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Buffett's Got a Pep in His Step as Berkshire Hits All-Time High

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“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ.” – Warren Buffett

It’s been quite the ride for one of the world’s most famous and admired investors.

Warren Buffett started investing in Berkshire Hathaway in 1962, which at the time was a troubled textile manufacturing company based in New Bedford, Massachusetts. In what the famed billionaire later described as his “dumbest” stock purchase ever, Buffett took control of Berkshire in 1965. And while the textile business didn’t turn out well, Buffett began to use Berkshire as a holding company for the many businesses and stocks he purchased over the ensuing decades.

Fast forward nearly 60 years later, Berkshire Hathaway stock (BRK.B - Free Report) is hitting all-time highs. An atypical conglomerate well-known for its humble beginnings, Berkshire has now grown to more than 90 subsidiaries engaged in businesses ranging from chocolates and ice cream to property and casualty insurance.

The Zacks Rundown

Berkshire Hathaway is primarily engaged in the insurance, freight rail transportation, and utility businesses globally. Berkshire is one of the largest property and casualty insurance companies by premium volume. Its Insurance group accounts for over half of company revenues and includes GEICO, which writes private passenger automobile insurance; General Re, which offers property, casualty, life and health coverage; Berkshire Hathaway Reinsurance Group, which underwrites reinsurance policies; and Berkshire Hathaway Primary Group, which is comprised of a wide variety of independently-managed insurance businesses.

The company also generates, stores, and distributes electricity from a host of energy sources such as natural gas, nuclear, and geothermal. Berkshire Hathaway is famously headquartered in Omaha, NE.

Berkshire maintains a strong capital position and substantial cash holdings. The liquidity helps the conglomerate buy back stock regularly, with $5.8 billion worth of shares repurchased through the first half of 2023.

BRK.B stock is part of the Zacks Insurance – Property and Casualty industry group, which ranks in the top 22% out of more than 250 Zacks Ranked Industries. This group has widely outperformed the market over the last three months:

Zacks Investment Research
Image Source: Zacks Investment Research

Despite the impressive performance, this industry group remains relatively undervalued:

Zacks Investment Research
Image Source: Zacks Investment Research

Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.

Earnings and Stock Performance

Buffett’s gem has surpassed earnings estimates in five of the past seven quarters. The company has delivered a trailing four-quarter average earnings surprise of 2.51%.

Zacks Investment Research
Image Source: Zacks Investment Research

Earnings and sales trends for the current year appear favorable. The Zacks Consensus EPS Estimate for 2023 calls for growth of 13.24% to $15.82/share. Revenues are projected to climb 9.58% on the year to $331.03 billion.

BRK.B stock has advanced nearly 35% in the past year. Shares are hitting all-time highs in September, even as the general market has pulled back. Only stocks that are in extremely powerful uptrends are able to make this type of price move while the market remains under pressure. This is the kind of stock we want to include in our portfolio – one that is trending well and receiving positive earnings estimate revisions.

Zacks Investment Research
Image Source: Zacks Investment Research

Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. As we know, Berkshire Hathaway has recently witnessed positive revisions. As long as this trend remains intact (and BRK.B continues to deliver earnings beats), the stock will likely continue its bullish run this year.  

Bottom Line

The Buffett investment strategy is a simple one: identify quality businesses at reasonable prices. The living legend hasn’t wavered in his strategy over time, and his persistence has suited Berkshire shareholders well. In fact, according to the company itself, Berkshire Hathaway stock has delivered a compound annual return of 19.8% (vs. a 9.9% gain for the S&P 500) from 1965-2022.

And it appears the Oracle of Omaha isn’t done his magical ride quite yet.

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