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Is The Ultimate Warren Buffett Stock A Buy As It Chases Buy Point Amid Coronavirus Rally?

01 Sep 2020

Warren Buffett is widely regarded as one of the greatest investors of all time. One way to share in his success is to invest in his firm, Berkshire Hathaway (BRKB). Berkshire Hathaway stock has built a base, but is it a buy as stocks rally following the coronavirus market crash? Let's take a close look at the fundamental and technical performance of the ultimate Warren Buffett stock.

Berkshire Hathaway is a conglomerate that owns some of America's most famous firms. It wholly owns the likes of Geico, Duracell, Dairy Queen, Fruit of the Loom and railroad operator BNSF.

Berkshire Hathaway Stock

Berkshire Hathaway is perhaps more famous for serving as an investment vehicle for Warren Buffett and his top lieutenant, Charlie Munger. Following their value investing philosophy, Berkshire Hathaway owns huge stakes in American Express (AXP), Coca-Cola (KO) and other heavy hitters.

But the definition of a Warren Buffett stock has evolved in recent years. Warren Buffett became a big investor in airlines such as Delta Air Lines (DAL). But he was left to rue his decision to go against his own long-held views about that industry's lack of profitability. The move blew up in his face as airline stocks were decimated due to the global coronavirus pandemic.

Mining Gold Stocks

Buffett also exited some long-standing holdings in Q2 and bought a stake in Barrick Gold (GOLD).

Under investment managers Todd Combs and Ted Weschler, Berkshire Hathaway has been increasingly sinking money into tech. It's taken large positions in established giants like Apple (AAPL), as well as younger companies like Brazilian payments company StoneCo (STNE). Berkshire also snapped up a stake in Amazon.com (AMZN).

Warren Buffett has also been spending more on stock buybacks. Berkshire made a record $5.1 billion in share repurchases in Q2, though his empire is still insulated with a mammoth stockpile of cash.

Buffett's Japanese Take-away

Warren Buffett has just turned 90, but he is not resting on his laurels. Berkshire Hathaway recently disclosed it's acquired stakes of slightly more than 5% in each of the five leading Japanese trading companies.

The firm has snapped up holdings in Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. Known as sogo shosha, these are conglomerates that import a wide range of products and materials into Japan. They deal in areas including energy, metals, food and textiles.

Berkshire bought up the stock over a roughly 12-month period on the Tokyo Stock Exchange. Berkshire intends the investments to be long term holdings. The firm may increase its stake in any of the companies up to a maximum of 9.9%.

Berkshire Hathaway Coronavirus Exposure

As well as its status as an investment vehicle, Berkshire Hathaway is a conglomerate in its own right. It has interests in segments such as railroads, utilities and energy. Those sectors, along with other "real economy" companies that are Warren Buffett staples, have been hard hit by the coronavirus shutdowns and massive economic contraction.

It has big exposure to the insurance sector by way of its ownership of Geico. Currently, states such as California are ordering insurers to give partial credits or refunds of premiums in lines such as private passenger automobile insurance. Also commercial automobile insurance, workers' compensation insurance and commercial liability insurance.

Geico is the second largest auto insurer in the United States, after State Farm. In addition, insurance companies look set to get hit by an increase in demand for policy payouts in areas such as travel insurance. And they will be paying out any policies that include contagious disease coverage.

Railroads Not Immune

Berkshire also owns BNSF Railway Company, the largest freight railroad network in North America. But profits will also be hit here due to the sudden economic contraction affecting the level of demand for its services. Other railroads including Union Pacific (UNP) and CSX (CSX) have already warned their businesses could see significant financial impacts.

Other wholly owned businesses such as Dairy Queen and multilevel marketing company Pampered Chef are also sure to be hit by the coronavirus recession. Also, Fruit of the Loom, aviation training company FlightSafety International and real estate giant Long & Foster.

Warren Buffett's Big Gas Bill

Warren Buffett has been criticized for the size of his cash pile. But on July 6, he made his biggest acquisition in years with a $10 billion deal for Dominion Energy's (D) assets.

Berkshire seized the chance to secure Dominion 's gas pipeline network after the utility giant and Duke Energy (DUK) unexpectedly aborted plans to build the Atlantic Coast Pipeline.

Berkshire Hathaway Energy will buy about 7,700 miles of natural gas transmission pipelines and 900 billion cubic feet of gas storage. The all-cash deal includes $4 billion of equity and $5.7 billion of debt. It's set to close in the fourth quarter.

"We are very proud to be adding such a great portfolio of natural gas assets to our already strong energy business," Buffett said in a statement.

Berkshire Hathaway Ejects Airline Stocks

Warren Buffett's firm revealed at its virtual annual meeting in May that it had sold off all of its airline holdings. This was part of a larger sell-off of $6.1 billion of net equities in April alone. It sold its shares of Delta Air Lines, United Airlines (UAL), American Airlines (AAL) and Southwest Airlines (LUV). The industry is currently facing a huge drop in air travel.

Berkshire initially sold off millions of shares of Delta Air Lines and Southwest Airlines amid the coronavirus crisis, according to regulatory filings released in early April.

Additionally, the sell-off came despite Warren Buffett asserting earlier in March that he had no plans to sell airline stocks. In February, Berkshire Hathaway disclosed it bought more Delta Air Lines shares.

Warren Buffett Goes For Gold

Berkshire Hathaway's most recent 13F filing showed the firm opened a stake in Barrick Gold in the second quarter. Berkshire bought nearly 21 million shares of gold mining giant Barrick Gold, valued at more than $563 million.

The move came as it exited Goldman Sachs (GS), Burger King-parent Restaurant Brands (QSR) and Occidental Petroleum (OXY) in the pandemic-hit period.

Buffett made a big bet on shale just before crude oil prices crashed. It took a $10 billion stake in Occidental in 2019 as it outbid Chevron (CVX) for Anadarko Petroleum. With global energy demand plunging during the coronavirus crisis, shale operations are largely unprofitable now.

Berkshire also cut stakes in JPMorgan Chase (JPM) by 61%, Wells Fargo (WFC) by 26%, and PNC Financial Services (PNC) by 41%.

Further, it made smaller cuts to U.S. Bancorp (USB), Mastercard (MA) and Visa (V).

Buffett's Coronavirus Recovery Plan

Overall, the firm's stock portfolio took a spanking amid the market drawback. But it has been recovering amid the broad post-cornavirus crash rally.

Its biggest holdings include Apple, American Express, Bank of America (BAC) and Coca-Cola. In the most recent quarter Buffett left his American Express stake unchanged.

Berkshire has actually added to its BofA shares, its second biggest portfolio position. Starting July 20, the stake in the banking giant expanded to more than 1 billion shares, up from 925 million shares at the end of Q2. Apple stock remains the No. 1 stock in Buffett's portfolio at 44.2% of assets

Meanwhile, airlines and restaurants look sure to have long-term issues even after the economy reopens. Financials are also struggling, as a combination of what could be a historic recession and record-low interest rates send investors fleeing bank stocks.

Warren Buffett managed to have some winners, even amid the Covid-19 pullback. Apple, Amazon, drugmaker Biogen (BIIB) and consumer staples retailer Kroger (KR) were among the stocks in Berkshire Hathaway's lineup of U.S.-listed stocks that performed well. Berkshire Hathaway is estimated to have paid an average $149.26 per Apple share, and it is now up more than 200%.

Other Buffett Blunders

There had been missteps that have damaged the Berkshire Hathaway stock portfolio even before the coronavirus crisis, such as large stakes in troubled Wells Fargo and Kraft Heinz (KHC). In fact, the firm is still carrying its Kraft investment at $13.6 billion. Its fair value is $8.1 billion, CFRA analyst Catherine Seifert said in a May 4 research note.

The Warren Buffett approach serves as a ready-built diversified portfolio for investors. But is this mix of wholly owned companies, blue chip stocks and a hand-picked selection of younger companies — along with massive insurance operations — enough to make Berkshire Hathaway stock a buy? Read on.

Berkshire Hathaway Stock Technical Analysis

Amid the coronavirus-related stock market pullback, Berkshire Hathaway stock plummeted. MarketSmith analysis shows it has recovered somewhat from its woes, and has now formed a cup base. It remains far from its ideal buy point of 231.71.

There are now some positive signs, such as that the stock is now well above its 50-day and 200-day moving averages. The 50-day line is on the cusp of passing the 200-day, which is positive.

The relative strength line of Berkshire Hathaway stock is also a cause for concern for investors. While up slightly in the past few weeks, last month the RS line fell to its worst level since late 2007. The RS line, the blue line in the charts provided, tracks a stock's performance vs. the S&P 500 index and reflects Berkshire's underperformance vs. the S&P 500 index.

Berkshire stock has lagged the S&P 500 index since the end of 2018. Before that, BRKB stock at best moved with the market for a decade. An investor could have bought an index fund or ETF like the SPDR S&P 500 ETF (SPY), and generated similar or higher returns with less stock-specific risk.

"In my view, for most people, the best thing to do is owning the S&P 500 index fund, Buffett himself said at Berkshire's annual meeting. "If you bet on America and sustain that position for decades, you'd do far better than buying Treasury securities, or far better than following people," he said at Berkshire's annual meeting. "Perhaps with a bias, I don't believe anyone knows what the market is going to do tomorrow, next week, next month, next year."

Berkshire Hathaway Earnings Mixed

Berkshire Hathaway earnings in Q2 were a mixed bag as its diverse array of businesses — from railroad BNSF to insurer Geico — suffered varied impacts from the coronavirus.

Operating income fell 10% to $5.51 billion, and Berkshire booked a $10 billion charge on Precision Castparts, which is exposed to the aviation sector.

"We believe the effects of the pandemic on commercial airlines and aircraft manufacturers continue to be particularly severe," the firm said in a statement. "In our judgment, the timing and extent of the recovery in the commercial airline and aerospace industries may be dependent on the development and wide-scale distribution of medicines or vaccines that effectively treat the virus."

But earnings from the vaunted stock portfolio totaled $34.5 billion. This is thanks to holdings such as Apple and Amazon going on strong runs lately, making up for the relative laggards in the portfolio.

The net result was an 86.5% surge in overall earnings to $26.3 billion. Berkshire Hathaway earnings per share came out at $2.28, a 9% dip on the previous year.

Berkshire Cash Pile Grows Again

The firm's cash pile has continued to grow. After a surge in stock sales, Berkshire's cash pile climbed to a fresh record high of $146.6 billion in Q2. This was up from $137 billion in the previous quarter.

It swelled even as Berkshire made share repurchases totaling $5.1 billion in Q2. This was almost double the prior record of $2.2 billion in Q4 2019 and a reversal from slower stock repurchases of $1.7 billion in Q1.

Improving performance has helped Warren Buffett's stock, though it still has a far from ideal IBD Composite Rating of 71. Still, this means it is among the top 30% of stocks tracked. The Stock Checkup Tool shows a good but not stellar Berkshire earnings-per-share growth rate of 20% over the past three years.

Meanwhile, its earnings also can be lumpy. Wall Street is not overly optimistic for Berkshire Hathaway earnings growth. Analysts project its earnings will fall 14% overall in fiscal 2020, before rebounding with a 27% rise in 2021.

Earnings ultimately drive stock performance. The CAN SLIM system recommends investors look for companies with earnings and revenue growth of at least 25%.

Difference Between BRKA Stock And BRKB Stock

The most obvious difference between Berkshire Hathaway's A class and B class shares is the price. While — at over 200 a share — BRKB stock may be considered relatively expensive, BRKA stock is the most expensive on the market at more than 300,000 a share.

Warren Buffett decided to introduce the BRKB shares to allow investors to purchase stock directly. Big demand for Berkshire Hathaway stock forced less-moneyed players to plow cash into unit trusts or mutual funds that mirrored his company's holdings.

"As I have told you before, we made this sale (of BRKB shares) in response to the threatened creation of unit trusts that would have marketed themselves as Berkshire look-alikes," Buffett said. "In the process, they would have used our past, and definitely non-repeatable, record to entice naive small investors and would have charged these innocents high fees and commissions."

BRKB stock was split 50-for-1 in 2010. It coincided with the firm using stock to help pay for the $27 billion acquisition of railroad Burlington Northern. BRKB shares are now worth 1/1,500th of BRKA stock. However the voting rights were unchanged.

Berkshire Hathaway Today

The modern Berkshire Hathaway operates in four main sectors.

Its insurance group is one of its biggest cash cows. One of the most famous jewels in the crown is Geico, which offers private auto and property insurance. Other parts of this business include multinational property/casualty and life/health reinsurance company General Re and Berkshire Hathaway Reinsurance Group. The latter underwrites excess-of-loss reinsurance and quota-share coverage globally.

Insurance operations are a big reason why Berkshire Hathaway earnings can be lumpy.

Its Regulated Utility Business group includes Berkshire Hathaway Energy, formerly known as MidAmerican Energy. It also includes railway services arm BNSF, North America's largest freight railroad network.

Meanwhile, the Manufacturing, Service & Retailing group includes Acme Building Brands, Fruit of the Loom and Justin Brands. The likes of Buffalo News, Business Wire, International Dairy Queen and NetJets fall under the service subsector. Retailers include See's Candies, Ben Bridge Jeweler, Helzberg Diamond Shops and Star Furniture.

Finally, the Finance & Financial Products segment includes: Hathaway Credit Corporation, transportation equipment and furniture leasing specialists XTRA and CORT, and BH Finance whose main interest is in proprietary investing strategies.

Berkshire Hathaway Stock Is Not A Buy

Berkshire Hathaway stock has been lagging the S&P 500 index since late 2018 and especially during the coronavirus market rally. While it has now formed a base, it is still some way before reaching its proper buy point.

Prior to the past 18 months, BRKB stock largely moved with the market. With its broad exposure to firms that have been hit by the coronavirus recession, Berkshire Hathaway's woes may continue.

After a late-2018 burst, Berkshire Hathaway earnings growth has been modest and uneven. Berkshire earnings declined in the most recent quarter, and in Q4 last year. In addition, Wall Street sees mixed fortunes for Berkshire earnings for the years 2020 and 2021.

While it may be presumptuous to bet against Warren Buffett, a canny investor looking for stocks to buy should focus on faster-growing companies, or even a broad-market ETF. The latter is an option espoused by Buffett himself, who says owning an asset such as the SPDR S&P 500 (SPY) is an ideal investment vehicle.

Bottom line: Berkshire Hathaway stock is not a buy.

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