Berkshire Hathaway Inc. (BRK.A) is enduring one of its worst years ever relative to the S&P 500 Index under the 54-year tenure of CEO Warren Buffett, yet it may be poised to outperform in 2020, especially if the market loses steam. Positives include a strong balance sheet, earning power, and low valuation. At the close on Dec. 17, 2019, Berkshire's class A shares were up by 10.8% year-to-date, versus 27.4% for the S&P 500.

“Berkshire is pretty cheap,” says Jay Gelb, an analyst with Barclays, as quoted by Barron's. “It’s a great collection of businesses and a high-quality defensive stock trading below its intrinsic value,” he adds. Gelb has an overweight or buy rating on the class A shares, with a price target of $401,000, or 18.3% above the Dec. 17, 2019 close.

Key Takeaways

  • Berkshire Hathaway is lagging the market in 2019 by a wide margin.
  • Still, some investors rate it a top pick for 2020, cheaply valued.
  • The critics counter that Buffett has long since lost his touch.

Significance for Investors

Given the recent stock market rally, Berkshire’s book value could rise nearly 5% from Q3 to Q4 2019, reaching $255,000 and producing a price-to-book (P/B) ratio of just 1.3, Barron's observes. Berkshire trades at about 21 times 2019 earnings, above the figure of 19 for the S&P 500, but below Berkshire's historical average, the report notes.

Moreover, Berkshire's P/E ratio is understated in the sense that the denominator includes just the dividends on its $220 billion equity portfolio. Buffett has insisted that investors should consider "look-through earnings," which also include Berkshire's pro-rata shares of undistributed profits from companies in its investment portfolio.

Critics argue that Buffett must reduce his $128 billion cash hoard by increasing stock buybacks substantially and paying dividends, spending more on big deals, and avoiding stingy deal offers. Berkshire lost technology products distributor Tech Data Corp. (TECD) to rival bidder Apollo Global Management Inc. (APO), a private equity firm, by a mere $200 million. Tech Data cost Apollo $5.1 billion, which offered $145 per share, versus a $140 bid by Berkshire.

Another Barron's report names Berkshire a top 10 stock pick for 2020. While noting that its growing cash pile, about 25% of its market value, has hurt performance, this report also cites low valuations as positives, as well as its annual earnings stream of more than $25 billion from its dozens of wholly-owned operating subsidiaries.

"Given Berkshire's size, Buffett needs to think big with acquisitions," this report urges. Possible targets that they suggest are Walgreens Boots Alliance Inc. (WBA), Delta Air Lines Inc. (DAL), Southwest Airlines Co. (LUV), FedEx Corp. (FDX), and United Parcel Service Inc. (UPS).

Among longtime investors who have lost faith in Buffett is David Rolfe, chief investment officer (CIO) of Wedgewood Partners, which has $2 billion in assets under management (AUM). Rolfe sold his Berkshire stock after more than 20 years, for these reasons: the KraftHeinz and IBM fiascos; missed opportunities with Visa, MasterCard, Costso and Microsoft; poor execution with acquisitions in general, including not enough big deals; and holding too much cash.

Looking Ahead

A lingering issue for Berkshire is succession planning. With Buffett at age 89 and longtime lieutenant Charlie Munger due to reach 96 on Jan. 1, 2020, announcing a formal plan is long overdue.