The Ultimate Stock To Buy and Hold Forever

While much attention this past week has focused on Berkshire Hathaway’s enormous cash pile, another number is arguably the one that investors should focus on – the amount of interest Buffett’s holding company is accumulating with each passing month.

But first, how much cash does Berkshire Hathaway have now? On its balance sheet, Berkshire Hathaway now holds $276.9 billion of which $234.6 billion is invested in 3-month or 6-month treasury bills.

In interviews previously, Warren Buffett has stated that he favors 3-month and 6-month Treasury bills as the place to park cash. These have been yielding as much as 5.40% in recent months but for simple math and to be conservative assume Berkshire is earning 5% annually.

Not all of Berkshire’s $276.9 is invested in short-term bills, but most of it is – a full $234.6 billion, reportedly. At a 5% rate of return, that sum is growing by almost $1 billion monthly.

For perspective, Berkshire Hathaway (NYSE:BRK.A) held $31.2 billion of cash on its balance sheet in Q2 2008 before deploying about $5 billion in the form of preferred shares of Goldman Sachs later in the year.

So Berkshire is now amassing more cash every 3 months than the sum total of its balance sheet liquid reserves when the Great Recession was in full swing. But why does this matter?

3 Reasons Why Buffett’s Cash Pile Matters

Buffett has famously followed his own advice to not merely be greedy when others are fearful but to do so in a big way. In other words, when he sees a deal he is willing to allocate substantial capital reserves to pounce on it. 

In 2016, for example, when he started to accumulate a position in Apple that ended up as a 789 million share holding, the stake represented at one point approximately 50% of his entire equity portfolio.

That level of conviction revealed Buffett is willing to invest massively when a deal finally appears. At the time, Apple’s price-to-earnings ratio sat below 15x, making it an enticing buy given its growth rates and cash flows.

Similarly, in 2008 when he snapped up Goldman Sachs preferred shares, the position represented a double-digit percentage of his overall balance sheet cash reserves.

So, the first takeaway as to why Buffett’s cash pile matters is that it provides the Oracle of Omaha with the optionality to make big purchases and deploy capital fast when he spots his next opportunity.

Indeed, if the bearish train gathers steam like it did in 2008, Buffett will have the ample reserves needed to swoop in and snap up undervalued assets. Better yet, he can do so using cash versus equity, which is likely to be more costly over the long-term.

Another key reason the cash hoard matters is it allows Buffett the opportunity to pursue further share buybacks that return value to shareholders. Since 2018, Buffett has spent $78 billion repurchasing Berkshire stock. 

While much attention has shone on how much Buffett spent on Apple shares, it turned out that he spent even more buying back shares of his own company, which reflected his confidence in its future prospects and the discrepancy he saw in its price relative to fair value.

Finally, growing economic uncertainties mean that Berkshire Hathaway will have ample reserves that can act as a buffer against market volatility.

When the Great Recession gripped the economy and markets, Berkshire stood firm as the beacon of stability and Buffett’s swift actions were widely credited as shoring up confidence among investors. So too will Berkshire’s enormous cash levels act as a fortress to defend and insulate Berkshire Hathaway from any economic downturns to come.

So, Is Berkshire a Buy?

Berkshire Hathaway’s cash fortress alone is arguably reason enough to buy the stock given that it is expected to produce about $1 billion monthly but there is much more to like about it than that. 

Berkshire is also a cash flow machine that reported a full $9.06 billion in free cash flows last quarter alone. Plus, it’s trading at almost the exact same price-to-earnings multiple of 13x that Apple traded at when Buffett was snapping up shares back in 2016.

In short, Berkshire is producing monstrous cash flows, has a fortress cash pile that ensures stability in the face of economic hardship, and is trading at a compelling price relative to future earnings. 

So, if you held that punchcard Buffett has so famously discussed in the past and could use just one of your twenty punches to buy any stock, Berkshire Hathaway is perhaps as good a choice as any.

How Has Berkshire Stock Done This Year?

If you had to buy just one stock, Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) deserves a spot on most any investor’s shortlist. Berkshire is up 16.4% year-to-date, eclipsing the S&P 500 which is up by 10.4%.

Since Buffett took over the firm more than half a century ago, its track record has eclipsed the S&P 500 by a factor of approximately 100%, meaning average annual returns at Berkshire were close to 20% versus the market’s 10% annualized gains. The effect of compounding has significantly amplified the wealth of long-term BRK.A shareholders over their index-favoring counterparts.

In its most recent earnings report, Berkshire further confirmed why it’s the standout company of the S&P 500 that deserves your attention, if you only had to pick one.

Largest Cash Pile In History

One compelling reason to buy Berkshire Hathaway is its enormous cash pile, which acts as a virtual insurance policy during bust cycles.

How much cash does Berkshire Hathaway have now? Berkshire has amassed a record $276.9 billion of cash reserves. It’s clear that Buffett is benefiting massively from higher interest rates. 

Buffett has communicated in previous interviews that he favors 3 to 6-month Treasury bills, which allow him the flexibility to access cash in a short time frame if needed while still accruing interest at a pace that closely rivals longer term 1 & 2 year T-bills.

The mountain of cash cannot be overstated from a strategic perspective. When the Great Recession hit, Buffett was able to pull the trigger rapidly in a very short period, buying stakes worth billions of dollars in Goldman Sachs.

Should another crisis hit, which Buffett may expect given that he has signaled valuations are lofty, the Sage of Omaha can step in again and make monster purchases, likely at discounted prices. 

It’s noteworthy that Berkshire made more sales during this past quarter than it did purchases, a further sign that Buffett can’t find compelling valuations in the market at this time. That should provide ordinary investors pause for thought, and send a warning sign that upside reward may be muted relative downside risk, certainly in the medium term.

In favor of investors at this time, though, are seasonal effects that support higher prices through year-end and famously into the new year thanks to the January Effect. Already we have seen the market bounce firmly in early November from an underwhelming October performance.

Why Buy Berkshire?

Beyond the optionality provided by its enormous cash pile, another main reason to consider Berkshire Hathaway is its relative outperformance during poor-performing years. Take 2022 as the most recent example, a year which experienced a market decline of around 20%.

During that dismal year, Berkshire managed to tread water, resulting in market outperformance of 20%. Now fast forward to 2023 and Berkshire is trading in lockstep with the market. So investors choosing the S&P 500 have vastly underperformed the Oracle of Omaha’s firm over the past two years.

But let’s list a series of additional factors that make Berkshire the ultimate stock to buy. Among the top reasons is its Piotroski Score that sits at a perfect 9. This score includes nine key, discrete financial factors that help to assess the best value stocks.

On valuation, Berkshire does indeed come up trumps, even after its significant market outperformance in recent years. The company’s price-to-earnings ratio is just 13.3x, far below the 15x that Buffett looks for to signal an S&P 500 company may be undervalued.

Analysts tend to agree and have a $466 price target on the stock, representing 10.1% upside opportunity. An earnings power analysis model paints a more optimistic and pegs intrinsic value at $722 per share, suggesting 76.9% upside.

No matter how we slice and dice Berkshire, it appears a compelling long-term buy.

Wide Moat Evident In 1 Crucial Metric

It’s no secret that Buffett has long favored companies with wide economic moats that lead to sustainable competitive advantages. By building a conglomerate of businesses and equities that all feature these wide moats, Berkshire itself has amassed a moat so wide it may be hard to ever dislodge.

The evidence of the moat can be spotted in one key ratio, return on invested capital. An ordinary firm in the S&P 500 may enjoy an ROIC of approximately 10%. Berkshire Hathaway has a ROIC of 9.7%, significantly above the average corporation.

If anything, Berkshire’s wide moat acts as a hindrance to its valuation at times. Contrast Berkshire with a hyper focused growth startup and you will see the latter often trades at a premium to sales and earnings. Berkshire’s mix of companies from railroads to candy stores, and equities that include everything from Apple to Snowflake, makes valuation challenging for even the most skilled analysts because while some Berkshire holdings benefit from boom cycles, others flounder and vice versa.

Wrap-Up

Berkshire Hathaway has a massive cash pile, its largest in history, of $276.9 billion, an increase from $147.4 billion last year. The conglomerate’s balance sheet is benefitting from significant interest hike tailwinds. The huge stash offers Buffett and his investment lieutenants optionality to swoop in and buy companies on sale if perilous times lie up ahead.

With a perfect Piotroski Score, a low price-to-earnings ratio, high return on invested capital and track record of outperforming the stock market in recent years and over the course of its operating history, Berkshire may well be the ultimate stock to buy both now and to hold long into the future.

From a valuation perspective, it still has considerable upside potential to the tune of over 10% according to a discounted cash flow forecast analysis. When you combine all those factors together, it’s hard to ignore Berkshire as a staple holding in any long-term portfolio.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.