I was taking a look at Berkshire Hathaway’s stock earlier this week because it has fallen along with the stock market overall. Plus, it has also been taking a few hits due to natural disasters that are likely to hurt Berkshire’s insurance business (earthquakes, tsunamis and general bad weather around the world). In addition, the stock has had some rare bad publicity in the aftermath of the departure of heir apparent David Sokol. Taken together, the soft market, the natural disasters and the human ones have taken a toll on the company’s shares BRK.A/BRK.B. Today, the B shares closed at $75.62 per share. The A shares closed at $113,100 per share.
I like Berkshire a lot and I’m inclined to think this is a bargain price. However, I’m philosophical about it because I bought some more shares recently at a higher price. So, I’m smarting a bit, but that is the way it goes.
Anyway, for those who believe in Berkshire (as I do) and those who like apparent bargains (as I do), the company is worth a second look. Its share price has fallen considerably from the recent highs and is now a bit above book value, which for the A shares are approximately $97,000 per share (compared to the share price of $113,100). Thus, the share price is about 1.16 times book value. For the B shares that would equate to a book value of about $65 per share compared to the current price of nearly $76.
This piece from the Wall Street Journal gives some background on Berkshire and Warren Buffett [emphasis added]:
…Berkshire’s A shares hit $109,925 on Wednesday, their lowest level since June 2010. They have since recovered a bit, closing Friday at $113,250, but are still down about 14% since a Feb. 28 high of $131,300. They haven’t traded below $100,000 since January 2010. (Berkshire’s B shares, which are 1/1,500th of an A share, have traded in similar fashion.)
At the end of the first quarter, Berkshire had a book value of $97,081 a share. That means the stock is trading about 1.15 times book value. According to Barclays, Berkshire’s median historical valuation is about 1.7 times book value, and 1.1 times book value is about as cheap as Berkshire has gotten in the past decade. Its historical price/book multiple since 2000 has been about 1.6. That would work out to about $155,000 a share, based on first-quarter book value.
There are a handful of fundamental reasons why Berkshire shares have come down since February. The company’s large reinsurance business—which provides insurance for insurance companies—is facing headwinds after natural disasters in Australia, New Zealand and Japan…
One problem with my determination that Berkshire is cheap is the so-called value trap. You buy a company because its shares are cheap and they just get cheaper, either because of company weakness or market declines. That can happen. However, Berkshire is a unique company with a legendary investor at the helm. It also has excellent businesses and one other important attribute — cash. Cash on hand to the tune of $22 billion or so.
The WSJ continues:
Berkshire has another tool that could renew interest in the company’s shares: the ability to do a large deal. “They have $22 billion in net cash on the balance sheet, which gives them enormous firepower,” says David J. Winters, head of fund manager Wintergreen Advisers, who believes Berkshire is cheap…
If history is a guide, this could be a buying opportunity. And, David Winters is a pretty fair judge of value himself. Winters’ fund, Wintergreen Fund, has developed an excellent record of finding undervalued companies, both here and abroad.
This piece gives a little background on Winters:
…Winters’ style runs counter to the short-term vision that dominates Wall Street. But he has beaten all rivals in the large-cap core category over the past one- , three- and five-year periods, according to Lipper Inc, a unit of Thomson Reuters Corp. He also beat 95 percent of his Morningstar peers when he managed the Mutual Discovery Fund from 2000 to 2005.
So far this year, Wintergreen is lagging most peers.
Wintergreen is now mostly invested overseas, where more than 70 percent of the $1.4 billion fund is allocated even as U.S. rail freight is up, a harbinger of a growing economy.
Winters has sought out companies that earn in different currencies to mitigate the effect of the Federal Reserve pumping enormous sums of money into the U.S. economy, which he believes will keep the dollar weak and spur inflation.
…Winters typically holds a stock for five years and often returns to what he likes...
Winters looks for three traits in a potential investment. A good business with improving economics, international diversification and top-notch management…
By the way, if you do not know Wintergreen Fund, it’s well worth a look. Winters formed the Fund in 2005 after a long stint at the Mutual Series group, which is part of the Franklin Templeton family of funds. He was president and chief investment officer for the Mutual Series group, which had $35 billion in assets at that time.
I think Winters is on to something with Berkshire. Now, the question is: should I buy more?
Disclosure: Kurt Brouwer owns shares in Wintergreen Fund (WGRNX) and Berkshire Hathaway (BRK.B)