Earlier this week, shares in Berkshire Hathaway (NYSE:BRK.B) hit fresh all-time highs. The company, mostly an investment vehicle for the legendary Warren Buffett, has enjoyed a share price gain of 24% over the past year.
The latest jump comes after positive results were released over the weekend. Is the stock fairly valued, or could there be more potential gains ahead?
Results show momentum
The Q2 earnings were helped by the rising interest rates. This might sound odd, given the fact that higher interest rates typically are bad for the stock market in general.
Berkshire has large exposure to insurance, for example, via Geico car insurance. Given that insurance companies typically invest in interest-rate sensitive products, this move in interest rates has helped the business to earn more.
The results included $25.9bn of mostly unrealised gains from the investment portfolio. A good chunk of this has come from Apple shares, which performed well in Q2. Given that almost half of the $353bn portfolio is invested in Apple, the company is very much tied to the stock movements of the tech giant.
Being cautious about new opportunities
I believe investors were also cheering the fact that Buffett remains sensible about where he’s investing money. During the quarter, he sold $8bn worth of stocks versus buying $4.5bn worth. This meant the company is sitting on a large cash pile of almost $150bn.
Granted, some might see this large cash amount as a risk. Given that inflation is still higher than average, this value is being eroded. However, the other side of the coin is that it gives Buffett plenty of dry powder to buy shares as soon as he spots any opportunity.
It also makes the share price of Berkshire Hathaway less exposed to a stock market crash. If the market does tumble, Buffett isn’t overly exposed to stocks. Rather, he can use the cash to buy his favourite stocks at cheaper levels.
The potential for further gains
I do understand investor concern about buying a stock at all-time highs. It’s usually not the ideal place to start buying the shares of a particular company.
Yet consider the price-to-book ratio. This compares the share price to the book value of the company (think of it as the accounting value of a business). Given the stocks the firm owns, it’s a good gauge on valuation.
The current ratio is 1.58. Granted, this is the highest level it’s been for years, yet this isn’t a high absolute value. Anything less than one is usually an undervalued stock, with a value above three being overvalued. So from this, the share price could easily rally further before heading into overvalued territory.
With everything being considered, I think investors can still expect further gains from Berkshire Hathaway shares, led by Buffett.
