Key takeout
- Berkshire Hathaway’s stock has seen a 12% decline since Warren Buffett announced his retirement in May.
- Market analysts have criticized the apparent loss of what’s referred to as the “Buffett Premium,” which reflects investors’ willingness to pay higher prices due to Buffett’s expertise and successful track record.
- Gregory Warren, a senior equity analyst at Morningstar, believes that other factors might be influencing the stock’s downturn.
Is Berkshire Hathaway losing its edge? Shares in Warren Buffett’s investment company have dipped over 12% since early May, and this downward trend persisted during a slow trading day on Monday following a second-quarter earnings report that didn’t meet investor expectations.
The ongoing decline raises questions about the so-called “Buffett Premium,” which used to give investors a reason to pay a bit extra for the company based on Buffett’s historical success in stock picking.
However, despite these disappointing returns aligning with a transition period for leadership at the company, Gregory Warren points out that “The Buffett Premium hasn’t been present for quite some time.” He attributes the downturn to various underlying factors.
For one, Berkshire’s performance has lagged behind broader market trends during significant market upswings since mid-April. Additionally, the company’s stock may be trading at a valuation that’s not typical and might be overdue for a recalibration.
Successful achievements
Under Buffett’s leadership, who passed away in 2023, and vice-chairman Charlie Munger, Berkshire Hathaway has become a hallmark of stock market triumph, largely due to its careful investment strategies and a steadfast belief in the resilience of the American economy. Buffett’s remarkable success in picking stocks has earned him the nickname of the “Omaha Oracle.”
Berkshire reached a market cap of over $1 trillion for the first time last summer. Next year, Greg Abel, the vice-chairman of the non-insurance division, will take over Buffett’s role.
“Buffett Premium” is outdated
Buffett is widely regarded as one of the greatest stock pickers in history. His approach—which focuses on buying valuable, well-established businesses with steady cash flow—has served as a reliable strategy for many years. While this expertise once commanded a significant premium from investors, Warren argues that it hasn’t been as powerful in the past decade.
“We were riding that wave for some time because we had avenues to deploy capital effectively,” he explains. However, with information on financial performance now widely accessible, Warren notes that Berkshire’s previous edge in the market has somewhat diminished.
Berkshire Hathaway’s key Morningstar metrics
The evaluation remains within historical range
Even without that premium, Berkshire’s stocks generally carry a higher price compared to certain indicators, like the price-to-book ratio, which evaluates a company’s value based on its balance sheet relative to its stock price.
Warren mentions that Berkshire is currently trading at about 1.6 times its book value—down from a peak of nearly 1.8 in the spring but still above its historical average of around 1.4 to 1.5 times. Class A shares are priced at $711,480, which some consider slightly undervalued based on Morningstar’s estimates. Earlier this year, Berkshire was priced at a much higher premium.
A UBS analyst named Brian Meredith recently elevated its 12-month target price for Class A shares to $892,120, believing the stock is trading close to its intrinsic value with a mere 4% premium. Just before May, the stock had been trading with a higher premium of 17%, as noted by analysts who continue to recommend a “buy” rating.
Berkshire stocks as defensive plays
So, what’s driving this stock decline? Some losses could stem from how investors perceive Berkshire as a stable investment in riskier market conditions. UBS analysts recently mentioned that Berkshire tends to outperform not just during economic slowdowns but also during periods of market turbulence owing to its diverse business portfolio and robust financial position.
Warren from Morningstar adds that it’s not unusual for Berkshire stocks to lag behind when the broader market is surging and investors are more inclined to take risks with tech stocks instead. “If the S&P 500 shoots up by 10% or more, you typically won’t see Berkshire keeping pace,” he observes.
The past couple of years may be seen as exceptional, with Berkshire riding the market wave. However, according to Warren, the recent underperformance aligns with long-term trends, particularly as growth rebounds and the impacts of tariff announcements fade while economic indicators remain strong.
“I’m not shocked by the 12% drop since May,” he says. “Some air needed to be let out of those tires.”
What’s next for Berkshire?
As Buffett’s exit approaches later this year, investors will closely monitor Abel’s early performance as CEO. Warren anticipates that Abel will be held to a different standard than Buffett. “He’ll need to make his mark and demonstrate a willingness to address ongoing issues,” he notes. “He’ll be scrutinized far more closely than Buffett ever was.”
Warren expresses confidence in Berkshire’s fundamentals. “The business has a reliable operating rhythm,” he comments, noting the diversified portfolio can balance out fluctuations over time. This was evident in the second quarter results, where solid performance from the insurance segment helped offset weaknesses in other divisions.
Furthermore, the company possesses a cash reserve of $344 billion, affording Abel and the executive team considerable flexibility for future acquisitions or to support stock prices via buybacks and dividends. With Berkshire currently priced at a premium, UBS analysts do not foresee any stock buybacks in 2025 or 2026.
In the near term, investors will be particularly attentive to a possible railway merger. Speculation has arisen that BNSF, Berkshire’s rail entity, may seek to acquire CSX in response to the recent merger announcements involving Union Pacific and Norfolk Southern, as Berkshire aims to remain competitive.
