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Berkshire Hathaway: Slow and Steady Wins the Race
Stock Analysis & Ideas

Berkshire Hathaway: Slow and Steady Wins the Race

Berkshire Hathaway (BRK.B) is a conglomerate known for its value investing philosophy. We are neutral on the stock.

Defensive Stock for Uncertain Times

Warren Buffett and Charlie Munger argue that although Berkshire Hathaway tends to underperform in a high-flying bull market, it outperforms in a bear or sideways market.

To find out if this is true, let’s take a look at the stock’s weekly beta since August of 2008 relative to the S&P 500 ETF (SPY). However, we won’t be using the traditional beta measure, which simply lumps upside and downside volatility into a single and sometimes misleading measure.

Instead, we will break up the beta into two separate measures: upside beta and downside beta. We want to know specifically how Berkshire Hathaway performs when the market is only falling and when the market is only rising.

When calculating the numbers, we found that the upside beta for Berkshire was 0.91, while the downside beta was only 0.87. Thus, we can statistically say that Buffett and Munger’s claims are indeed correct. Since the values are less than one, it means that the stock climbs slower in a bull market but also falls slower in a bear one.

You can see part of the calculations in the image below. All the data points would not fit on one page, but essentially, weekly closing price data was taken for SPY and BRK.B since August 9, 2008, to come up with these figures. A total of 705 weekly data points were measured.

Source: Author’s beta calculations

Interestingly though, the upside beta is higher than the downside beta, which is ideally what you want to see as an investor. By being able to climb faster than it falls, the stock’s performance has been able to mostly keep up with the SPY’s performance during the same time period.

Although there was a big divergence between the two stocks after the pandemic crash, the gap is slowly becoming smaller as Berkshire has been performing strongly in the past few months while the opposite has happened for the indices.

Growth Catalysts

Berkshire Hathaway is well positioned to benefit from an inflationary environment. This is due to its portfolio allocation, which is heavily concentrated in Apple, financials, and consumer staples stocks.

If inflation persists for a long time, Apple and the consumer staples stocks have the pricing power to pass on costs to customers. In Apple’s case, it has the bargaining power with suppliers to negotiate better prices while also securing the resources it needs. Simply put, it gets preferential treatment versus smaller companies.

However, if the Federal Reserve decides to become more aggressive in fighting inflation, then the financials stand to potentially benefit. This is because the Federal Reserve would be forced to raise interest rates, leading financial companies to do the same thing. This would result in higher revenues and profits for lenders.

That is, of course, if the Federal Reserve doesn’t raise rates too fast to the point where it shocks markets. If that were to happen, it could cause financial instability, causing all stocks to plummet.

Fortunately for Berkshire, although the stock would fall as well in such a scenario, it has $150 billion in cash that it would finally be able to deploy to acquire deeply discounted businesses.

A massively growing cash pile has been a bit of a problem for the company because it’s hard to find good deals that are large enough in a market that Buffett considers to be overvalued. Thus, a fall in valuations would definitely benefit the company in the long run.

Wall Street’s Take

Turning to Wall Street, Berkshire Hathaway has a Moderate Buy consensus rating, based on one Buy assigned in the past three months. Berkshire Hathaway’s price target of $354 implies 12.6% upside potential.

Final Thoughts

Berkshire Hathaway is a legendary company that has significantly outperformed the market over the past 50 years. However, going forward we don’t think there will be tremendous outperformance by BRK.B versus the indices.

Nonetheless, index investors who are closer to retirement might prefer the stock’s reduced volatility, especially if the performance is similar.

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