Here's Why Berkshire Hathaway Stock Is a Buy Before November

Berkshire Hathaway has underperformed the S&P 500 over the past year, largely attributed to market concerns regarding Warren Buffett's impending retirement and the succession of Greg Abel, alongside the firm's value investment focus in a growth-oriented market. Despite these headwinds, the company's core operating businesses, particularly its insurance subsidiaries, have demonstrated robust growth with a 15% CAGR in operating earnings since 2019, providing resilience against economic downturns. Analysts suggest that Berkshire remains reasonably valued at 21x operating earnings and is poised for continued long-term growth, as Abel is expected to uphold Buffett's value-oriented investment strategy.

Analysis

Berkshire Hathaway's stock has demonstrated notable underperformance over the past 12 months, gaining only 7.4% compared to the S&P 500's 16% rally. This lag is primarily attributed to investor apprehension surrounding the impending retirement of CEO Warren Buffett and the succession of Greg Abel, whose experience lies more in operations than in stock picking. This management transition introduces perceived risk to the firm's $295 billion investment portfolio. The company's conservative actions, including pausing buybacks, selling top stocks, and building a record cash position through short-term Treasury purchases, further suggest a defensive posture and a view that the market is overvalued. Despite these headwinds, Berkshire's fundamental performance remains robust, with operating earnings growing at a 15% compound annual growth rate (CAGR) from 2019 to 2024, driven by the resilience of its core insurance businesses. The stock currently trades at 21 times 2024 operating earnings, a more favorable valuation compared to its multiple of 23 at the end of 2019, suggesting that current prices may not fully reflect its stable earnings power and the expectation of strategic continuity under Abel's leadership.

Key Decisions for Investors

• Given the strong 15% CAGR in operating earnings and a reasonable valuation at 21x earnings, long-term investors may consider the current stock price, weighed down by succession concerns, as an attractive entry point.
• Investors should closely monitor Greg Abel's initial management of the equity portfolio post-transition for any strategic shifts away from the company's long-held value-investing principles.
• Recognize that Berkshire's defensive stance, evidenced by its high cash levels and paused buybacks, could provide relative downside protection in a market correction but may lead to continued underperformance if a strong growth-led rally persists.
• Pay attention to macroeconomic indicators like interest rates, as a stabilizing environment could unlock value in Berkshire's non-insurance segments such as railroad and energy, providing a catalyst for future growth.