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Pros and Cons of Buying Berkshire Hathaway Inc. (BRK.B) Stock

Brian O'Connell

Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) stock is the Taj Mahal of company stocks, long known for its sky-high Class A share price and for its iconic -- and refreshingly unassuming -- chairman, president and CEO, Warren Buffett.

The Omaha, Nebraska-based company operates in the financial services sector (particularly insurance) and also operates in the freight transportation, real estate brokerage, energy, utility and diversified manufacturing sectors. The company, founded in 1889, boasts 377,000 employees, and many staffers are likely wondering what a post-Buffett Berkshire Hathaway would look like.

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Buffett is still at the helm of Berkshire Hathaway, and seems as vibrant and on the ball as ever.

But the Oracle of Omaha is 87 years old and talk of a change at the of the company is on the rise. Buffett himself has acknowledged the need for new blood at Berkshire Hathaway, and has installed two senior portfolio managers, Ted Weschler and Todd Combs, to steer the investment management side of the company going forward.

Buffett is bullish on that move, calling the rise of both Weschler and Combs at Berkshire Hathaway "one of the best moves" the company has ever made. Together, they've built a broadly diversified investment portfolio stocked full of dozens of subsidiary companies across myriad industries, and stock holdings in over 40 companies -- all under the sturdy roof of a single company.

Can the good times last at Berkshire Hathaway? Stock market experts seem to think so, but there may be some clouds on the horizon for the company.

Berkshire Hathaway stock at a glance. Berkshire Hathaway's Class A stock price stands at $287,600, with a one-year analyst target estimate of $348,000 per share. Berkshire's Class B stock is a more achievable goal for Berkshire investors, and currently trades at $191 per share.

The company's stock is returning nearly 12 percent over the last year, and Berkshire Hathaway is, as always, flush with cash. Two of its dominant industries -- utilities and insurance -- are seeing a big demand for products and services, but high costs in another BRK segment -- transportation and railroad operations -- could tamp down the company's stock price going forward.

Even so, stock market experts remain fairly bullish on Berkshire Hathaway.

"Berkshire Hathaway is an interesting story," says Robert Johnson, principal at the Fed Policy Investment Research Group in Charlottesville, Virginia. "Increasingly, it's a conglomerate composed of over 80 different operating companies in a wide variety of industries. BRK is now a bet on the capital allocation ability of Warren Buffett and his management team."

Berkshire has a "terrific structure" from which to allocate capital from businesses with limited growth prospects to those with more attractive growth prospects. "That is difficult to do within a typical corporate structure concentrated in one industry or business," Johnson says.

Pros of buying Berkshire Hathaway stock. Berkshire Hathaway's stock value remains robust, primarily because of its solid core holdings, which include some of the biggest brand names in America.

"According to his recent shareholder letter, Berkshire owns roughly 17 percent of American Express ( AXP), 7 percent of Bank of America ( BAC) and 9.4 percent of Coca-Cola ( KO) ," says Sam G. Huszczo, a financial planner at SGH Wealth Management, in Detroit. "These are huge percentage ownerships in pillars of the American economy."

It's no secret why Berkshire Hathaway stock has performed so well for so long. "Berkshire has approximately $100 billion in unrealized gains," Huszczo says. "Buffet is a long-term stockholder who can stomach volatility better than maybe any other investor before him."

Berkshire is currently selling at a below market average price/earnings ratio and its earnings are projected to grow at an above market average rate over the next few years, says David Kass, a finance professor at University of Maryland's Robert H. Smith School of Business. "Its intrinsic value is likely at least 10 percent above its current share price. Therefore, it's undervalued and should be outperforming the market over the near future."

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The company's largest holdings include Apple ( AAPL), Wells Fargo & Co. ( WFC), Kraft Heinz Co. ( KHC), Bank of America, and Coca-Cola. "Apple is Berkshire's largest holding and Berkshire has been adding to it in recent quarters," Kass says. "It has a below market average price-earnings ratio and above-average projected growth. Apple's iPhone customers are very loyal and over 90 percent upgrade their iPhones every two to three years. Apple appears to be undervalued."

Bank of America has successfully dealt with problems stemming from the financial crisis, and is well-managed and growing nicely, Kass says. "It, too, appears to be undervalued," he adds.

Kraft Heinz's specialty of turning food companies around should result in a higher stock price after it announces its next acquisition, Kass says. "Additionally, Wells Fargo should resume its growth and profitability over the next year or two after it recovers from the reputational damage of the scandal where many of its customers were charged for services that they did not request," he says.

Cons of buying Berkshire Hathaway stock. At 87, Buffett won't be able to drive Berkshire Hathaway forward forever.

"At that point, is Buffett's eventual retirement already baked into the price of Berkshire, as people recognize this as inevitable?" Huszczo says. "This could be seen as a reason that Berkshire hasn't performed as well as of late, because investors find it hard to commit to the ship whose captain will soon retire."

In all likelihood, when Buffett does retire, people will panic, Huszczo says, "No matter how prepared you are for a death in the family, it's never really easy to handle."

Weighing the pros and cons of buying Berkshire stock should also include a candid assessment of your investment goals and interest.

"BRK stock is great for value investors with long-term horizons, but not so much for aggressive traders seeking high returns," says John Kilhefner, analyst and deputy managing editor at InvestorPlace.com. "So long as there's the overhang of the investigation into [President Donald] Trump's personal lawyer, the Russia investigation and geopolitical concerns such as Syria, volatility will remain in the market. That will push investors into, or to add on to, a position in BRK.B stock."

The bottom line. Even without Buffett at the helm, Berkshire Hathaway will carry on the same leadership position in the markets, Kilhefner says.

"Buffett himself once said that he prefers to invest in companies that are so wonderful an idiot can run them, because some day one will. Buffett has also created Berkshire in that 'wonderful' model, but rest assured that the person who Buffett has selected to succeed him will be no fool," Kilhefner says. "They just may be the right person to make the calls that Buffett refused to, or could no longer see, in his advanced age."

Other say it's not realistic to expect the same level of portfolio success Buffett and Berkshire Hathaway have provided.

"BRK has historically done very well for its shareholders," says Eric Wightman, a partner at XML Financial Group in Vienna, Virginia. "According to their last annual report, since 1965 shares have grown, on average, almost 21 percent per year versus almost 10 percent for the S&P 500. Yes, that's more than double the S&P for the 52 years and if you think about the effects of compounding, shareholders have benefited even more."

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During that time frame Berkshire had returned 2,404,748 percent versus the S&P 500's return of 15,508 percent, Wightman adds. "That's a substantial amount. Using a more relevant time frame, over the last 10 years the shares have increased over 210 percent and rose about 550 percent over the last 20 years," he says.

Wightman doesn't think that'll be the case going forward. "I would be surprised to see them grow more than say 9 percent per year going forward, but I'd also be very surprised to see them growing less than 6 percent per year," he says. "That's not a bad outcome for most investors if I'm right."



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