Berkshire Hathaway:The Value Play of the 21st Century
Jul 16th, 2009 | By Contrarian Profits | Category: Top StoryWarren Buffett’s storied investment vehicle Berkshire Hathaway Inc is now trading at somewhere in the region of 1.2 times its book value of $72,000 a share. This makes it well worth considering for value-minded investors.
Now trading at $90,560, Berkshire Hathaway class A shares (NYSE: BRK.A) have plunged 60% from their 2007 peak of $149,000. According to Barron’s:
In the past decade, the stock has traded for an average of 1.6 to 1.7 times book value, a measure of shareholder equity per share. The current price-to-book ratio is near the low reached in early 2000, when Berkshire’s stock bottomed at about $40,000.
The turmoil in the financial markets has seriously dented confidence in Berkshire. And some would say with good reason. In March, Berkshire made a loss of about $5 billion on long-term put options on equity indexes – just as share prices were beginning to take off again. And the company has also suffered losses on stakes in ConocoPhillips and American Express.
But as we’ve been at pains to stress here at Notes, the markets are topsy-turvy right now. And the recent rally has favored what Mr Market has seen as “offensive” stocks (read junk stocks: low quality, debt laden and consumer sensitive) over so-called “defensive” stocks such as Berkshire – those with strong cash positions and low debt levels.
Berkshire class A shares could top $110,000 in the next year, according to Barron’s. This would put them at roughly 1.4 times Barron’s estimate of book value in 12 months time: $80,000 a share. Even better values are Berkshire’s class B shares (NYSE: BRK.B):
Berkshire’s class B shares (BRK-B), worth 1/30th of the A shares, fetch about $2,750 each. The B shares look like a better buy than the A shares, because they sell at a 3% discount to their theoretical value. But the discount has persisted for some time, and could continue, as the B shares can’t be converted into A shares.
Rahm Emanuel is right about one thing: this crisis is an opportunity. Buying Berkshire shares now could be one of the best value plays in a generation.
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