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If there ever was a stock that was hiding in plain sight, it is that of Berkshire Hathaway (BRK.B) which is capitalized at a tad over $150 billion and run by "my pal Warren" and his pal Charlie. That's Warren Buffett and Charlie Munger, perhaps the most successful investors in five generations.Berkshire Hathaway, a textile mill, was Buffett's first turn-around play. He was successful and started generating significant amounts of free cash-flow that allowed him to invest in other things. Those investments also paid off and eventually the original enterprise became the namesake of today's diversified giant holding company.
I selected BRK.B for numerous reasons and believe it will easily beat the market next year as has been it's history.
Over the past 2 years Berkshire Hathaway had been accumulating shares of Burlington Northern Santa Fe (BNI) railroad, becoming the largest shareholder. In 2010 it will become its only shareholder, as the BNI board has accepted an offer to be acquired and the deal has been approved by the Department of Justice.
At the time of the BNI announcement, Berkshire also disclosed that it would split the B-shares 50 to 1, something that had run contrary to Buffett's ideals. Until then the only concession ever made to the small investor was to create the B-shares that have been trading around $3,300 each over the last few weeks, while the original A-shares traded at 30 times that, hovering around $99,000 lately.
This high price has kept trading volume below the threshold required to be included in the Standard & Poor's 500 stock index. The stock split will change this allowing many more retail investors to buy shares, increasing trading volume and forcing many index tracking funds to include the stock. This can only be a positive for the share price.
Buffett was destined to make a major purchase and this qualifies. Beyond BNI, he has also invested in a Chinese electric car company BYD Co LTD (BYDDF), bought more Wells Fargo Co. (WFC), and became the largest shareholder in Goldman Sachs (GS) and General Electric (GE) by supporting them with massive loans in the form of convertible notes and warrants.
Berkshire shares underperformed the market this past year gaining about 5.5%, a year when small caps and riskier more leveraged companies excelled. 2010 may be the year that large cap stocks lead. BRK.B enters this environment with an extremely low P/CF of 1.01, while the P/S is a modest 1.39 and the P/B of 1.23 is low too.
When you add the fact that BRK.B would appreciate 25% in 2010 if it only climbs half way back to its high of $5,000 while adding stability to any portfolio it seems like the soundest of investments.
Berkshire Hathaway ended the trading day, December 28, 2009 at $3,285.37.
For the other nine picks see: Chasing Value: 10 Stock Picks for 2010
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of BRK.B.
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Reader Comments (Page 1 of 1)
12-29-2009 @ 8:55PM
samcustomworks said...
30 P/E seems a litle rich, even for the "Oracle" for the at this stage of a recovery??
12-29-2009 @ 10:18PM
Sheldon L said...
Sam,
The P/E is high -- you raise an important point. That is why the total picture presents a better view. If that were the only criteria I might run for the hills myself.
There is no company comparable to Berkshire but two large well respected conglomerates, P&G and J&J, are worth a look. They both have P/E's that are half of BRK.B's. However, they have P/S's of 2.46 and 2.66 considerably higher than BRK.B's 1.39. Historically the P/S has been a better investment guide.
The bottom line, meaning earnings, has been affected by a tough year and may reflect losses, tax credits and carryovers from 2008 and insurance company right-offs and other accounting items that are not as pure a picture as the top line sales.
When you examine the P/CF P&G and J&J run 12.78 and 10.47 which is just fine but Berkshire's is a tenth of that.
The 29.88 P/E is a trailing number where as the forward P/E is 18, reflects my belief that the bottom line will see improvement in 2010.
BTW: Berkshire is the largest shareholder of both comps.