Berkshire Hathaway (NYSE: BRK.B) (NYSE: BRK.A) enables people to invest with one of the greatest investors of all time, Warren Buffett. The conglomerate owns a set of businesses outright, and it has a large portfolio of publicly traded stocks.
The core of Berkshire's empire is insurance companies, such as GEICO and General Re. Buffett likes the insurance industry, as it provides him with a lot of money to invest with through its float. Float is the money that insurance companies collect and hold until a claim is paid out. While most insurance companies invest in safe, fixed-income securities to boost their returns, Buffett takes a different approach, investing in great companies that he considers undervalued.
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This unique strategy has worked, making Berkshire one of the largest companies in the S&P 500 index with a $1 trillion market cap. But does that make the stock a buy?
The Buffett succession plan
Buffett has been the face (and the CEO) of Berkshire since 1965 when he took over as CEO of the failing textile company. He is now 94 years old, and he won't be around forever. The question is whether his successors can maintain that Buffett magic.
Greg Abel is set to become CEO of Berkshire when Buffett is gone and will be in charge of all investment and capital allocation. He currently oversees Berkshire's non-insurance businesses, and he helped turn Iowa utility MidAmerican Energy, now called Berkshire Hathaway Energy, into a utility powerhouse.
Unlike Buffett, Abel has never been a stock picker. He will have the help of Todd Combs and Ted Weschler, who have been helping manage Berkshire's investment portfolio for more than a decade, but none of the three have Buffett's track record. Furthermore, Combs and Weschler deal mostly with Berkshire's smaller stock positions.
Berkshire's insurance operations, meanwhile, will continue to be run by Vice Chairman Ajit Jain. He's been Berkshire's lead insurance executive for a long time and has often been praised by Buffett. Those who monitor the company credit him with getting Berkshire into the reinsurance business and helping turn GEICO around.
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Valuation has gotten high
Berkshire currently trades at a price-to-book (P/B) ratio of 1.6, which is high by historical standards. For a while, Buffett would repurchase shares only when the stock was trading below 1.1 times book; then he upped the number to 1.2, and finally he got rid of that guideline altogether.
Data by YCharts.
There are clear signs that Buffett and some of his executives think Berkshire stock is currently overvalued. Last quarter, for the first time in six years, Buffett did not buy back shares, despite being flush with cash. Berkshire ended Q3 with $325.1 billion in cash and short-term investments in U.S. Treasury bills on its balance sheet. He must have been aggressively selling stock in the Berkshire portfolio this past year, as the company's cash and short-term investment position at the end of 2023 was $167.6 billion.
Meanwhile, Jain sold more than half his Berkshire A share stake in September. It was the first outright sale (not counting gifts) since 2007 by any Berkshire insider. That 2007 sale was made by a departing director.
Is Berkshire stock a Buy?
Buffett has created a unique business model that should continue to thrive once he is gone. However, the stock's valuation is high, and Buffett himself isn't buying back stock. One of his main executives dumped more than half his shares. Meanwhile, Buffett appears to be struggling to find value in the market as a whole currently, reducing a lot of his top holdings without making new acquisitions.
I think investors should take the cue from Buffett and Jain and hold off on buying the stock at current levels. Berkshire will likely continue to win in the long term, but there is no reason to rush in and buy the stock at its current valuation, especially considering Buffett's advanced age.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
