- Berkshire Hathaway led by Warren Buffett has outperformed the market for many years.
- BRK.B stock is an excellent option for a diversified low-risk investment with a significant capital appreciation potential.
- The company is continuing to operate in the same manner, and it has a good chance to continue to outperform the market.
Investors seeking diversified low-risk investment with a significant capital appreciation potential might consider Berkshire Hathaway Class-B (NYSE:BRK.B) stock (Berkshire Hathaway Inc (NYSE:BRK.A) stock at $215,824 is out of reach for most of us). The main reason to consider Berkshire's stock is the company's legendary chairman Warren Buffett, who has achieved tremendous success in the past. However, Has Mr. Buffett's past success been repeated in the last few years? Is it not better to invest in the S&P 500 index through an ETF (like SPDR S&P 500 Trust ETF (NYSEMKT:SPY)), after all, it is more diversified than Berkshire's portfolio? To answer this dilemma, I have made a comprehensive study comparing BRK.B stock performance to the S&P 500 index for seventeen different scenarios. I assumed starting investment in both every year since January 1, 2000, and holding the investment until now (July 11, 2016). I have compared the total return, the annualized return, and the maximum drawdown, for Berkshire stock and the S&P 500 index, including dividend for the S&P 500 (BRK.B is not paying a dividend), as shown in the table below.
As the table clearly shows, in every scenario except those when investment started on January 1 2009, and on January 1 2015, BRK.B stock gave a better return, most of the times with a lower maximum drawdown. The average annual return of the seventeen scenarios by investing in BRK.B stock was at 9.04%, while the S&P 500 average annual return including dividend was at 6.84%. These results demonstrate that also in the last few years Berkshire has outperformed the market, and I believe it will continue doing so because of its extraordinary value investing methodology.
BRK.B Monthly Chart
Chart: TradeStation Group, Inc.
Berkshire's Stock Picking
Mr. Buffett, who followed his mentor Benjamin Graham's ideas, is well known for his smart stock picking based on value parameters, and holding the stocks for the long run. However, to those who are worried about Mr. Buffett's age of 86, he is not working alone. Charles Munger, Berkshire's vice chairman is also famous for his ability to find attractive investments, and there is a new generation of very experienced managers who are also making investment decisions.
Berkshire Recently Bought Apple Inc. Stock
Berkshire lately bought about 9.8 million shares of Apple valued at almost $1 billion which is not a very big investment for Berkshire. An investor might wonder how come that Berkshire, which has been avoiding growth tech stocks, bought Apple. However, Apple stock, trading at P/E of 10.8 and currently paying a dividend yielding 2.34% a year might also be considered a value stock. In my opinion, Apple stock is undervalued right now, and Berkshire took advantage of the opportunity to buy the stock at an attractive price, as the stock has fallen about 25% from its 52-week high.
Phillips 66 (PSX)
In the first quarter, Buffett added to his Phillips 66 holdings by about 23%. As of March 31, he owned 75.6 million shares of Phillips 66 worth $5.73 billion at the current value. PSX has about 5% allocation in Berkshire's holdings. Phillips 66 operates as an energy manufacturing and logistics company. It operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties. The company processes, transports, stores and markets fuels and products globally.
Phillips 66 fits well into Buffett's value principles; it has a compelling valuation, its P/E ratio is very low at 11.44, and its price to sales ratio is extremely low at 0.43. Moreover, the company returns substantial capital to its shareholders through stock buybacks and increasing dividend payments, currently yielding 3.3%.
International Business Machines (IBM)
Berkshire also added 198,853 shares of IBM in the first quarter bringing its holding to more than 81 million shares valued at more than $12.7 billion at the current price. IBM accounts for about 9.5% of Berkshire's public equity holdings. IBM also has a compelling valuation; P/E of 11.8 and dividend yield of 3.57%.
In Berkshire's 2015 annual report the company said that it had lost $2.6 billion on the IBM investment. However, IBM stock price has gained 14.5% since the beginning of the year decreasing the loss by about $1.6 billion. In any case, Mr. Buffett is a long-term investor, and as he likes the company, he has continued to increase his holdings in IBM stock.
In my view, investing in BRK.B stock could be an excellent solution for investors looking for a diversified low-risk investment with a significant capital appreciation potential. Berkshire, led by the legendary Warren Buffett, has outperformed the market for many years due to a consistent method of smart stock picking based on value parameters and holding the stocks for the long run. As I see it, the company is continuing to operate in the same manner, and it has a good chance to continue outperforming the market.