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 13.7% year-to-date, essentially in line with the S&P 500 which has climbed by 13.9% for the year.
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 $157.2 billion of cash reserves, up $9.8 billion from Q2. It’s clear that Buffett and Munger are 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 8.9x, 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 $407 price target on the stock, representing 15.7% upside opportunity. A discounted cash flow forecast analysis is more optimistic and pegs intrinsic value at $469 per share, suggesting 33.4% gains may be on the horizon for patient investors.
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 13.6%, 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 $157.2 billion, an increase from $147.4 billion in the prior quarter. 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 33% 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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