Warren Buffett-led Berkshire Hathaway stock could provide similar diversification as S&P 500 ETF with even better results.
- Berkshire Hathaway, led by the legendary investor Warren Buffett, has outperformed the market for many years.
- Berkshire can continue to beat the market due to its consistent method of smart stock picking and buying assets based on value parameters.
- Investing in BRK.B stock could achieve the same purpose of diversification as investing in the SPY ETF with even better results.
Many investors prefer a diversified low-risk portfolio over the riskier strategy of stock-picking. The SPDR S&P 500 ETF Trust (NYSEMKT:SPY) is very popular for this purpose since it follows the S&P 500 index of 500 large cap companies listed on the NYSE or NASDAQ. However, in my opinion, investing in Berkshire (NYSE:BRK.B) stock could achieve the same purpose of diversification with even better results.
Berkshire Hathaway, led by the legendary investor Warren Buffett, has outperformed the market for many years. In the last five years, BRK.B's stock has increased 116.7% while the SPY ETF has gained 79.7%. What's more, in four of the last five years Berkshire stock has outperformed the SPY ETF, as shown in the chart below.
* 2016 until December 23, 2016
According to Berkshire Hathaway's 13-F filing on November 14, 2016, its holdings as of September 30, 2016, consisted of 48 different public companies. However, the 20 companies with the highest holdings by Berkshire accounted for 93.3% of the total public holdings. The table below shows the list of 20 companies and their price change in 2016 (until December 23), the number of shares holdings, holding value and Berkshire's stake in the companies.
The average price gain of 13.3% for the 20 companies in 2016 was much less than the 25.2% appreciation in BRK.B stock in the same period. As such, an investor who was trying to copy Berkshire's holdings by investing in the same stocks would fail to achieve the results of BRK.B stock. Investors should bear in mind that apart from Berkshire's holdings in public companies it has large assets in very successful private subsidiaries where in most of them the company has a 100% ownership. The list of the private holdings includes BNSF, Duracell, GEICO, General Re, Forest River, Precision Castparts, Russell Brands, IMC International Metalworking Companies and many others.
Berkshire Hathaway Growth
Berkshire has recorded substantial growth in the last few years. The company's annual average sales growth over the previous five years was pretty high at 9.13%, and the average EPS growth was high at 13.05%. What's more, the company's annual average shareholders’ equity growth over the last five years was high at 10.19%, and in the first three-quarters of 2016, Berkshire's shareholders’ equity increased 5.41% to $272.6 billion. The average annual estimated EPS growth for the next five years is relatively high at 8.8%.
Berkshire's largest holding, by far, in a public company is Kraft Heinz (NASDAQ:KHC). It's holding value is about $28.5 billion, about 20% of the total holding of all the 48 companies in Berkshire Hathaway's public companies portfolio. Moreover, Berkshire owns a stake of 26.6% 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.
Recent Quarter Results
On November 03, after market close, Kraft Heinz reported its third quarter 2016 financial results, which beat earnings-per-share expectations by a significant margin of $0.09 (12.2%). Sales of $6.27 billion for the quarter, down 1.4% year over year, were slightly below Wall Street's estimates of $6.36 billion. The company beat earnings-per-share estimates in all its last four quarters, as shown in the table below.
In the report, Kraft Heinz CEO Bernardo Hees, said:
"Overall, our third quarter results are a good representation of where we are as a company. While our financial performance is respectable, we continue to have the opportunity to improve our offerings and retail execution in several key markets and take our brands to places they don't currently compete. Our focus now is to finish 2016 strong and set the stage for another year of strong, profitable growth in 2017."
Kraft Heinz Stock Performance
Since the beginning of the year, KHC's stock is already up 20.4% while the S&P 500 Index has increased 11%, and the Nasdaq Composite Index has gained 9.6%. According to TipRanks, the average target price of the top analysts is at $100.80, representing an upside of 15.1% from its December 27 close price of $87.58, which appears reasonable, in my opinion. Moreover, four 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.
Berkshire Hathaway, led by the legendary investor, Warren Buffett has outperformed the market for many years. In the last five years, BRK.B stock has gained 116.7% while the SPY ETF has gained 79.7%. As I see it, Berkshire can continue to beat the market due to its consistent method of smart stock picking and buying assets based on value parameters and holding the stocks for the long run. In my opinion, investing in BRK.B stock could achieve the purpose of diversification like investing in the SPY ETF, with even better results.