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Berkshire Hathaway Meets NLO Target

|Includes:Berkshire Hathaway Inc (BRK.A), BRK.B

On May 7, 2012, we proposed in a Seeking Alpha article that Berkshire Hathaway (BRK-A) was trading at a price that was well below its true value. At the time, BRK-A was trading at $164,990 per share. However, we proposed that Berkshire Hathaway should have been selling at much higher prices with upside targets of $175k, $197k and $219k in a 2-3 year timeframe. As BRK-A sits within 1% of our mid-range target of $197,190 after two years, we believe it is time to reassess where Berkshire Hathaway sits within the context of Edson Gould's Altimeter.

In the chart below we can see the price movement of BRK-A from May 7, 2012 to August 8, 2014. Also in the chart is the upside targets from the May 7, 2012 article.

(click to enlarge)Click to enlarge

The first thing we'd like to draw your attention to is the fact that from May 7, 2012 to July 2013, the price of BRK-A went into a steep run-up in price. However, as soon as BRK-A got to the $175,000 level the stock price stalled in a trading range from July 2013 to February 2014. While we don't know the reason why the stock price stalled, the $175k level proved to be a substantive technical resistance level.

As we approach the second of the three upside targets at $197,190, BRK-A seemed to be running out of steam as the stock price has been trading in a range from $187k to $194k from March 2014 to August 2014. However, the recent rise above $194k would be considered a major breakout for the stock. We're on the lookout to determine whether or not BRK-A is going to make the $197k level a meaningful support or resistance level.

Finally, a review of what Edson Gould's Altimeter indicates about the relative value of BRK-A. Below is an updated Altimeter for BRK-A.

(click to enlarge)Click to enlarge

Based on the assumptions outlined in the May 2012 article, BRK-A now has an undervalued level at $190,869.16 and trades at an overvalued level at $241,863.61 and above. Where the $219,100 price once was the height of overvaluation it is now merely the fair value level for BRK-A according to Edson Gould's Altimeter.

As each new year brings higher fair value levels, we have to reconcile our primary concern, downside risk, with where the stock is trading presently. Although the prospects for BRK-A are looking good going forward, the possibility exists that the $197k handle ($197,001-$197,999) may experience significant upside resistance.

We can't resist giving BRK-A the benefit of the doubt on concerns of downside risk as the compounding of income alone pushes the valuation of the company higher every day. Suffice to say that investors should accumulate BRK-A at $191k and below. Keep in mind that while investors could achieve much greater gains in many other stocks, the remote prospect of a substantial one-time dividend is not out of the question and makes these shares worth holding for the long term as a quasi-bond component of the portfolio.

Disclosure: The author is long BRK.B.

Stocks: BRK.A, BRK.B