Warren Buffett’s investing career has been one of the most-watched in financial history. From early investments like Coca-Cola to a more recent entry into the tech world with a giant stake in Apple, investors everywhere have observed Buffett’s moves and tried to learn from them. Oddly enough, though, the best Buffett stock may be hiding in plain sight.
Buffett bought Berkshire Hathaway in the 1960s when the company operated as a struggling textile company. Ironically, the legendary investor has since described the purchase as the worst investment of his career.
Since making what he perceives as an initial mistake, though, Buffett has built Berkshire into a behemoth valued at over $930 billion.
Over the last several years, he has also allocated enormous amounts of the company’s capital to buying back its own shares. Here’s why what the Oracle of Omaha once viewed as his biggest investment blunder may now be the ultimate Warren Buffett stock.
How Much of Berkshire Has Buffett Repurchased?
To get a sense of just how bullish Buffett is on his own company, it’s helpful to understand the scale of Berkshire’s share buybacks in recent years.
In 2018, Berkshire’s board of directors changed the company’s rules on share buybacks. Previously, Buffett was only allowed to pay up to 20% of book value for Berkshire, a restriction that all but prohibited buybacks for such a large and successful company.
Since then, though, Buffett has been buying Berkshire at practically every opportunity. At the beginning of 2018, there were 2.469 billion Class B shares of Berkshire outstanding. That number has declined in every subsequent year to reach a total of 2.160 billion at the end of Q1 2024.
In other words, Buffett has bought back roughly 12.5% of one of the biggest companies in the world in just under six years.
What Makes Berkshire Hathaway the Ultimate Buffett Stock?
A quick look at Berkshire Hathaway’s business model may explain part of why Buffett has been so aggressive with his buybacks. As a company built by the legendary investor and his late partner Charlie Munger, Berkshire has many of the characteristics Buffett is known to look for in a great company.
The first feature of Berkshire that aligns with Buffett’s views on what makes a great business is its moat. When it comes to investing activities, Berkshire’s moat comes from the massive cash stockpile it has built up over the decades.
As of the end of Q1, the company held about $189 billion of cash. Thanks to this horde of cash and the company’s famous aversion to debt, Berkshire can make huge investments whenever it sees attractive opportunities. Few other companies can deploy capital at a scale similar to Berkshire, giving it an edge when it comes to making large investments.
The company also enjoys a solid moat in its core insurance business. Berkshire is the third-largest property and casualty insurance company in the United States, boasting a market share of about 6.2%.
Though this may not seem like a huge market share, it’s worth noting that Berkshire is only slightly behind the second-ranked Progressive, which commands 6.5% of the market. Buffett’s company also outranks major names like Allstate, Farmers and Liberty Mutual.
Berkshire’s structure as a conglomerate that reinvests cash from businesses it owns into higher-return opportunities also allows it to continue growing by deploying additional capital.
Buffett has often used the example of See’s Candy, an early Berkshire acquisition, to illustrate why some businesses can’t earn progressively more money through incremental capital investment.
By putting the money generated by See’s and other businesses it owns into stocks and new acquisitions, Berkshire has been able to consistently move capital to where it can generate the highest return for shareholders.
A final aspect of Berkshire Hathaway that makes it the ultimate Buffett stock is the fact that it produces very solid profits and cash flows.
Berkshire’s management team has historically avoided the modern trend of investing in high-growth companies that haven’t yet achieved profitability.
Berkshire, however, produced $22.84 in cash flow per share in the last fiscal year and delivered a net margin of 19.9%.
With this profitability and a long potential growth runway as its investments continue to pay off, Berkshire will likely be able to to deliver reliable returns for its shareholders for years or even decades to come.
Is Berkshire Undervalued?
Another characteristic Buffett is famous for seeking out in stocks is pricing below the intrinsic value of the company.
On the surface, Berkshire’s valuation seems fair but perhaps not especially low. The stock trades at 23.1x forward earnings, a bit above the S&P 500 average of 22.1.
The stock’s price-to-sales and price-to-earnings-growth ratios are also slightly high at 2.5x and 1.6x, respectively.
Buffett’s view, however, seems to be that there’s good value to be had in Berkshire shares. The company repurchased about $2.3 billion worth of its shares in Q1, a slight increase in volume from the quarter before.
Interestingly enough, this fast-paced buyback activity occurred at a time when the stock was rising sharply. At the end of the first quarter, Berkshire was up about 14% for the year, well outpacing the S&P 500 during the same time period.
With the stock now up over 21% YTD, it may be worth watching Q2’s buyback activity to see whether or not Buffett still believes his own stock is undervalued.
Warren Buffett Best Stock to Buy Now
The best Warren Buffett stock to buy now is likely Berkshire Hathaway which appears to be what Buffett himself might call an opportunity to buy a great company at a fair price.
Though Berkshire is unlikely to generate the kind of returns that the market has become accustomed to in high-growth tech stocks, it’s still likely a good choice for long-term investors seeking conservative growth opportunities.
A continued program of share buybacks combined with ongoing earnings growth is likely to support higher share prices, and Berkshire’s core businesses remain very solid.
Although Buffett hasn’t found many new investment opportunities in today’s expensive market, the company’s cash reserve will likely come in handy for buying sold-off stocks in the future.
Overall, Berkshire remains a compelling business that produces mountains of cash flow and is likely to do so for the foreseeable future regardless of the economic climate.
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