No. of Recommendations: 2
" The Bottom Line
Berkshire’s stock price is trading at levels not seen in many years, as measured by a multiple to book value. Despite Berkshire de-emphasizing book value as a relevant metric over the past several years, I believe that it still makes sense to follow book value as an understated measure of intrinsic value. If book value progresses at a certain rate in the future, intrinsic value is likely to progress at a similar rate. When we combine this assumption with the guidance provided by Berkshire’s willingness to repurchase stock, we can form conclusions regarding the likely return that shareholders can expect from current levels.
Warren Buffett correctly warned shareholders against buying the stock at particularly elevated levels and explicitly mentioned 2x book value as representing a rich price. We are not anywhere near 2x book value, although the current price is materially above where Berkshire has been willing to repurchase shares. All of this warrants caution for those contemplating investing in the stock. For those who already own the stock, it still seems highly likely that we will achieve positive returns over a five to ten year period. However, anything can happen over the next couple of years. Shareholders who need to sell shares over the next year or two might consider doing so now, but we should keep in mind that the current price-to-book ratio of 1.72x is likely to decline in the coming quarters as book value advances due to retention of earnings."
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