When it comes to looking for pedigree and quality in the market, Berkshire Hathaway (NYSE:BRK.A) shares come to mind. It is undoubtedly one of the most successful investment companies in the world, and Class A shares in the company are now the most expensive on the market.
Berkshire Hathaway is managed by Warren Buffett, one of the most respected investors of all time. The company has a long history of generating returns for its shareholders. Investors can buy Class A shares with a cool $530,000 price tag, or the more manageable Class B shares at $350. The second class of shares were created in a 1:50 stock split in 2010, with the lower price enabling more flexible buying and selling. So is there more to come, or are the best returns in the past?
How has it performed?
The company has an interesting history. It has transitioned from manufacturing textiles to becoming a holding company of a wide range of businesses. These have included insurance, railroads, utilities, and consumer goods. Since Buffett first bought Berkshire Hathaway shares at $7.50 in 1962, the value of each share has skyrocketed to well over $530,000.
What is it worth?
It is important to note that Berkshire Hathaway is a very different company from most others. It is a holding company, and it does not generate earnings in the traditional sense. Instead, Berkshire Hathaway generates cash flow from its investments.
The price-to-earnings (P/E) ratio is a common metric used to value stocks. The P/E ratio for Berkshire Hathaway is currently 106.2 times. This is well above the average P/E ratio for the S&P 500, which is around 20 times.
Additionally, Berkshire Hathaway shares have a discounted cash flow valuation of $353,388, currently 48% below the current price of $520,499. This means that the company is currently trading at a significant premium to its fair value.
Is there still growth ahead?
The track record for Berkshire Hathaway shares speaks for itself. The company has a large and diversified portfolio of quality investments, and it is well-positioned to benefit from a number of long-term trends. The company has a strong management team, and large cash reserves. Berkshire Hathaway is well-known for its ability to make strategic acquisitions.
Why would I avoid it?
Besides the high valuation, there are a few risks to consider before investing in Berkshire Hathaway. With a CEO in his 90s, a succession plan is clearly important. The current vice chairman, Greg Abel, is widely expected to take the helm, and most likely already leads many major investment decisions.
Furthermore, the company’s main investments are also concentrated in a few key industries, such as insurance and energy. This means that the company’s performance is sensitive to these industries. A massive 46% of Berkshire Hathaway consists of shares in Apple, which is vulnerable to changes in consumer sentiment and economic pressures.
Am I buying more Berkshire Hathaway shares?
Berkshire Hathaway is a great company with a long history of generating returns for its shareholders. I have held shares for a number of years, which have seen great returns, but with the valuation now suggesting the price is well above fair value, I will likely be looking to reduce my position over the next few months.
