Berkshire Hathaway Stock After the Price Rally: Is Buffett’s Stock Running Out of Potential For Now?

• Berkshire Hathaway recently wowed shareholders with a strong price rally
• “Real Money” columnist Paul Price sees the stock’s potential exhausted for the time being
• The price-to-book ratio is well above the long-term average

Warren Buffett has enjoyed tremendous performance from his investment vehicle, Berkshire Hathaway, over the past few months. While the broad US index S&P 500 has had to cope with significant losses in recent months, the shares of Berkshire Hathaway have so far been up 12.16 percent for the year (as of the closing price on April 22, 2022).

Why Are Berkshire Hathaway Stocks Performing So Strong?

Investors appear to be assuming that Buffett’s solid, broad-based company will be relatively stable through the period of inflation and the Ukraine war. In addition, Berkshire Hathaway has insurance companies like GEICO or holdings in banks like Bank of America, all of which should benefit from rate hikes. Rising energy prices could also benefit large Berkshire holdings like Occidental Petroleum. In addition, after a few rather restrained years on the capital market, the 91-year-old Buffett is currently clearly more willing to buy. The “Oracle from Omaha” recently bought not only large shares in Occidental Petroleum, but also the insurance company Alleghany and a large block of shares in the computer and printer manufacturer HP.

For many investors, the Berkshire Hathaway papers are therefore the ultimate life insurance in stormy stock market times, as a rock in the surf. However, in view of the enormous price gains in recent years, the question inevitably arises as to whether a new entry into the American model company is still worthwhile.

“Real Money” columnist currently sees little chance at Berkshire Hathaway

At least Real Money columnist Paul Price doubts that an investment in Berkshire Hathaway will pay off in the short to medium term. Price warns of caution in the face of the raving media coverage of Berkshire Hathaway: “Media spokespeople love to rave about stocks that have just gone up a lot. Rather than questioning whether that makes stocks expensive or overpriced, they usually try to justify the price moves. ” Price recalls this approach to Sherlock Holmes’ criticism that many people tend to twist facts to fit theories – rather than judging facts from established theories. While Price acknowledges that Berkshire Hathaway’s recent share price rise may well be justified, it always requires an unbiased analysis of fundamentals. So what are Berkshire Hathaway’s key metrics?

Buffett recommends price-to-book (P/B) ratios for valuing Berkshire

The price-earnings ratio (P/E) is usually used to compare the valuation of a company. The current price per share is divided by the company’s net profit per share. But Warren Buffett considers this figure to be extremely problematic for his investment company Berkshire Hathaway, since the many insurance companies it contains have high volatility in earnings. As a more meaningful valuation metric, Buffett instead recommends the value-based price-to-book (P/B) ratio in his annual letters to shareholders. In the KBV, the current share price is divided by the book value (the sum of all tangible and financial assets as well as intangible assets) per share.

Berkshire Hathaway’s PBV has increased significantly in recent months

A closer look at Berkshire Hathaway’s P/E ratio shows that the recent share price rally has boosted the holding company’s valuation significantly. Berkshire Hathaway’s average P/B between 2011 and 2021 was 1.25, according to TheStreet. That means Berkshire Hathaway’s average market cap was 1.25 higher than the combined book value of all companies that Berkshire Hathaway owns either wholly (like GEICO, See’s Candy, or Nebraska Furniture Mart) or at least partially (like Apple or Coca-Cola). . As Price points out in “Real Money,” this key metric was 1.95 at the time of the all-time high, where Berkshire Hathaway stock traded at $362.10 on March 29, 2022. As a result, Berkshire Hathaway’s stock market value is currently almost twice the book value of the holding company. According to Price, the PBV is now “absurdly” high, but a closer look puts this assessment into perspective. Berkshire Hathaway’s P/E ratio is about nine, which is well below the average for S&P 500 companies (about 22). Additionally, the average analyst price target for Berkshire Hathaway is $363.95, higher than the current share price. Additionally, most pundits are full of praise for Buffett’s holding company’s financial solidity, strong acquisitions, and excellent concept.

Even if the bullish conglomerate Berkshire Hathaway can by no means be described as overvalued, Paul Price’s warning is certainly helpful. As the stock market legend André Kostolany once said: “You should never run after a tram and a share. Just be patient: the next one will definitely come.” And indeed, after the strong run in the first three months of the year, Berkshire Hathaway stock seems to have taken it easy. In the past few weeks, the investment holding company from Omaha has not been able to record any more highs.

Editorial office finanzen.net

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