Is Berkshire Hathaway Massively Undervalued?

The secret?

Buffett doesn’t invest in the stock getting the most press during a given week. He rarely pays attention to IPOs, and market enthusiasm over particular industries and popular assets doesn’t impact his investment strategy. Instead, he carefully examines business fundamentals and chooses opportunities that are undervalued with a high likelihood of steady long-term growth. 

In other words, through Berkshire Hathaway (BRK.B), Buffett executes a value-based investing strategy. He invests in quality companies that have been overlooked by the market and appear to be trading beneath their intrinsic values. 

When asked for his perspective on best trading practices, Buffett offered these insights into his philosophy: 

• If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.
• Our favorite holding period is forever.
• Price is what you pay, value is what you get.
• It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
• Never invest in a business you cannot understand.

With all of this in mind, it’s easy to assume that investors are willing to buy Berkshire Hathaway shares at any price. It might even appear that Berkshire Hathaway is overvalued given the high price of Class A shares. However, a deep dive into the company’s fundamentals shows a different picture, and analysts are starting to ask, “Is Berkshire Hathaway massively undervalued?” 

Berkshire Is 48% Undervalued?

Berkshire Hathaway has two share classes: Class A and Class B. Class A is the original Berkshire Hathaway stock, and it trades at hundreds of thousands of dollars per share. As of December 2021, its 52-week low was $333,150 per share, and its 52-week high was $445,000 per share. 

While most companies split their stock long before prices reach these heights, Buffett has declined to do so with Berkshire Hathaway Class A shares. His reasoning is centered around attracting the sort of investors that share his philosophy – a commitment to long-term gains versus chasing short-term ups and downs in pricing. 

The obvious downside to such high-priced shares is that a vast majority of investors are unable to participate. Before Class B shares were made available, Buffett noticed that Berkshire Hathaway’s success sparked interest in the stock, and it appeared that lower-quality alternatives were coming to market. For example, mutual funds and unit trusts were considering setting up products that mirrored Berkshire Hathaway’s historical trades in an effort to deliver comparable returns. 

To avoid what would certainly be a poor experience for those who invested in look-alike funds, Berkshire Hathaway created Class B shares. In a 1996 letter to shareholders, Buffett said: 

We made this sale [of Class B] in response to the threatened creation of unit trusts that would have marketed themselves as Berkshire look-alikes. In the process, they would have used our past, and definitely non-repeatable, record to entice naïve small investors and would have charged these innocents high fees and commissions. Berkshire would have been burdened with both hundreds of thousands of unhappy, indirect owners (trust holders, that is) and a stained reputation.

Class B shares make Berkshire Hathaway accessible for every investor. Over the past year, prices ranged from a 52-week low of $221.26 per share to a 52-week high of $295.65 per share. However, some models indicate Berkshire Hathaway Class B shares are deeply undervalued – perhaps as much as 48 percent. 

Based on Berkshire Hathaway’s history, the company’s current activity, and the intrinsic value indicated by fundamental financial condition, projections show potential for share prices to increase as high as $537.71. Of course, this figure comes from the most optimistic analyst, but the average projection of $411.19 still leaves plenty of upside – 48 percent, to be exact. 

Berkshire Has Diversified Revenue Streams

The beauty of a holding company like Berkshire Hathaway is that it doesn’t rely on a single source of revenue for success. Diversified revenue streams make it possible for the company to weather economic storms and remain relatively stable through market ups and downs. 

To begin with, Berkshire Hathaway owns stock in companies that can be counted upon to deliver consistent results – but they aren’t limited to a certain industry or sector. Examples of stocks in Berkshire Hathaway’s portfolio (as of September 30, 2021) include: 

• Apple (AAPL)
• Bank of America (BAC)
• American Express (AXP)
• Coca-Cola (KO)
• Kraft Heinz (KHC)
• Moody’s Corporation (MCO)

What do these companies have in common? Among other things, each has a long history of producing products and services that are deeply integrated into daily life. Their financials are strong, and there is every reason to believe they will continue creating value for shareholders over time.

However, there is something these companies don’t share: their industries and markets. They range from consumer staples and technology to a variety of financial services, which means if a crisis hits one industry, the rest of the portfolio can offset some or all of the damage. 

On top of its diverse mix of securities, Berkshire Hathaway owns a number of successful companies in their entirety. Examples include: 

• GEICO
• Dairy Queen
• Berkshire Hathaway Energy
• Duracell
• Benjamin Moore & Co. 

Together, these diversified revenue streams put Berkshire Hathaway in a position of strength that few of its peers can match. 

Berkshire Invests in Companies with Moats

When Warren Buffett examines a business for potential purchase, he looks at more than basic financial measures, organizational structure, and management. He also considers whether the company can hold its own against would-be competitors through a substantial moat. 

Moats can be any competitive edge that differentiates one company from others in the marketplace. Brand recognition, high switching costs, and efficiencies of scale are just a few of the moats that keep competitors at bay.

By including shares of these companies in the Berkshire Hathaway portfolio, Buffett increases the odds that Berkshire Hathaway will generate returns because the companies that he owns are more likely to continue producing profits over time. 

Why Has Berkshire Not Realized Fair Market Value

Berkshire Hathaway has generated significant returns throughout its long history, but the past decade hasn’t been quite as successful. That isn’t to say Warren Buffett miscalculated, for the most part. Instead, it has more to do with the types of companies that thrived before and during COVID. 

Buffett almost never jumps into IPOs. Instead, he waits to see a company’s track record before putting money in. That took many high-growth tech companies out of the running in their earliest days, with the notable exception of Snowflake in September 2020. 

Though Berkshire Hathaway might invest in some of these tech stocks in the future, the rules Buffett lives by preclude the purchase of overpriced shares – which many tech companies appear to be – and buying any shares he wouldn’t be satisfied to hold for a lifetime. 

While Buffett’s strategy is likely to pay off in the long term, it doesn’t attract investors to Berkshire Hathaway in the current environment. As a result, Berkshire Hathaway has not realized fair market value, creating opportunity for those who buy Berkshire Hathaway stock today. 

What Spark Would Cause Berkshire Stock To Pop?

Any number of events could cause Berkshire stock to pop, but market experts have their eye on a particular scenario. If Berkshire Hathaway’s utility subsidiary can succeed in increasing market share as it relates to renewable energy, the company will realize exceptional cash flows.

That’s the sort of win that will attract investors to Berkshire Hathaway stock – or to put it another way, it is the spark that would cause Berkshire stock to pop. 

#1 Stock For The Next 7 Days

When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.

Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.