I'm a huge fan of Warren Buffett; since starting my professional career in 2001, I've studied his investment deals and methodology extensively, even employing leveraged arbitrage in a very similar fashion.
In fact, anyone reading this has probably analyzed Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) stock based on both brands and financial performance, right? Please let me know your own thoughts on its value.
Posting this article will surely garner plenty of grief from the readership. Rightly so, because most people are basing their valuations on history. Berkshire has been built on the vision of Buffett’s own ideals, and that gives off really good feelings.
I’m not speaking to the massive individual brands under the Berkshire umbrella; many are definitely undervalued as subsidiaries of the conglomerate. I am thinking of the entity as a whole, which at a $400 billion market cap may look cheap on a price-earnings (P/E) basis, yet that size, as with many other companies, has been inflated by the market.
There’s no question that Berkshire Hathaway is a phenomenal business, but how long until it doubles in price? Ten years? Fifteen? Twenty? As an investor, you should be asking this on all asset buys. With Berkshire, it isn’t going to happen anytime soon, unless the stock tanks due to the tide “going out” sinking all of the Standard & Poor's stocks.
Buffett is going to die. The next steward(s) will not be as good. More scrutiny will be placed on the company and the brands it owns in the coming decades because of this. Either more poor stock choices – like Walmart (WMT, Financial) –Â or more dilutive direct acquisitions are coming. The insurance businesses will continue to grow, but like other parts of finance, prices will come down, cutting margins.
Looking through the companies Berkshire owns is like a journey through history. Many are operating within industries that are ripe for new upstarts to grab market share or will simply fade away as the population ages, and they fail to adjust accordingly.
A few that come to mind
- Fruit of the Loom.
- Core Business Services.
- Nebraska Furniture Mart.
- Star Furniture.
- Helzberg Diamonds.
- H.H. Brown Shoe Group.
- Justin Brands.
- Jordan’s Furniture.
- Buffalo News.
- Business Wire.
- BH Media Group.
- Ben Bridge Jeweler.
- Oriental Trading.
Granted these are mostly its retail operations, and I’m not a fan of the retail business at all, right now especially. Why does Buffett like jewelry so much?
For Berkshire, the sum total of all its business assets far outweighs the prices paid, even the current value. This means if any of the companies mentioned simply closed, the holding company would not suffer. Buffett has done a great job buying into these companies at fair, even discounted prices. Another reason you have to think twice about buying Berkshire.
In the last decade, Berkshire has increased its book value by 109% without seeing a double in sales or net earnings. This is definitely a testament to how Buffett sees the value of shareholder equity. The next decade will not be so kind.
The silver lining in all of this is that the bear market is coming and BRK.B may drop below $100, which will make it a short-term (five-year) hold. Long term, you are likely to get better returns in the D.C. real estate market than owning this stock.
Disclosure: I have no position in BRK.A or BRK.B.
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