Few investors can match the fame or investing prowess of Warren Buffett. Nonetheless, many are eager to apply the billionaire’s value investment philosophy and emulate his long-term success in beating the market when managing their own portfolios.
There’s one stock above all others that probably deserves particular consideration from Buffett fans. Indeed, what company should top that list over his very own Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B)?
Today, it’s one of the 10 largest companies in the world, with a market cap in excess of $750bn. Over the past five years, long-term investors have been rewarded with a healthy 61% gain in the Berkshire Hathaway share price.
So, let’s take a closer look at what the conglomerate does and whether investors should consider buying shares now.
Berkshire’s business model
Buffett’s holding company engages in activities spanning insurance and reinsurance, utilities and energy, freight rail transportation, finance, manufacturing, and retailing services.
Overall, the group’s operating businesses performed well in the third quarter, largely due to strong growth for the insurance division’s underwriting profits. Collective profits for Berkshire’s businesses rose 41% to $10.8bn.
However, it hasn’t all been plain sailing for the company. Berkshire’s real estate businesses have suffered amid high US mortgage rates and the insurance unit remains exposed to cumulative charges arising from wildfires that have ravaged America’s west coast in recent years.
Despite these challenges, it’s fair to say the operating businesses as a whole are well run and in good health. Besides, arguably the main event is what Berkshire does with its cash.
Buffett’s company invests in a range of publicly listed large-cap stocks, primarily from the US stock market. Examples include Apple, Coca-Cola, and American Express.
In addition, the group’s investment style has been characterised over the years by taking major stakes in stocks that Buffett firmly backs. A good recent illustration of this has been Berkshire’s rapid accumulation of Occidental Petroleum shares, bringing its stake in the oil producer to over 25%.
Perhaps the most striking feature of Berkshire’s portfolio today is the enormous $157.2bn cash pile the company has amassed. It currently owns $126.4bn in short-term Treasury bills yielding at least 5%.
That’s higher than the current US CPI rate of inflation of 3.7%. Although the real returns on cash are hardly spectacular, it suggests Buffett is keeping plenty of dry powder for potential stock market bargains in the future.
Indeed, investors should note that Berkshire shares face volatility risk from their stock market investments. The group’s equity portfolio is not as diversified as many potential investors may imagine, with 70% concentrated in just four stocks.
Warren Buffett has been the chairman and largest shareholder in Berkshire Hathaway since 1970. This makes him the longest-reigning CEO in the S&P 500 by a considerable margin. He turned 93 a few months ago.
No doubt some will question whether the Berkshire share price might crash upon Buffett’s departure. It’s a reasonable concern.
Nonetheless, company veteran Greg Abel has already taken on many responsibilities. I think he’s well-placed to guide Berkshire through its post-Buffett future, however daunting the challenge.
Overall, I believe Berkshire Hathaway shares merit consideration from all investors inspired by Warren Buffett. I’m a shareholder myself.