurchases. Let us look at each to see how either one may create value for shareholders.
Purchasing Other Companies: Berkshire Hathaway either buys out entire companies or invests substantial sums of money in other publicly traded companies through common stock purchases. Its portfolio, which covers a wide range of sectors, is not quite like any other publicly traded firm.
In general, management does not volunteer any more information on this portfolio than is legally required. Some analysts see the investment giant’s stock-picking strategies as its trade secret. Whenever BRK.B announces a new position in a company, the shares of that company shoot up as investors feel Buffet has found value in the price of the stock.
Currently, we know that Apple (NASDAQ:AAPL), the largest holding of BRK.B, occupies over 20% of the portfolio. Second in line is Bank of America (NYSE:BAC), followed by Wells Fargo (NYSE:WFC), Coca-Cola (NYSE:KO) and American Express (NYSE:AXP).
The company has recently acquired shares in the Brazilian fintech company, StoneCo (NASDAQ:STNE) as well as a stake in the parent company of India’s largest mobile-payments service, Paytm. Buffet also announced that BRK.B now holds shares in Amazon (NASDAQ:AMZN).
Wall Street has seen these acquisitions as BRK.B’s progressive moves to capitalize on high growth trends, including emerging markets. It is possible that, in an attempt to create growth, the company’s investing approach could change in the future.
Going forward, BRK.B has an enviable amount of cash on hand to finance more potential acquisitions to fuel the growth of the stock. And management will likely be constantly looking for promising opportunities.
Repurchasing BRK.B Stock: Long-term followers of Buffett’s value investment strategy know that he regards share repurchases as a good way for companies to reward shareholders. Companies then reduce the number of outstanding shares and each shareholder ends up holding a larger piece of the company. He last bought BRK.B stock in the first quarter of 2019.
In 2018, the company said that management would authorize share repurchases when it believed that the repurchase price would be “below Berkshire’s intrinsic value.” Previously, Buffet has relied on a book value multiple of 1.2x when deciding if it may be an appropriate time to buy back shares.
In case of further declines in BRK.B stock price, I’d expect management to consider another stock repurchase program, which would act as a support level for the stock price. Whenever Berkshire Hathaway has bought back its shares in the past, the market has applauded the move and BRK.B stock price has gone up.
Could BRK.B Stock Finally Pay Dividends?
Warren Buffett — AKA “The Oracle of Omaha” — is never shy to let investors know how much he loves to invest in stocks that pay dividend income. Yet, he has also made it clear that he does not intend for BRK.B stock to pay dividends.
However, many BRK.B shareholders would like to see the group pay dividends, partly because Berkshire Hathaway has so much cash available.
In the past, Buffet has argued that management would be able to reinvest that money better than most shareholders. Nonetheless, he has recently admitted that good investment ideas are not easy to find any more.
Therefore, the investing legend may indeed have a change of heart soon. Then there could be an upcoming shareholder letter telling investors that the company would pay dividends. And that is likely to be good for the stock price.
Short-Term Technical Analysis Shows Headwinds
Many stocks may continue to be volatile in May, and I would not advocate trying to identify stocks that could be immune to a U.S.-China trade war.
As a result of the strong run-up in BRK.B stock price earlier in 2019, its short-term technical indicators had become somewhat “overbought,” until last week. However, in less than two weeks, BRK.B stock price is down almost 9%.
Yet if Berkshire Hathaway stock price declines further, long-term investors may find it particularly attractive. I believe BRK.B stock price is likely to find major support between $195 and $200. At that point, I’d expect BRK.B stock to start to stabilize and then trade sideways until its next earnings report in late July.
If you aren’t already long BRK.B stock, you may want to remain on the sidelines and wait for a pullback. I’d also consider buying covered calls in conjunction with going long on Berkshire Hathaway stock.
Investor Takeaway on Berkshire Hathaway stock
In many ways, there will never be another company like Berkshire Hathaway and many analysts agree that, in the future, the group may not be able repeat its stellar past performance. Yet, the strength of the balance sheet coupled with management’s proactive approach, which is firmly grounded in the value investing tradition, will likely enable BRK.B to buy into companies that will fuel its growth. Therefore, despite any potential short-term price weakness, BRK.B stock belongs to a diversified portfolio.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
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