Warren Buffett announced his pending retirement on 3 May. And since then, Berkshire Hathaway (NYSE:BRK.B) stock has fallen 10% — while the S&P 500 rose 12%. Has the company really lost its long-term Buffett premium?
With a forecast price-to-earnings (P/E) ratio of 24, it’s now valued no more highly than the index average. And if we adjust for the more than $330bn in cash — around a third of its market cap — the P/E of the investment business itself looks like only around 16.
If there’s anything investors really don’t like it’s uncertainty. And Berkshire Hathway is coming off 60 years of that special Buffett kind of certainty that’s helped shareholders sleep soundly.
Big shoes to fill
With Greg Abel set to take the helm, are there really reasons for fear? Or is it more — meet the new boss, same as the old boss?
Well, Buffett isn’t just handing over the reins blind. Abel is his hand-picked successor. And Buffett has been preparing him for the role for years.
At 63 he’s a fair bit younger than his mentor, but Abel is no reckless upstart who’s likely to rush for risky growth stocks the way so many newbie investors do. He’s a man of considerable experience, having been at Berkshire Hathaway for more than 30 years.
Will he make mistakes? Yes of course. But so did Buffett, sometimes quite big ones. I really hope investors give him a fair chance to show what he’s made of.
Underlying change
But it’s not just about the change of boss. There are other, fundamental, concerns too. One is that the insurance cycle might have peaked, the way it periodically does — and Berkshire is big in insurance.
Long-term investors shoud look beyond such cycles, but not all do. Some hedge funds, perhaps not exactly known for ‘buy and hold forever’ stances, have been selling.
Then there’s the fact that Buffett hasn’t made many new investments for a while and is accumulating cash. But when markets are soaring and valuations are high, isn’t that exactly what he should do?
And it’s no surprise that in bullish spells, investors will move away from long-term safer stocks like Berkshire and plump for those storming up the Nasdaq.
Cash burning holes?
Some say the cash should be used to buy back shares. If I owned Berkshire stock, I’d be happy to leave that to Buffett, his team, and his successor to decide. After all, I’d have stumped up my cash precisely because I trust their skills and judgement better than my own.
I wouldn’t be surprised to see Berkshire Hathaway treading water for a while now. Maybe for more than just a year or two. I can’t blame people who want to see proof of the ‘new’ guy’s potential before they risk their hard-earned.
And realistically, I can’t see the company matching the returns it was able to generate in its earlier years. Things were different then.
But I’d still put Berkshire Hathway near the top of the companies I think those investing for the next 60 years should consider.
Oh, and I almost forgot — second-quarter results are due on Saturday (2 August).
