Buy Into Berkshire's Struggles

By Matthew McCall | August 25, 2008 AAA

Warren Buffett's Berkshire Hathaway (NYSE:BRK.A, BRK.B) stock has been struggling in 2008 as it underperforms the major benchmarks. Could this be the time to take advantage of the weakness and buy into Berkshire at a discount? (Learn more in What Is Warren Buffett's Investing Style? and Benchmark Your Returns With Indexes.)

What is Berkshire Hathaway?
In essence, Berkshire is Warren Buffett's personal portfolio that is composed of companies in a number of industries. Buffett owns approximately one-third of Berkshire and thus is annually listed as one of the richest people in the world. There are two classes of shares traded on the NYSE, the A-class shares trade around $115,000 per share and average less than 10 shares traded per day. The B-class shares trade at approximately 1/30th of the A shares and are currently around $3,800 per share and trade on average nearly 25,000 shares per day.

The companies that make up Berkshire include everything from an ice cream shop (Dairy Queen) to an Israeli maker of metal-cutting tools and everything in between. But the reason the stock has underperformed this year, and is down nearly 20%, is the exposure it has to insurance companies. They include National Indemnity, GEICO, and General Re. With the issues in the financial sector, it has made its way over to the insurance industry and Berkshire has paid by lagging the market this year.

Time to Nibble
Even though Buffett is no longer a spring chicken, he still has the ability to make profitable moves for Berkshire, especially in down markets. During the tech crash of 2000 Berkshire took a hit, but was able to rally back with a vengeance and by early 2004 was back at an all-time high. What has made Buffett one of the greatest investors of all-time has been his ability to find value in bear markets and use the weakness to accumulate solid long-term holdings. In the current market environment there are more than a few opportunities both here and overseas and if anyone is able to take advantage of them it is Buffett.

From a technical perspective, BRK.B stock is not far from very important long-term support at the $3,600 area and from a reward-to-risk view, now is the time to buy. Keep in mind, if the support I mentioned is broken, the stock should be sold with a minimal loss. (Find out how you can combine the best of both strategies to better understand the markets in Blending Technical And Fundamental Analysis.)

Within Berkshire
A few of the stocks that Buffett owns a stake in include the following.

  • Kraft Foods (NYSE:KFT) - The major food company has held up well along with the other consumer staples as the U.S. and international stock markets fall. It has managed to pass along rising food cost, and so Kraft is an attractive play if inflation continues to increase.

  • Burlington Northern Santa Fe (NYSE:BNI) - Buffett can say he was in the railroad sector before the big rally earlier this year. BNI and its peers have had a great run not only in 2008, but for the last five years as the demand for commodities has required movement by rail. I feel this is a solid stock in a sector that has the ability to continue outperforming.

  • Coca-Cola (NYSE:KO) - Of the large-cap stocks that are considered consumer staples, Coke has been a laggard in 2008 after two very strong years. From a valuation perspective it may be time to once again look at Coke after its pullback this year. This is the typical Buffett stock because it is a long-term story that has consistent earnings and should not have a big downside.

Bottom Line
In the end, you probably won't get huge gains out of Berkshire stock, but going forward the downside should be limited. And there is no doubt in my mind that Buffett's working overtime looking for bargains in the market.

If you prefer to coattail Buffett's investments, check out Build A Baby Berkshire.

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