No. of Recommendations: 2
" Takeaway & Positioning
In this deep-dive of Berkshire Hathaway, I have expressed my view that despite positive commendations by Buffett and the late Munger, we don't have a lot of good data to assess Greg Abel's broader investing/capital allocation skills. So this is a big overhang over Berkshire's stock. I think the insurance business led by Ajit Jain is a prized possession for Berkshire. I think it will continue outperforming its insurance peers by a large margin. Leading indicators suggest that the outlook for most of Berkshire's non-insurance operating subsidiaries is rather uninspiring, with Berkshire Energy being an exception as the capex investments outlook is positive for the electricity utilities distribution focused business.
On valuations, Berkshire stock is trading at a ~10.5% P/B premium vs its longer term valuation averages. This reduces the margin of safety for buys. Technically vs the S&P500, Berkshire stock looks like it is failing to break out of a 17-year range. Hence, I think we are more likely to see a mean reversion move down, corresponding to a few years of underperformance vs the S&P500.
A big question is how can Berkshire continue to make needle-moving investments going ahead? Given the conservatism trait present in the conglomerate's leadership culture, I am inclined to believe that Berkshire today is well positioned to manage risk very well and protect one's wealth. But it may not be the best investment for the purposes of grow wealth (compared to other choices such as the S&P500). However, this conservatism trait would work well to Berkshire's advantage in the insurance, banking (specifically lending) industries. Hence, I think we can expect some big investments in these areas if and when the opportunities arise. I believe we can also expect more investments in international and especially large emerging markets such as China and India, following on from their foray into Japan in recent years. This would enable them to implement the same playbook of buying great franchise businesses at attractive/fair valuations in countries that are seeing higher nominal growth. A successful deployment of Berkshire's $363 billion cash and cash equivalents balance would be an upside risk for the stock.
Overall, as my ratings are always relative to the S&P500 (see section below), I rate Berkshire Hathaway a 'Sell'."
https://seekingalpha.com/article/4793378-berkshire... 