A Fresh Peek at Berkshire Hathaway's Hot Portfolio and Valuations
Equity investment
As of mid-December 2015, Berkshire Hathaway’s (BRK-B) equity has declined by 15% over the past one year, compared to the 2% decline of the S&P 500 (SPY). Historically, the company has delivered performance at par or above the index. Its 3Q15 earnings, for example, beat records, helped by a one-time gain of $4.4 billion from the H. J. Heinz (HNZ) transaction and improvements in railroad earnings. The company saw lower underwriting income and subdued manufacturing earnings.
The company’s operations can be classified as a combination of active asset management and conglomerate management. Because it doesn’t raise capital directly from markets or launch funds or any financial products under its parent company structure, the only way to participate in Warren Buffett’s investments is by purchasing Berkshire Hathaway equity. The company competes with asset managers like Blackstone (BX) and BlackRock (BLK) on buying quality assets.
The company’s long track record of outperformance, combined with a highly risk-averse approach towards investments, has enabled it to command a premium over its peers and the overall market.
Declining valuations
On a one-year forward price-to-earnings basis, Berkshire Hathaway was trading at 16.3x as of mid-December 2015. By comparison, its peers were trading at 13.1x. Berkshire Hathaway has commanded a premium over the years because of its ability to redeploy excess capital from its subsidiaries toward better opportunities, including better-performing subsidiaries and successful minority investment bets made by Warren Buffett.
In the third quarter of 2015, Berkshire Hathaway’s equity portfolio was valued at $110.3 billion, compared to $117.7 billion in the previous quarter. The fall in global equities resulted in lower valuations for stocks as well as derivatives. In the current quarter, most of the company’s holdings have appreciated except for the steep decline of 6% in American Express (AXP) and 3% decline in DaVita Healthcare (DVA). Its other major public holdings have risen between 2% to 10%.
The company could continue to trade at around 17x to 19x of its one-year forward earnings. But this will depend on how long Berkshire Hathaway can outperform the S&P 500 Index. As the company has grown, the spreads against the index are diminishing, and this could result in slower growth in the future.
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