If Berkshire Hathaway’s Close to the Price at Which Buffett Buys, Should You Buy, Too?

Scouring Berkshire Hathaway’s (BRK.B) 13-F SEC filing for insights on what stocks Warren Buffett and his two investment managers are buying and selling is always a popular investor sport. But all the attention on whether Berkshire has increased its Wells Fargo (WFC) holdings, or added a big new stake, a la last year’s IBM (IBM) foray, can obscure the more obvious way to invest along with Warren Buffett: buy stock in Berkshire Hathaway itself.

The conglomerate’s stock price hasn’t kept pace with the market for the past three years.

BRK.B Chart

BRK.B data by YCharts

But the metric that matters to Buffett is intrinsic value. The standard way to get a sense of intrinsic value is to use book value. And on that front, Berkshire Hathaway is doing just fine.

BRK.B Book Value Chart

BRK.B Book Value data by YCharts

The fact that the stock price has lagged the increase in per-share book value is what savvy investors should take note of. Last fall Berkshire announced that if the per-share book value fell below 110% of the stock price (1.1x the stock price) the company would step in and repurchase shares. The historical norm is for Berkshire Hathaway stock to trade at around 150% of book value (1.5x).

Right now, Berkshire’s stock is about 115% of the book value (1.15x)

BRK.B Chart

BRK.B data by YCharts

Buy some Berkshire Hathaway today and you have the added allure that it is trading at a steep discount to its normal book-value valuation, and the company is standing on the sidelines ready to buy back shares if the metric dips from today’s 1.15x to below 1.10x.

Moreover, amid all the doom and gloom economic headlines, there are signals from Berkshire’s economically sensitive subsidiaries that the economy isn’t on its deathbed. For example, revenue from railroads (BNSF), energy and utilities (MidAmerican Energy) are up 5.4% in the first half of the year, compared to the same period a year ago. Revenue from Berkshire’s building-products subsidiaries (Acme Brick, Clayton Homes) gained 4% in the first half of the year. You’d expect the housing segment to get a continued boost if the recent signals of a firming housing market persist.

Case-Shiller Home Price Index: Composite 20 Chart

Case-Shiller Home Price Index: Composite 20 data by YCharts

The big opportunity-and challenge-for Berkshire is how to deploy its massive cash horde.

BRK.B Cash and ST Investments Chart

BRK.B Cash and ST Investments data by YCharts

Buffett has stated he likes to keep a liquidity stash of about $20 billion. That means there’s another $20 billion free for scooping up businesses, as he did with BNSF in 2010, or taking a deep dive into stock-as we saw with last year’s investment in IBM. Given Berkshire’s long-term track record on both fronts, odds are shareholders will pocket a nice return on future acquisitions.

Carla Fried is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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