Can Warren Buffett's Berkshire Hathaway Inc Stock Continue To Outperform?

  • Berkshire Hathaway can continue to outperform the market but not by a big margin.
  • There is no significant difference in the valuation between the group of Berkshire's 15 largest holdings and the S&P 500.
  • BRK.B's stock is an excellent solution for a diversified low-risk investment with a significant capital appreciation potential.

In my previous article about Berkshire Hathaway Berkshire (NYSE:BRK.B), I highlighted that Berkshire Hathaway, led by the legendary investor Warren Buffett, had outperformed the market for many years. However, investors might ask themselves if Berkshire's current portfolio of public companies can continue to beat the market.

According to Berkshire Hathaway's 13-F filing on August 15, 2016, its public holdings as of June 30, 2016, were spread across 47 different public companies. However, the 15 companies with the highest holdings by Berkshire accounted for 90.5% of the total holdings. As such, I will focus in this article on these 15 companies.

The table below shows the 15 companies and their percentage in the total holdings, their sectors, industries, and market capitalization.

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To find out if there are some unique characteristics for Berkshire's largest holdings; I have put together some important valuation metrics for the fifteen companies, as shown in the table below.

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Source: Portfolio123

Also Read: Will Berkshire Hathaway Stock Remain A Buy After Warren Buffett

Valuation And Dividend Yield

The average trailing twelve months P/E ratio, as well as the forward P/E for the group of the 15 largest Berkshire holdings, is about 20, while the current S&P 500 P/E ratio is at 24.61. That means that according to the P/E ratio parameter, the group of 15 largest Berkshire holdings is cheaper than the market by about 19%.

The average price to sales ratio of the group of the 15 companies is at 2.41, while the current S&P 500 price to sales ratio is at 1.89. That means that according to this parameter the group of Berkshire's largest holdings is more expensive than the market by 27.5%.

The average price to book value of the group of the 15 companies is at 3.10, while the current S&P 500 price to book value is at 2.83. That means that according to this parameter the group of Berkshire's largest holdings is more expensive than the market by 9.5%.

The average annual dividend yield of the group of the 15 companies is at 2.77%, while the average annual dividend yield of S&P 500 is at 2.09%. Hence, the dividend yield of the group of Berkshire's largest holdings is 32.5% higher than the average annual dividend yield of the S&P 500.

Valuation Multiples Summary

All in all, we cannot say that there is a significant difference in the average valuation metrics between the group of the 15 largest Berkshire holdings and the S&P 500.

Also Read: Why Warren Buffett Should Buyback Exxon Mobil Corporation Stock Now

Kraft Heinz

The largest of Berkshire's public company holdings is Kraft Heinz (NSDQ:KHC), by far. Its holding value is about $28.7 billion, or 22.1% of the total value of Berkshire Hathaway's public companies portfolio. Moreover, Berkshire owns a stake of about 26% in the company. As such, the performance of KHC's stock will have a significant influence on Berkshire's future results.

Kraft Heinz was formed through the merger of Kraft Foods and H.J. Heinz on July 2, 2015. The merger created the third-largest food and beverage company in North America. Before the merger, Heinz was owned by Berkshire Hathaway, and after the merger, Warren Buffet became a member of Kraft Heinz's board. KHC's Management expects the deal to generate annualized cost savings of $1.5 billion by the end of 2017. The deal is also helping Kraft to expand into international markets due to Heinz's strength in overseas markets. Previously Kraft had almost all its sales in North America.

Kraft Heinz Stock Performance

Since the beginning of the year, KHC's stock is already up 20.8% while the S&P 500 Index has increased 4.5%, and the Nasdaq Composite Index has gained 3.6%. According to TipRanks, the average target price of the top analysts is at $97.63, representing an upside of 11% from its September 14 price, which appears reasonable, in my opinion. Moreover, eight best performing analysts who cover the stock rate it as a Buy or a Strong Buy, and only one top analyst rates it as a Hold.

Wells Fargo

The second largest holding among Berkshire's public company holdings is Wells Fargo (NYSE:WFC). With a holding value of about $22.5 billion, it accounts for 17.3% of the Berkshire Hathaway's public companies portfolio. Moreover, Berkshire owns a stake of about 9.5% in the company. As such, the performance of WFC's stock will also have a significant influence on Berkshire's future results.

Wells Fargo Stock Performance

Wells Fargo's shares have fallen sharply in the last two weeks due to the scandal surrounding allegations that it opened two million accounts for customers without their knowledge. However, in my view, it would not affect the company too much in the long term, since the company's fundamentals are strong.

Since the beginning of the year, WFC's stock is down 12.6% while the S&P 500 Index has increased 4.5%, and the Nasdaq Composite Index has gained 3.6%. However, since the beginning of 2012, WFC's stock has gained 73.1%. In this period, the S&P 500 Index has increased 69.8%, and the Nasdaq Composite Index has risen 99.1%. According to TipRanks, the average target price of the top analysts is at $54.84, representing an upside of 15.4% from its September 14 price. However, I expect lower appreciation because of the recent issue.

Conclusion

As I see it, Berkshire Hathaway can continue to outperform the market due to its consistent method of smart stock picking based on value parameters and holding the stocks for the long run. However, I do not expect it to beat the market by a big margin. After all, there is no significant difference in the average valuation metrics between the group of Berkshire's 15 largest holdings and the S&P 500. However, in my view, investing in BRK.B's stock could be an excellent solution for investors looking for a diversified low-risk investment with a substantial capital appreciation potential.

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Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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Comments on this article and BRK.B stock

Sonyawiley
neutral
Dear Warren
I got invited to join 'Steemit' and having a tough time logging in going to get assistance today.

Can't wait to get my story out,
Much love, Sonya
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user profile picture
User
bullish
Given the well below beta for BRK I am just fine with it even matching the S&P 500. Every article commenting on Uncle Warren's demise has eventually shown its errors. I also know of no other major company CEO that has been planning his succession for decades like WB has. 98%+ of his wealth is held in BRK stock, where do you think his and his teams' focus is?
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Do share this awesome post