Berkshire Hathaway Stock: Buy Charlie Munger’s Favorite Investment (NYSE:BRK.A)

There’s been a substantial amount of effort that has gone into attempting to copy brilliant minds in the market such as Warren Buffett. However, for the specific brilliant minds of Warren Buffett, and former giant in investing Charlie Munger, there’s a much easier way to do it. Copy the largest investment in Charlie Munger’s portfolio, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B).

As we’ll see throughout this article, Berkshire Hathaway has an unparalleled portfolio of diverse assets and investments that not only means massive cash flow, it means continued long-term shareholder returns.

Berkshire Hathaway Results

The company has continued to generate incredibly impressive results.

Its net earnings continues to be impacted by share price fluctuations, however, its operating earnings have remained incredibly strong. The company’s operating earnings in the quarter were $10.8 billion, up more than 30% YoY, and for the 1st 9 months, the company earned almost $29 billion, or up 20% from the 1st 9 months last year.

Those are incredibly strong results, the company’s annualized operating earnings are roughly $40 billion, giving the company a P/E of less than 20, not counting its massive cash position and public equity portfolio.

The company’s public equity portfolio is a massive $360 billion, which gives the company substantial additional cash from dividends. The largest source, 47% of the portfolio, is the company’s take in Apple, which has an incredibly low dividend. In terms of dollars in profit, it’s probably the best single investment in history, but it is one that we think Berkshire Hathaway should move on from.

Counting the next 9 largest investments to round out the top 10, the company has Bank of America, American Express, Coca-Cola, Chevron, Occidental, Kraft Heinz, Moody, Itochu, and Mitsui. These 9 investments together are 44% of the company’s portfolio making the top 10 investments 90% of its portfolio. That’s a massive portfolio, but it includes some well-timed gems.

BYD, now the largest volume EV producer in the world, was discovered more than a decade ago. The company’s massive portfolio here is cherry on the cake.

Berkshire Hathaway Repurchases

Berkshire Hathaway has recently started a new format for shareholder returns, given the company never paid out a dividend. It’s been repurchasing shares.

The company repurchased $1.1 billion in shares in the most recent quarter and its 9-month total is $7 billion. That means that the company has repurchased ~1% of its outstanding shares in a mere 9 months. Obviously that’s not a ton, and we’d like to see the company pick it up, but with less trading volume on its shares there’s only so much it can do.

For a company that never historically did share buybacks it’s substantial. We’d like to see the company ramp this up as much as possible and think it will be a key factor in the company’s long-term growth. The company has a $157 billion cash pile that can fund this for the long-term.

Berkshire Hathaway Segment Breakdown

From a segment perspective, a number of the company’s segments have remained strong, despite a tough time.

The company’s Geico auto-insurance segment recently received permission to increase rates. That’ll help make up for some tough times recently in the business. The company’s strong results were buoyed by a substantial improvement on insurance-underwriting along with continued strength in insurance investment income, with a float ~$150 billion.

At the same time, the company’s reliable railroad and utility and energy businesses earned more than $1.7 billion for the quarter. The company, with some lawsuits, closed its acquisition of Pilot Travel Centers. The total cost of the 80% stake was more than $10 billion, with annualized earnings at more than $500 million.

A variety of other smaller controlled businesses the company has, in all sorts of market segments, such as Precision Castparts, earned almost $4 billion showing the strength of the company’s businesses. The ability to have the earnings potential of such a diversified group of businesses is a major appeal. These businesses alone at the S&P 500’s P/E are worth more than Berkshire Hathaway’s current market cap.

Berkshire Hathaway Shareholder Returns

Berkshire Hathaway offers several benefits over investors simply copying its public investment decisions, which is why we recommend investing directly in Berkshire Hathaway.

The first is the relative value. Let’s consider the company’s entirely owned operating businesses as a business akin to the S&P 500 in terms of diversification. Some would argue the S&P 500 is more diversified if you’re equating valuation, and while we would agree, we would argue the trade-off comes in Berkshire Hathaway’s larger share of utility like businesses which have less volatile earnings.

Together, that would total $40 billion in annual earnings, worth $1.04 trillion at the current S&P 500 P/E. Now let’s add cash of $160 billion and stock of $370 billion. You get a valuation there more than double the S&P 500’s. Even if you subtract the cash, because the company is earning on it as cash, those are still incredible earnings.

The company’s direct returns to shareholders might not be significant, but the company’s intelligent mastery of allocating capital and long-term acquisitions and growth show its value.

The above chart shows the company’s performance versus the S&P 500 over the past decade. The company has outperformed, primarily, in our view due to the company’s skill at deploying capital during the last market crash in 2008. That skill, combined with the company’s cash pile, is a unique benefit you receive by investing in Berkshire Hathaway.

Thesis Risk

The largest risk to our thesis has been stated by Warren Buffett himself. On average, most fund managers do not outperform the market, and Berkshire Hathaway’s incredibly success doesn’t mean that it’ll be able to continue outperforming. Should that happen, investor’s capital will be locked up in an underperforming asset.

Another often talked about risk is the transition when Warren Buffett, unfortunately and inevitably, passes away like Charlie Munger. However, here we feel the company again has minimal risk. The company has been grooming successors for years now who already have a hand in the investment decisions, and most of its businesses are run by market leaders in those companies.

The Berkshire Hathaway head office has very few employees. That strength means we feel the company will see very little impact to its business as it did with the death of Charlie Munger.

Conclusion

Charlie Munger, an icon in investing, best known for his work with Berkshire Hathaway, unfortunately passed away recently. For those looking for something to invest in, we recommend his favorite investment, Berkshire Hathaway. Berkshire Hathaway has a diversified portfolio of incredibly profitable assets.

The company’s market cap remains well below its fair valuation in our view, as the company continues to repurchase stock. As we discussed above, we see that number as $1.04 trillion, or more than 30% above its current market cap, today. The company might not directly pay a massive dividend, but its continued commitment to shareholder growth and ultimately shareholder returns shows its value and makes the company a valuable long-term investment.