Shares of Berkshire Hathaway Inc. (BRK.A) have put on a growth spurt recently, propelling them far ahead of the market, in defiance of critics who had raised concerns about the giant ($526 billion market capitalization) conglomerate's prospects for future growth, and who argued that CEO Warren Buffett had lost his edge as an investor. Now some leading investment professionals are seeing value in Berkshire, and calling it a buy, Barron's reports. The recent performance of Berkshire's class A stock is compared to major stock market indexes in the table below.

Buffett's Berkshire Is Flying High

Stock or Index Gain Since 7/17 1-Year Gain
Berkshire Hathaway Class A 10.9% 16.5%
S&P 500 Index (SPX) 3.7% 16.1%
Dow Jones Industrial Average (DJIA) 5.3% 18.2%
Nasdaq Composite Index (IXIC) 2.4% 24.7%

Source: Yahoo Finance, based on adjusted close data.

What Matters for Investors

Widely recognized as an investing genius, Buffett's moves are closely watched for clues about the future direction of the market and the best places to invest. Also, since Berkshire's constituent operating subsidiaries are often seen as models of best management practices.

Nonetheless, Berkshire stock has lagged the market for a number of years, as detailed in the table below, leading an increasing number of analysts and commentators to criticize Buffett as someone who is still resting on the laurels of big gains posted decades ago. In June, a Barron's column argued that Berkshire is long overdue for a series of changes necessary to keep it relevant going forward. (For more, see also: How Berkshire Should Prepare for Life After Buffett.)

Berkshire's Stock Has Lost Its Edge

Average Annual Total Returns Last 10 Years Last 5 Years
Berkshire Hathaway Class A 8.7% 11.1%
S&P 500  9.7% 13.5%

Source: Barron's, based on Bloomberg data and Berkshire reports; data through June 13.

One of those proposed changes was to return capital to investors through dividends and share repurchases. Berkshire is sitting on a mountain of cash that exceeded $106 billion as of June 30, spurring concerns that Buffett is finding it increasingly difficult to employ this capital profitably. On July 17, Buffett announced that Berkshire would become more flexible in its approach to share repurchases, a move that sent its shares upward. Since its recent high close on Sept. 20, however, the price of Berkshire's class A shares has retreated by 4.0%.

"Berkshire is not a screaming bargain, but it's still undervalued," according to David Rolfe, chief investment officer at St. Louis-based money management firm, in remarks to Barron's. He believes that the class A shares should be worth about $400,000 each, or 25% above the Sept. 28 close, while he values the class B shares at $275 each, implying a potential 28% gain. 

Rolfe bases these figures on a bottom-up analysis of Berkshire's operating units, such as the Burlington Northern railroad and the Geico insurance company. He inferred market values for them, based on comparisons with competitors that share their strengths. Additionally, he applied current market prices to Berkshire's investment portfolio of share holdings in other publicly-traded companies, which was worth $192 billion as of June 30.

Second quarter operating profits for Berkshire were up by 67% year-over-year (YOY). Barron's notes that its operating companies are domestically-focused, and are propelled by the strong U.S. economy, while also being big winners from corporate tax reductions.

Looking Ahead

Buffett turned 88 in August, and his longtime right-hand man, Berkshire Vice Chair Charlie Munger, is 94. A major question mark hanging over the company is Buffett's failure to announce a succession plan.

Meanwhile, Berkshire's stake in Apple Inc. (AAPL) is by far the largest position in its equity investment portfolio. As of June 30, Berkshire held 252 million shares of Apple, then worth nearly $47 billion, according to Fortune. Since then, Apple's share price has risen by 22.4%, making this holding now worth about $57 billion. Buffett has been adding to this position, though others question whether Apple's growth has peaked.

As far as investing Berkshire's cash hoard is concerned, rumors abound regarding what new companies Buffett might choose to buy into, or buy outright. Among those alleged targets is Southwest Airlines Co. (LUV), whose market cap of around $36 billion would make it easily digestible for Buffett. Berkshire already owns Southwest stock worth about $3 billion, and has positions in several other major airlines. Berkshire also increased its holdings of The Goldman Sachs Group Inc. (GS) and Teva Pharmaceutical Industries Ltd. (TEVA) in the second quarter, per Fortune. (For more, see also: Morgan Stanley Thinks Berkshire Should Buy This Airline.)