Berkshire Hathaway (BRK.B), under the stewardship of the iconic investor Warren Buffett, achieved a remarkable feat as its market cap soared past the elusive $1 trillion mark. This milestone marked a distinguished honor for the conglomerate, positioning it as the sole non-tech U.S. company to reach such esteemed heights amidst the plethora of trillion-dollar market cap firms.
Despite the enthusiastic market sentiment surrounding Berkshire shares, propelling the stock to unprecedented levels, Warren Buffett himself appears to deviate from this optimism, evident in his restrained Q2 repurchasing activity.
In the second quarter, Berkshire netted sales exceeding $75 billion, while allocating a mere $345 million towards share repurchases – a fraction in the grand scheme of the organization’s colossal $277 billion cash reserves. Remarkably, Q2 witnessed the lowest repurchase activity since 2018 when Berkshire refrained from buybacks altogether.
Question arises: did Buffett err in exercising prudence with share buybacks during a period of soaring Berkshire stock prices? This discourse commences with an exploration of Berkshire Hathaway’s share buyback policy.
Delving into Berkshire Hathaway’s Share Buyback Policy
Previously, up to 2018, Berkshire’s buyback policy restricted repurchases to shares priced under 1.2 times their book value. However, in mid-2018, the company revised its policy to grant Warren Buffett broader discretion in share repurchases. Subsequently, Berkshire embarked on an aggressive buyback spree from 2020 to 2021, amounting to over $50 billion. Although the pace has somewhat tempered since, quarterly repurchases never dipped below $1 billion until the recent Q2.
Reflecting on Q2: Another Bellwether Moment for Buffett?
During a whimsical exchange with the Financial Times in 2019, Buffett whimsically portrayed his “nightmare” scenario: stocks perceived as overvalued while Berkshire’s shares remain fairly priced. Recent trends, particularly Buffett’s decision to reduce stakes – notably in top holding Apple (AAPL) – to forestall future capital gains tax implications, underscore his apprehensions about market valuations. Q2 likely epitomizes a period where Buffett grappled with deploying Berkshire’s burgeoning cash reserves.
Assessing the BRK.B Stock Forecast
Despite Berkshire’s trillion-dollar status, the stock garners coverage from a sparse five analysts, indicative of a mutual standoff between Buffett and the analytical cohort. The stock is pegged at a “Moderate Buy” rating, with a mean target price marginally exceeding Wednesday’s closing figures by 2.7%.
Buffett’s apparent reluctance towards Berkshire shares in Q2 contrasts sharply with the buoyant views held by market analysts and investors.
Deciphering Buffett’s Apprehension Over Berkshire Shares’ Valuation
Valuing Berkshire proves to be a complex calculus owing to its intricate business structure and diverse holdings. However, scrutiny of key metrics can provide insights into its appeal as an investment prospect. Notably, the current price-to-book ratio near record highs at 1.61x poses challenges, especially given Buffett’s historical penchant for repurchasing shares below 1.2x book value.
The stock’s NTM enterprise value-to-EBITDA ratio of 15.4x surpasses historical averages, prompting reflective comparisons with Buffett’s value investing ethos. Though Buffett’s partner, Charlie Munger, expressed skepticism towards EBITDA as an earnings gauge, a paucity of alternatives complicates Berkshire’s valuation.
Contemplating Berkshire Investment Prospects
At present valuations, Berkshire shares do not beckon as compelling investments amidst the current market landscape devoid of unequivocal bargains. Nonetheless, Berkshire remains a stalwart choice for value investors seeking a bedrock asset in their portfolio. While concerns loom over succession at Berkshire post-Buffett, the conglomerate’s enduring conservative investment strategy mirrors Buffett’s timeless value investing principles.
Despite the apparent discord in viewpoints between Buffett and the markets, the ensuing verdict on Berkshire shares will unravel only in hindsight, unveiling the astute wisdom or fallibility of contrasting investment philosophies.