Is Berkshire Hathaway a Good Investment?

We have often used Warren Buffett and his company as an example of the use of intrinsic stock value as a guide to profitable investing. And, we mentioned his so-called silent warning for investors in that he was stockpiling cash because he did not find any stocks that fit his criteria in an overpriced market. Now we see that The Motley Fool is suggesting the dirt cheap Warren Buffett stock as a current investment opportunity.

The reason I like Berkshire now is the reason why so many investors have hated it recently. The insurance giant has a cash hoard that’s unparalleled, and the coronavirus crash has given Buffett the chance to deploy that money in any of a host of smart ways. Crisis situations like this are what make Buffett stand apart from the crowd. It’s been a long wait, and the amount of cash on Berkshire’s balance sheet weighed on performance during the bull market. Now, though, Berkshire shareholders are likely to get their comeuppance.Yet because Berkshire’s been out of favor, it trades at bargain prices.

Those with long enough memories will recall that Buffett also got out of the market, built up his cash reserve, and waited during the run up to the dot com crash. His comment was that the market did not make any sense.
Individual stocks that comprise the bulk of the Berkshire Hathaway portfolio include Apple, Coca Cola, and a collection of financials including Bank of American, S. Bancorp, American Express, JP Morgan Chase, and Wells Fargo. All of these have taken hits in recent weeks but all or solid investments that will likely reward anyone who buys them at depressed prices and holds them for the long term.

However, the major argument for choosing Berkshire Hathaway itself is that you get Buffett’s expertise and that of his associates such as Charlie Munger. These old guys have been around for decades, tend to anticipate situations like we are in now and routinely walk away with long term profits.

Although there are and will be numerous investment opportunities during this market crash and in the months and years to come, we have to agree with The Motley Fool that picking Berkshire Hathaway Class A or Class B shares and holding on is probably one of the better stock investing options today.

Follow these links for other versions of this article:

Video

Slideshare

Is Berkshire Hathaway a Good Investment?

Is Berkshire Hathaway Undervalued?

The Motley Fool says to in their article about three reasons to buy Berkshire Hathaway.

Over the last decade, Berkshire Hathaway has become a certified cash cow of the first order.

The gap between the stock price and the long-term value of the company has been widening lately.

They cite the profits that his whole owned companies generate and the fact that if they were to go public again, their values would be a lot higher than the book value at which they are now valued.

In addition, Buffett has been buying back shares. He has always been hesitant to do this, but as he sees his own stock as a bargain, he is buying his own shares at the rate of about $2 billion a year!

Why Invest in Berkshire Hathaway for the Long Term?

Many of us equate Berkshire Hathaway with Warren Buffett. As such, many might be tempted to get out of this stock when Buffet is no longer active in the business. However, the “Oracle of Omaha” has also been the planner and teacher of Omaha as well. Each of Berkshire Hathaway’s sixty business segments is run by someone who was trained by Buffett and follows his approach to fundamental analysis and working with the long view in mind. We can fully expect the company to follow the same approach to investing and business management when Buffett is no longer in the picture as now when he is still running the show.

Why Does Buffett’s Approach to Investment Work?

Buffett’s approach to investment, which he learned directly from non-other than Benjamin Graham, is simply to analyze an investment for its projected profit potential, determine an “intrinsic” value based on that assessment, and compare the intrinsic value to the current stock price. He has admitted that he and his team toss out 95% of stocks they analyze as being too difficult to make an informed judgement on. But, when they do pick a stock this way, they typically hold it for years. Buffett has been quoted as saying that his favorite holding period for an investment if forever. And, he and his team pick investments with that in mind. Thus, Berkshire Hathaway is comprised of companies selling products and services that are not likely to become obsolete with changes in technology and are likely to grow and produce more profits year after year after year.

Should You Hold Your Investments Forever, or Not?

Buffett has been quoted as saying that when he purchases stock in a strong company with strong management that favorite length of time to hold that investment is forever. And now, according to the most recent Berkshire Hathaway quarterly report, they are holding $122 Billion in cash while in normal times they would be holding something like $30 Billion. This is because in almost four years Berkshire Hathaway has not made any major stock purchases or acquisitions. And, in the first two quarters of this year, Buffett has be a net seller of stocks. The two parts of intrinsic stock value are the likelihood of a stock making money over the years and the current price of the stock, or any investment. What is happening with Buffett’s company is that they are not seeing any investments these days that combine growth and money-making potential with reasonable or low prices. This is the silent warning for investors.

Why Is Buffett Not Buying Back as Much Berkshire Hathaway Stock?

A third piece of the silent warning for investors is that Berkshire Hathaway has reduced its stock buybacks as well. Buying back your stock is done to increase share price and put excess cash to the best use possible. According to company reports, stock buybacks went from $1.7 Billion in the first quarter to $400 Million in the second quarter. We recently wrote about the potential dangers of stock buybacks. In the case of Berkshire Hathaway, the company has not been trying to artificially raise its share price and has rather been putting its cash to the best use. The fact that they are now keeping a large hoard of cash implies that the “better use” of this money will be in invest in the near future after a substantial market correction or even a crash. The likelihood of the trade war becoming permanent is such that smart investors will do well to hold a large amount of their portfolio in cash until the future becomes clearer and until the prices for stocks and other investments become more realistic.

Kraft Heinz

Kraft Heinz was formed just a few years ago in a merger of two companies with hundred-year histories, Kraft Foods and Heinz, the famous ketchup maker. The deal was pushed by none other than Warren Buffett and is a classic Buffett investment. The so-called “Oracle of Omaha” only invests in companies when he fully understands how they make money and how they will continue to do so for years on end. The company formed by two packaged food stalwarts was a typical Buffett investment and is company, Berkshire Hathaway, owns slightly more than a quarter of Kraft Heinz stock shares.

Management sought to make the company more profitable by cutting $1.7 Billion in “excess costs.” And, prior to the recent debacle, Kraft Heinz as returning more per shareholder dollar than competitors like General Mills. That is no longer the case!

The company traded for $80 a share after the merger and from early 2016 to the middle of 2017 rose to the $90 range. Since that time the cost cutting at Kraft Heinz was not working so well as the share price gradually fell to the upper $40 range. Then the bombshell exploded.

CNN reported that Kraft Heinz posted a huge loss and revealed an SEC investigation.

Kraft Heinz wrote down the value of its Kraft and Oscar Mayer brands by $15 billion, posted a $12.6 billion loss, cut its dividend by 36% and announced its accounting practices are under investigation by the Securities and Exchange Commission.

Some pundits have referred to an “existential crisis” for Kraft Heinz. On the other hand, Warren Buffett who holds a fourth of the stock and suffered a loss of more then $4 Billion, says he expects to be holding the stock five years from now. His comment was that management seems to have gotten confused about cost cutting and consumer tastes.

Millennials, Organic Foods, and Amazon.com

A strong “selling point” for Kraft Heinz, General Mills, Unilever, Mondelez International, Nestle, and the like is that they have products with strong brand name recognition. Kraft macaroni and cheese, Heinz ketchup, and Oscar Meyer processed meats have been around for a long, long time. But, does the generation of millennials want these products or something with the label “organic?” Now that Amazon.com is running Whole Foods, there is a huge marketing machine pushing organic foods and the convenience that Amazon.com has created with home delivery.

The take home point from what went wrong at Kraft Heinz was probably that they quit thinking about what the consumer wants and thought their product line was golden and would sell forever. So, they focused on cutting costs. It is amazing really how such a large company with so many bright people could have missed this at their stock faltered over the last couple of years.

Beware of a Visit by the SEC

CNBC reported the SEC subpoena.

Kraft also disclosed the SEC subpoena is part of an investigation into its procurement and accounting policies. The company said it launched an internal investigation into the matter after receiving the subpoena. Following its investigation, Kraft Heinz said it posted a $25 million increase to the cost of products sold after determining it was “immaterial to the fourth quarter of 2018 and its previously reported 2018 and 2017 interim and year to date periods.”

This may be a minor issue, blown out of proportion due to the huge stock loss and inventory write down. Or it might not be. Kraft Heinz has enough problems right now and does not need to have the SEC on their doorstep. But, that is how it is.

Is Kraft Heinz a Stock to Buy Right Now?

We write frequently about intrinsic stock value and long term investing. When a stock takes a hit but the company still has the ability to generate good profits over the long term, it is a good buy for a long term investor who is willing to wait and whose preferred length of holding a stock is forever. The issue with Kraft Heinz is if they can revitalize their old product line, add new items, spiff up the old ones and do so in such a manner as to bring back sales, profits, and their stock price.

It is of interest that Warren Buffett says that he believes he will holding that stock in five years. That is a good vote of confidence. On the other hand, he might be expected to say that in order to stock the decline of the Kraft Heinz stock price. In the case of Berkshire Hathaway’s investment in Kraft Heinz it will be instructive to see if they buy more of the stock, sell the stock, or simply hold their ground in the coming months.

The concern for long term value investors is that Buffett got it wrong this time around and that Kraft Heinz is now selling at its appropriate price considering the changes in the packed food industry and its aging product line. If that is the case, this is not a stock to buy and wait for bounce or recovery and not a stock to hold for the long term!

Buffett said on “Squawk Box” his top concern is how to prevent rogue nations from getting weapons of mass destruction, and he singled out North Korea as a specific threat.

The health of the economy at the end of four years is a second yardstick by which Buffett said he’d evaluate the Republican Trump administration.

“And then third, I’ll judge him on if the economy does well, which I expected it to do, how wide the participation in a better economy extends.”

To that end, Buffett told CNBC on Monday that mixing politics and investment strategies would be a “big mistake.”

Meanwhile to so-called Oracle of Omaha has poured money into the market.

“Probably half the time [in] my adult life, I’ve had a president other than the one I voted for,” he said. “But that’s never taken me out of stocks.”

But how does this approach work for so-called green investors of people who oppose the tobacco industry? The logical answer is that you do not need to invest in any stock that you do not like. And if you have a favorite that matches your social and political concerns go ahead and invest. But if what you want are profits it is a mistake to mix politics and investment strategies because the most socially acceptable stocks are often not the best money makers.

Long Term Money Makers

Part of why an investor like Buffett is successful is that he only invests in companies whose businesses he understands. And he only invests when he can safely predict profits into the ten year or more range. In this regard take a look at our articles about how many years are required to make an investment long term and what stocks make the most money over the long term.
Buffett’s second and third measures of how he would judge Trump are the growth of the US economy and whether or not the benefits of that growth are widely spread across the socio-economic spectrum. Companies like the old AT&T and General Motors grew with the country. So have Coca Cola, GE, Exxon and Proctor & Gamble. To the degree that your political concerns are primarily that the economy does well you may be mixing politics and investment concerns but in the end investment decisions should be based on intrinsic stock value and not the politics of the president. Pick your stocks based on expected profits and vote for president based on your social and economic concerns. And don’t mix the two.

It Is a Mistake to Mix Politics and Investment Strategies DOC

It Is a Mistake to Mix Politics and Investment Strategies PDF

It Is a Mistake to Mix Politics and Investment Strategies PPT

Over the past decade, the landscape of the airline industry in the US has changed greatly. All four airlines have reported record profits, over the past two years, buoyed post-financial crisis capacity discipline, depressed labor costs, and cheap oil.

There are also fewer competitors in the domestic market to contend with.

In the year 2000, the sky was filled with names such as America West, US Airways, TWA, AirTran, Continental, ATA, and Northwest Airlines. By 2016, all of these brands had disappeared by being merged into or acquired by the Big Four. 

The remaining big four U.S. airlines are these.

• American
• United
• Southwest
• Delta

It should be noted that Buffett is investing roughly equal amounts in these four carriers. That would seem to be consistent with his stated philosophy of buying stocks for the long haul and only buying stocks when he has a clear idea of how the company makes money and will continue to do so for the foreseeable future. Airlines are better investments than they used to be because fuel costs are down along with other costs of doing business such as salaries. And the desperate game of underbidding to try to claw back passengers for rivals has pretty much gone away as the guys who were doing this have been absorbed into the remaining big four.

How Long Will the Good Times Last?

Is there still time for you to invest in US airline stocks or has the opportunity passed you buy? CNBC notes that aviation stocks are soaring but investors should be careful.

Investors have reason to be bullish right now on air travel, but domestic commercial airlines’ recent soar has some experts questioning whether there is still enough meat on the bone to get in now and still achieve above-average returns.

Several favorable market conditions continue to make airlines a good value stock: low fuel prices, low seat capacity and consolidation.

“It already had a great run, so there is always a question of ‘How much is left?'” said Jerry Braakman, chief investment officer for First American Trust, which oversees $1.1 billion in assets. The company bought stake in Delta for $10.41 a share in 2012. Last year it sold the last of its Delta stock for about $40 per share, believing the recovering airline had hit its peak. It is now trading at around $48.

Interestingly these folks looked at Delta and others as short term investments. They bought for the recovery and sold but it turns out that they sold too soon. Airlines will continue to be better investments than they used to be so long as the market remains only moderately competitive and so long as fuel and labor costs stay down. But if Trump economics really do end up stimulating the economy prices could go up across the board which could hurt the air carriers.

Why Are Airlines Better Investments Than They Used to Be? DOC

Why Are Airlines Better Investments Than They Used to Be? PDF

Why Are Airlines Better Investments Than They Used to Be? PPT

How far back does that tradition extend? In the U.S., it dates at least to the 1800s. The Wall Street Journal itself began as an investment letter in 1883, when Charles Dow and Edward Jones inaugurated “The Customer’s Afternoon Letter.” Dow and Jones changed their service’s name to Wall Street Journal in 1889. (Dow Jones also is the publisher of MarketWatch.)

This is more than just a historical curiosity. Of the 200 investment letters whose performance is monitored by the Hulbert Financial Digest, no fewer than 10 have outperformed Buffett over the past 15 years – since the top of the Internet bubble, in other words.

In addition, each of those 10 can boast of something else besides superior performance: They are published at least monthly, if not more frequently. None of them makes you wait a whole year, as Buffett does, to get updated insights.

The newsletters listed by MarketWatch are these:

• Nate’s Notes
• Turnaround Letter
• Investment Reporter
• The Prudent Speculator
• Sound Advice
• Investor Advisory Service
• Investment Quality Trends
• The Buyback Letter
• Morningstar StockInvestor
• Utility Forecaster

Assuming that you strictly followed the advice of the newsletter the best return on investment over the last fifteen years would have been from Nate’s Notes. Does this make it the best of investment newsletters? The factor common to each of the ten best investment newsletters is that they all look for value in depressed stocks.

Long Term Profits

The focus of the MarketWatch article is on newsletters that recommend investing based on long term value. Is this the best approach to investing or is a short term in and out approach more profitable? There are certainly investments that pay very well over a very short term. The problem is finding these opportunities and not losing money on any of them while waiting for the big payoff. Interestingly, USA Today carries an article by Motley Fool in which the best single stock to own is said to be Warren Buffett’s company, Berkshire Hathaway! In other words do not just read Buffet’s newsletter but rather invest in his company.

In my opinion, the single best stock you can own is Berkshire Hathaway (BRK-A) (BRK-B). Simply put, buying Berkshire is like getting a well-diversified investment portfolio that’s managed by some of the greatest minds in the investing world.

Berkshire offers the only way that you can invest in companies including Geico, NetJets, and more than 50 other fully owned subsidiaries, many of which are national brands. And Berkshire’s stock portfolio is a long-term investor’s dream, with such favorites as Johnson & Johnson, ExxonMobil, and Wells Fargo, just to name a few.

Further, I can’t think of anyone I would trust more than Warren Buffett and his team of stock-pickers to invest my money wisely.

A good point is that Berkshire Hathaway has several fully owned subsidiaries and the only way to invest in them is to invest in Berkshire Hathaway.

Is Value Investing Conservative Investing?

Value investing is based on solid fundamental analysis. If you are too conservative and afraid of changing your portfolio you may miss out on great long term profits. Money Morning suggests that investors exploit oil’s current low.

If you’ve been eyeing a new gas-guzzling SUV as your next vehicle, you may want to reconsider that Prius once more. That’s because today’s low gas prices won’t be around forever and oil prices aren’t about to “tank” any time soon.

In fact, the oil price crash has created a state of “contango,” a market anomaly that savvy investors can exploit. It’s presenting a rare market opportunity to profit that only comes around once every few years.

These guys are not on the MarketWatch best investment newsletters list but their advice would seem to be sound.

Best Investment Newsletters DOC

Best Investment Newsletters PDF

Best Investment Newsletters PPT

More Resources