Why Berkshire Hathaway Stock is a Must-Have for Any Diversified Portfolio

Dana Blankenhorn

Mon, Apr 25, 2022, 8:06 PM 5 min read

Insurance is a bet on disaster that helps remove some of the risk from your life. You can insure your home, car, business or life knowing that, if the worst happens, you and your loved ones will be taken care of. Usually, the worst doesn’t happen and the insurance company comes out on top, which is why the insurance business is such a lucrative one.

Just ask Berkshire Hathaway (NYSE:BRK-A) shareholders. People think Warren Buffett’s stock picks make him the undisputed king of Wall Street. I suppose that’s true, but the real reason to buy BRK-A stock isn’t because of Buffett’s investing savvy, it’s that Berkshire is the world’s biggest insurance company.

Berkshire has a leading position in numerous lines of insurance. Based on direct premiums written, it is the No. 2 property and casualty insurer in the United States. It’s also the No. 2 writer of individual auto insurance and sixth in commercial auto insurance. And it ranks sixth in commercial liability insurance and worker’s compensation insurance as well.

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Among the insurance companies Berkshire Hathaway owns are Geico auto insurance and General Re reinsurance. In March, Berkshire announced it would purchase property and casualty insurer and reinsurer Alleghany (NYSE:Y) for $11.6 billion. This will mark Buffett’s biggest deal since 2016.

Shortly before this news was announced, Berkshire’s Class A share price surpassed $500,000. While most stocks have struggled in 2022, with the S&P 500 down nearly 10%, BRK-A stock is up 12.3% year to date.

BRK-A

Berkshire Hathaway

$506,200.06

The Sizzle and the Steak

Buffett’s stock picks have always been the sizzle of Berkshire. Investors feel confident buying Apple (NASDAQ:AAPL) or Bank of America (NYSE:BAC) because they are among Buffett’s favorite stocks. News of his recent $4.2 billion-plus purchase of HP (NYSE:HPQ) stock sent shares of the computer maker to a record high early this month, even as the rest of the tech sector took it on the chin. And shares of Occidental Petroleum (NYSE:OXY) soared to a multi-year high after Buffett disclosed he upped his stake in the oil company by nearly $1 billion.

Buffett can afford multi-billion-dollar stock purchases because the rest of Berkshire throws off so much cash. The company had $146.7 billion in cash and short-term investments on the books at the end of 2021. That’s more than Apple or Alphabet (NASDAQ:GOOGL) has on hand. And for each of the past three years, Berkshire has generated net operating cash flows of around $39 billion.

As Berkshire outlined in its latest annual report, much of the company’s value is derived from its “Big Four” companies, i.e., the steak. First and foremost is the company’s insurance business. As the letter states, “The product will never be obsolete, and sales volume will generally increase along with both economic growth and inflation.”

Rounding out the “Big Four” are the company’s stake in Apple, its 100% ownership of America’s largest railroad, BNSF, and the Berkshire Hathaway Energy holding company.

BRK-A Stock Beyond Buffett

While Buffett is widely considered to be the most successful investor of all time, Father Time is undefeated. Buffett and long-time vice chairman Charlie Munger are both in their 90s, and many investors see succession as the biggest risk to BRK-A stock.

Some of Berkshire’s biggest shareholders have proposed the company separate the positions of chairman and CEO, both now held by Buffett. The Oracle of Ohama is resistant to the idea and holds 32% of the voting stock.

Speculation continues over who will take the helm. Ajit Jain, previously mentioned as a successor, is now 70. Alleghany CEO Joseph Brandon is in his early 60s and described as a “long-time friend” of Buffett.” But the most likely successor is Greg Abel, 59, who has been running the non-insurance operations of Berkshire since 2018.

What should matter to investors is that all Berkshire operations are run semi-autonomously. Berkshire operates as a bank and the executives manage their businesses. It would not be hard to break up the company, and it would likely provide enormous value.

The Bottom Line on BRK-A Stock

One of the dumbest things I’ve done in my investing career has been to not buy shares of Berkshire Hathaway. Despite talk of how Buffett has lost his edge, the stock’s value has doubled in the past five years.

When stocks become stonks, BRK-A stock outperformed, and it continues to outperform as the rest of the market tanks. That’s because insurance is a profitable business in good and bad times. Investors can expect Berkshire’s insurance operations to continue to deliver cash flow even as the economy struggles.

It’s cash that made Buffett king, giving Berkshire opportunities when the rest of the investing world had to hesitate. Cash is king in a crisis, and no one has more than Buffett.

BRK-A stock sells for less than 2.2 times sales and is a good buy in any market. If $500,000 a share is too rich for your blood, you can always purchase the B shares (NYSE:BRK-B).

On the date of publication, Dana Blankenhorn held long positions in AAPL, GOOGL, and BAC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

The post Why Berkshire Hathaway Stock is a Must-Have for Any Diversified Portfolio appeared first on InvestorPlace.

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