Berkshire Hathaway (NYSE:BRK.A,BRK.B) has undershot the market this year, returning just under 10 percent against the S&P 500’s trailing 12-month return of nearly 16 percent. With legendary investor Warren Buffett stepping down as CEO at the end of the year, now may be a good time to take a second look at Berkshire to see what its performance and prospects could look like going forward. Is Berkshire Hathaway stock undervalued, and could Berkshire still be a good investment to make for the long run?
Berkshire Hathaway’s Valuation
In a market defined by high-flying tech stocks, Berkshire Hathaway commands the modest price multiples of 16.0 times earnings, 2.9 times sales and 1.5 times book value. Despite this low valuation, analysts only expect BRK.B to advance by about 5.8 percent from its current price of $499.84 to a consensus target of $528.67 over the coming 12 months.
One of the more telling metrics in Berkshire’s valuation is its price-to-book ratio, which is currently at one of the highest points it has reached since the late 2000s. Berkshire’s P/B ratio is a useful metric because, until the policy changed in 2018, all share buybacks had to take place when BRK.B was priced below 1.2 times book value. This, therefore, represents a concrete metric that Berkshire’s own management team has historically taken to indicate that the stock is attractively valued.
How Is Berkshire Hathaway Performing Now?
While the stock’s pricing suggests limited growth expected in the near future, Berkshire Hathaway’s wholly-owned businesses have performed rather well recently. In Q3, operating profit rose by 34 percent to $13.5 billion. One of the strongest growth drivers during that period was insurance underwriting, which more than doubled relative to the year-ago period to reach about $2.4 billion.
Although Berkshire doesn’t generally invest in the kind of high-growth tech businesses that have propelled the market to fresh highs this year on AI enthusiasm, its stock portfolio also continues to generate respectably solid returns. Apple (NASDAQ:AAPL), its top holding, is up by about 9.4 percent in the last year, closely mirroring the 9.8 percent that BRK.B itself has gained over the same period.
Although Berkshire has been a net seller of stocks this year, its enormous portfolio of long-term holdings acquired at favorable prices will likely keep delivering steady, compounding returns for it in the years to come.
Buffett’s Buyback Pause
One of the strongest arguments against Berkshire being significantly undervalued may be found in its own lack of recent share repurchases. Warren Buffett has long been a proponent of share buybacks during periods of undervaluation as a means of building value for shareholders. In the period between 2018 and 2024, Berkshire was consistently buying back its own shares, in many cases deploying well over a billion dollars per quarter.
Since Q3 of 2024, though, there has been a telling lack of repurchase activity at Berkshire. It’s important to understand, however, that this doesn’t necessarily point to overvaluation. Instead, it simply suggests that Buffett and his team don’t see Berkshire Hathaway stock as being undervalued enough to be an attractive buy relative to other opportunities they believe may present themselves.
Can Berkshire Create Outsized Value From Its Massive Cash Reserve?
One of the most characteristic features of Berkshire Hathaway over the past few years has been its enormous cash stockpile, which in Q3 reached a record of about $381 billion. With Buffett’s retirement at the end of the year, the management of this enormous reserve of capital will pass to Greg Abel, Buffett’s chosen successor.
Assuming Abel sticks to the same investing strategies that have allowed Buffett to handily outperform the market through much of the last 60 years, this cash could be deployed to create substantial new value for Berkshire’s shareholders. Though the market hasn’t presented many sharply undervalued buying opportunities at a scale that Berkshire can invest heavily in recently, future corrections will likely give Abel the chance to buy large businesses with strong competitive advantages at steep discounts.
The huge cash stockpile also provides Berkshire with a degree of insulation from what many investors are now seeing as a generally overvalued market. By keeping a large amount of cash in Treasury instruments that produce safe, predictable yields, Berkshire can keep a pool of capital ready to deploy without it being affected by the kind of market downturn that is likely to present favorable buying opportunities. As such, Berkshire would likely benefit from a market correction that could negatively impact the high-growth tech businesses currently topping the S&P 500.
Is Berkshire Hathaway Undervalued?
Right now, it appears more likely that Berkshire Hathaway is somewhere in the neighborhood of being fairly valued, rather than being truly undervalued. With the P/B above the level historically used to judge undervaluation and Buffett himself declining to buy back more shares over the last year and a half, it’s hard to make an argument that BRK.B is trading significantly below its intrinsic value. With that said, the valuation is also far from being out of line, especially in the current market.
Even without significant undervaluation, Berkshire could still be a good stock to buy for long-term compounding gains. At what is likely a fair price, Berkshire Hathaway stock represents an opportunity to gain exposure to a strong investment portfolio and a stable of wholly-owned businesses that have shown significant recent growth. Further deployments of capital to buy stocks or private businesses could build additional value, setting Berkshire up to keep growing over long periods of time.
It’s also worth noting that Greg Abel’s ascension to the CEO’s role could finally bring about a long-awaited change on dividend policy at Berkshire. Despite its staggering reserves of cash, Berkshire Hathaway has never paid a dividend due to Buffett’s preference for share buybacks. Under Abel, however, it’s possible that Berkshire could finally begin to allocate some cash to dividend distributions, potentially turning one of the best growth stocks in American market history into a strong income-producing asset. Though Abel hasn’t commented specifically on issuing a dividend, the leadership change currently taking place at Berkshire could present a good opportunity to explore new options for returning cash to shareholders.
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.