There is no doubt that Berkshire Hathaway Inc. (BRK.B - Free Report) is a stock that most investors want in their portfolio, primarily because of the assurance that the company is being managed by one of the best investors of all times, its CEO and Chairman Warren Buffett.
The company has diverse businesses comprising nearly 60 wholly owned subsidiaries engaged in everything from construction, furniture, and insurance to banking, soft drinks, and jewelry. This gives investors exposure to some of the strongest companies around and assures them of strong returns from Berkshire Hathaway.
Buffett has created tremendous value for shareholders over the last 49 years with BRK.A book value (class A shares) growing from $19 to $134,973, reflecting a compounded rate of 19.7% annually, compared to a gain of 9.9% in S&P 500 over the same time period.
In this piece we will look back at Berkshire’s performance in 2015. But sorry, we don’t have a robust momentum story to share this time around.
Unlike the year 2014 when the stock gained 27.8%, BRK.A struggled to post positive gains in 2015. In fact, Berkshire lost 11.5% last year compared to a decline of 0.7% for the S&P 500 index.
The stock felt the weight of some of Buffett's big stock bets that tanked in 2015. The company’s portfolio of public securities was valued at $110.3 billion, down 6.1% from year-end 2014. These include the investment in IBM Corporation (IBM - Free Report) , which posted a double-digit year-over-year revenue decline in each of the past four quarters due to loss of revenue from some of the business it sold in 2014 and also from the adverse impact of a strong dollar.
Buffett's investments in American Express Company (AXP - Free Report) after its results suffered from a strong dollar and an increase in total expenses led by higher spending on growth initiatives. Wells Fargo and Coca Cola Investments also yielded negative returns.
Alongside, the company’s insurance business posted a decline in underwriting income of a significant 43% for the first nine months of 2015 led by lower contribution from subsidiary GEICO, which suffered from an increase in auto insurance claims. Underwriting earnings of BHRG and General Re declined in 2015 from 2014. These losses from stocks coupled with subdued results from some of the company’s wholly owned subsidiaries led to the overall decline in the value of Berkshire shares.
Investors are generally overwhelmed by Buffett's investment acumen, and investing in Berkshire Hathaway is normally seen as a safe bet given its track record. But investors who dared to invest in other companies earned returns higher than what Berkshire Hathaway generated in 2015. What reasons may have to led to this surprising trend reversal?
Is Size a Spoiler?
Back in 2009, Buffett had said, “The big minus is that our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue.” Those investments in growth can take years, sometimes even decades, to pay off. Buffett has confessed that it's increasingly hard for the company to outperform the market as it gets larger.
During the last reported quarter, the company had cash of $66.3 billion. It is hard to be convinced that Buffett, and Berkshire portfolio managers Ted Weschler and Todd Combs, will be able to find enough big deals to take full advantage of the company's ever-growing cash generation, in such a way that it may earn handsome returns for its shareholders.
Is the Absence of a Dividend Dulling the Stock?
Stocks with dividends, which generate current income and bolsters investors’ returns, have always been preferred over stocks sans dividend. Academic research has shown the long-term historical trend of dividend stocks beating non-dividend paying stocks. Though Berkshire Hathaway has been one of the financially strongest businesses in history, it has eschewed paying a dividend since the 1960s. In this context, dividend growth stocks trading at a discount to their valuation look more attractive than Berkshire Hathaway.
Is Buffett’s Succession Posing a Hurdle?
Warren Buffett is an octogenarian. Investors are cautious about the fact that there is no certainty as to how long he will be able to run the company and provide his investment expertise. Though we cannot say that Buffett has always been infallible, since some of his investments have yielded poor results, he is without doubt an ace investor. Those who are afraid of how the company will fare post-Buffett, look for companies offering a more stable and strong management team.
Better than Berkshire
The Buffett mania is widespread. Yet, there are stocks that are undeterred by the iconic investor’s promise of big returns. Below are 5 such stocks that have generated returns far more than Berkshire Hathaway did in 2015. These top performers have returned more than 100% gains in 2015. All these stocks have an impressive Zacks Rank and a positive current year estimated growth rate. So these are set to move north in the near term as well.
Eagle Pharmaceuticals Inc. (EGRX - Free Report) focuses on developing and commercializing injectable products primarily in the critical care and oncology areas. The company returned 400.7% in 2015. The stock has current-year estimated EPS growth rate of above 100% and a Zacks Rank #2 (Buy).
Recro Pharma, Inc. (REPH - Free Report) is a clinical stage specialty pharmaceutical company that returned 210% in 2015. The stock has current-year estimated EPS growth rate of above 100% and a Zacks Rank #2 (Buy).
Amazon.com, Inc. (AMZN - Free Report) is one of the largest online retailers in the world. It is also a leading provider of cloud infrastructure as a service to enterprise customers. Amazon.com generates strong cash flows. The nature of business does not leave too much room for differentiation, so price competition is intense.
The stock returned 119.1% in 2015. It carries a Zacks Rank #2 and its current-year growth estimate is 35.6%.
Energy Focus, Inc. (EFOI - Free Report) designs, develops, manufactures and markets fiber optic lighting systems. EFOI returned 177.8% in 2015 year to date. Current-year estimated EPS growth rate is 35% for this Zacks Rank #2 entity.
NVIDIA Corporation (NVDA - Free Report) operates as a visual computing company in the United States, Taiwan, China, the rest of Asia Pacific, Europe and other Americas. The company sells processors primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers and retailers/distributors.
The company returned 66.5% in 2015. It carries a Zacks Rank #1 (Strong Buy) and the current-year growth estimate is 8.9%.
So for all the admirers of Berkshire Hathaway, there are other attractive return-generating opportunities too. One just needs to have a critical eye and the confidence to bet elsewhere.
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